USD - The greenback lost ground against most of its major world counterparts last week and this morning, as investors raised their appetite for risk amid an improving outlook for future economic growth. The world's reserve currency is also likely to face increased volatility throughout this week as an economic docket chock-full of key inflation, retail sales, and manufacturing data, is expected to reinforce the nascent recovery of the world's largest economy. A steady stream of mostly sanguine economic data last week helped to bolster investor confidence lending credence to the notion that the worst is well behind: ISM Non-Manufacturing (55.4 in Mar. vs. 53.0 prior); Pending Home Sales (8.2% in Feb. vs. -7.8% prior); Initial Jobless Claims (460K for wk. of 4/3 vs. 442K prior); Continuing Jobless Claims (4.55M for wk. of 3/27 vs. 4.681M prior). Fed Chairman Bernanke is scheduled to testify before the Joint Economic Committee of Congress this Wednesday and is anticipated to speak on the outlook of the US economy. The comments from the Central Bank chief is likely to be a market-moving event as market participants weigh the prospects for future monetary policy, and its corresponding impact on the global capital markets. As risk trends continue to have an impact on the currency market, positive economic developments in the US could encourage an improved outlook for global growth and lead market participants to seek higher yielding investments. However, the correlation between the USD and risk is likely to deviate over the near-term as the Fed aims to normalize its monetary policy this year.
EUR - The euro is broadly higher, buoyed by optimism following the announcement of an aid package for Greece that lifted the single currency. The euro broke from its recent ranges, climbing to highs at $1.3691 following the announcement of the multi-party deal. In a coordinated effort, Eurozone countries pledged EUR 30B in aid to Greece with the IMF also expected to contribute another EUR 10B. The news came as welcome relief for the E-16, which has shown progressing improvement from its economic slump. Last week saw the Region's PMI make further inroads to 55.9. The ECB also left interest rates unchanged at 1%. An aid package for Greece is viewed as removal of another obstacle to Eurozone recovery.
GBP - Sterling opened higher against the USD this morning at $1.5377 after better-than-expected local economic data. PPI rose 0.9% in March, while the average home price in England and Wales increased 1.1% from the previous month adding to signs of an economic recovery. The GBP is now trading at a 6-week high against the greenback. With an election scheduled for May 6, four opinion polls this week suggested no party will gain an overall majority in Parliament as the country struggles with sluggish economic growth and a record deficit. The UK's budget shortfall reached 11.8% of GDP in the past fiscal year, near Greece's deficit of 12.9% of GDP last year. With the UK situation worse than that of Portugal, Spain or Italy it could be the next major concern for the market.
JPY - The yen is near 7-month lows vs. the dollar following a report that the government welcomes a weaker yen. JPY weakened to 93.62 (vs. USD) overnight after Finance Minister Kan suggested he prefers a weaker yen but would not pressure the BoJ to further loosen monetary policy. The country's leading indicators rose a modest 1% in February while machinery orders fell -5.4%, highlighting the start-stop nature of the recovery. Consequently, policymakers will likely resort to yen weakness to support the export sector to aid in its nascent recovery.
CAD - The loonie is an underperformer, down 0.6% against the USD to begin the week. The CAD approached parity with the USD after Finance Minister Flaherty said the currency's rise has been orderly and reflects the country's good fiscal position. The CAD pared earlier losses after a BoC survey showed the nation's businesses expect sales growth over the next year and plan the fastest price increases in more than a decade, adding to the evidence of an economic recovery. However, last Friday's net employment change came in lower-than-expected, but at 17.9K it was still quite constructive, resulting in the third consecutive monthly employment build. The loonie achieved parity last week with its US counterpart for the first time in almost two years on speculation the Central Bank will raise borrowing costs by the end of Q2'10.
MXN - Despite a slight setback of crude oil prices this week, the peso continued to strengthen, appreciating over 1% against the greenback. Crude oil revenue funds about a third of the Mexican government's budget, leading to the strong correlation between the commodity and currency. Ahead next week, all eyes are on Mexico's central bank's decision on overnight interest rates. Speculation of an interest rate hike strengthened as futures traders increased bets on the 28-day Interbank rate futures contract, known as TIIE. The increase in futures contracts suggests that investors are expecting policy makers to increase its key rate from a record low of 4.5% this coming Monday. Mexico's Gross Fixed Investment dropped (-4.8% in Jan. vs -4.1% prior), while Industrial Production (y/y) improved (4.4% in Feb. vs. 3.6% prior).
AUD - The Aussie dollar rose to 5-month high vs. USD on easing risk aversion amid optimism over the Greek rescue plan. AUD rose to highs at $0.9382 overnight and remains firm on expectations for further rate hikes. The Reserve Bank of Australia raised interest rates last week by 0.25% to 4.25% in response to strong domestic fundamentals. Australian employment rose by 19,600 while the unemployment rate was at 5.3% in March, reflecting the solid economic conditions.