USD - America's currency has been whipsawed by global risk trends and US monetary policy outlook throughout this year, though the underlying sentiment is now ostensibly in favor of the greenback. The USD has maintained its appeal as a safe haven-particularly with the uncertainty surrounding the fiscal crises plaguing Greece, Portugal, and Spain-while concomitantly garnering interest amongst speculators for interest rate yield potential. Notwithstanding the Fed's recent communiqué that it would leave interest rates exceptionally low for an extended period, Fed Fund futures are now already pricing-in a 50% probability of a hike in September 2010, and a 67% chance of tightening to 0.50% by November 2010. In the meantime, the FOMC continues to tighten the policy reins in other areas: Lending facilities established to support liquidity throughout the financial crisis are scheduled to expire at the end of this month, and speculation is running high that another hike in the Discount Rate (currently at 0.75%) can be imminent. The recent stream of sanguine economic data would seem to support the aforementioned likelihood of interest rate increases in H2'10: Existing Home Sales (5.02M in Feb. vs. 5.00M exp.); Durable Goods Ex Transportation (0.9% in Feb. vs. -0.6% prior); Initial Jobless Claims (442K for wk. of 3/20 vs. 456K prior); University of Michigan Confidence (73.6 in Mar. vs. 72.5). Though the annualized Q4 GDP printed below expectations (5.6% vs. 5.9%), and this morning's Personal Income Index was down (0.0% in Feb. vs. 0.3% prior), markets generally shrugged-off the news and are anxiously awaiting the upcoming US NFP report this Friday, which is expected to show that 182,000 jobs were added in March. With risk and rate speculation conspiring to underpin the dollar, its recent inverse correlation to the US equities may be temporarily suspended as both the greenback and DJIA (10,895.50) are on track to hit their best levels year-to-date. With key event risk on the economic horizon this week, expect volatility in both FX markets and US equities.
EUR - The euro recovered from its lows last week after European leaders came to broad agreement over a potential Greek rescue package. The single currency rose to a high of $1.3420 overnight, rebounding from 10-month lows, after European leaders agreed upon a potential rescue package for Greece involving both the ECB and IMF at the conclusion of a leadership summit last week. Euro also received a boost from an improved Economic Sentiment report (97.7 in Mar.). Although pressure on the euro has eased with accord on a Greek rescue plan, the Eurozone will have to show concrete steps in shoring up its budgetary issues to stabilize the single currency longer term.
GBP - The British pound rose amid an easing of risk aversion. The pound rose above $1.50 but found further gains capped amid political uncertainty ahead of upcoming elections in May. Standard and Poor's also affirmed the country's AAA rating but kept its negative outlook citing concerns over the country's public finances. Due to this, the pound is likely to remain under pressure until further clues over the outcome of elections and resolution of country's messy debt situation is known.
JPY - The yen fell last week as US economic data improved, while Japan remains in deflation mode. Last week, BoJ policy board memberHidetoshi Kamezaki left the door open to more monetary easing. He warned that deflation was likely to persist for some time and it is starting to affect public perception about future price movements. Pressure for the BoJ to take action in credit-easing weighed on the yen. The yen fell further today as Greece went ahead with plans for a debt offering, boosting appetite for higher-yielding, riskier currencies. This week, markets will eye the February Retail Trade and Jobless Rate for direction.
CAD - The loonie was recently hurt by worries over Greece's woes and tighter monetary policy in China. However, higher commodity prices and talk of a possible Canadian interest rate hike as soon as June limited losses. The outlook for the CAD remains positive and has gained 3.1% since the beginning of the year. The currency will be influenced by external factors for now. Today, the market will focus on a speech by Paul Jenkins, senior deputy governor of the central bank, for clues on interest-rate moves. Last week, Bank of Canada Governor Mark Carney said he thinks rising consumer prices have been due to recent economic strength. Thus, Carney's comments led market players to believe he was more hawkish on raising interest rates. This Wednesday, the market will eye Canada's growth data, where the economy is expected to expand at a rate of 0.5 percent in January.
MXN - The peso strengthened against the USD to its highest level since November 2008 as positive economic data suggests exceptional signs of recovery in the Latin American region. Rising crude oil prices ($82.48/bbl) continues to benefit the peso as the commodity generates 1/3 of Mexico's annual revenue. Furthermore, a rise in risk appetite further supported the high-yielding currency to appreciate close to 0.80% against the greenback this week. On the data front, Mexico's Trade Balance for February posted better-than-expected numbers (244M vs -333M prior and -5M exp.). Unemployment numbers in February dropped significantly (5.43% vs 5.87% prior and 5.70% exp.). Bi-Weekly Core CPI rose slightly (0.18% vs. 0.17% prior and 0.22% exp.).
AUD - The Australian dollar remains firm vs. the US dollar amid speculation of further interest rate increases. Aussie rose to highs at 0.9166 after Reserve Bank of Australia Governor Stevens said that interest rates had been too low and could not remain at previous levels. Markets are forecasting a 61% probability of a 0.25% rate hike at the Central Bank's meeting next week.