USD - The US Q2 reporting season gets under way this week and is likely to be a major driver of forex markets. This week's US calendar is quite full. On Wednesday, the retail sales report for June is expected to reveal a continued decline, driven by a drop in both car sales and gasoline prices. In contrast, chain store sales showed firm June figures. So, continued positive figures for retail sales less autos and gas are to be expected. On Friday, June's CPI is expected to show some easing, with a slight drop of 0.1% from May to June, reflecting the declining gasoline prices.

Later on Friday, University of Michigan confidence is expected to show a decline in consumer confidence. Further, FOMC minutes are due to be released on Wednesday. Last week, China took a 'significant step' last month when it abandoned its unofficial says that RMB remains 'undervalued'. It is not clear whether the policy shift will correct the undervaluation peg to the USD and allowed RMB to appreciate. US Treasury Department finally released its delayed report on the exchange policy of the US's main trading partners.

The Treasury report says that China took a 'significant step' last month when it abandoned its unofficial peg to the USD and allowed RMB to appreciate. However, the report also says that RMB remains 'undervalued' and it is not clear whether the policy shift will correct the undervaluation. Hence, eventually China will be judged on the size of the appreciation and tensions could resurface again at some stage.

EUR - The euro was knocked lower on worries about the outcome of stress tests on European banks. The euro has rallied 6.1% since the 1.1877 low in June. Any disappointment from the stress tests will weigh on the euro. If growth concerns return, then Europe will be worse off than the U.S. ECB President Jean-Claude Trichet recently said he expects the euro area economy to grow at a moderate, and still uneven pace in an environment of high uncertainty. Last week, the euro was supported by strong German factory data. This week, the market will eye Eurozone CPI (Wed), ECB's July Monthly report (Thu), and Eurozone trade balance report (Fri).

GBP - The GBP fell sharply last Friday dropping from 1.5200 to open this morning at 1.5074 against the Greenback. Disappointing U.K data in the form of a larger than forecast widening in the Total Trade Balance from 3.5 to 3.8 billion GBP and lower than expected Producer Prices triggered the move out of the GBP. This morning Q1 GDP was released at 0.3% as expected, but the Q1 Current Account came in at -9.6 B vs. -4.5B forecast, thus falling short of expectations. Concerns that UK growth could slow significantly as public sector cutbacks impact is weighing on the GBP, which has struggled to make any headway, even against a weaker dollar. The UK currency is thus very vulnerable to any unexpected signs of weakness in upcoming data in the short term.

JPY - The Japanese yen is trading softer following Japanese election results indicating political uncertainty ahead. Japan's ruling coalition, led by Prime Minister Naoto Kan's Democratic Party of Japan, lost its upper house majority in an election on Sunday, making it harder to deal with the country's debt. Standard & Poor warned that if Japan's fiscal position erodes further, its sovereign ratings could be cut. Japan's rating is currently at AA. The Bank of Japan will announce its policy decision this Wednesday where interest rates are expected to remain at current 0.1%. This week is the release of machine tool orders and Tokyo department store sales.

CAD - The Canadian dollar remained strong following last Friday's upbeat domestic jobs report, which showed Canada's economy created six times more jobs at 93.2k vs in June than the forecasted 20k. The data solidified the view that the Bank of Canada (BOC) will raise interest rates again on July 20th by 0.25% to 0.75%. The BOC last month was the first central bank to raise borrowing costs since the global financial crisis. A recent rebound in commodity prices and rising new homes prices in Canada for the third straight month in May also boosted the loonie. Out this week is new motor vehicle and manufacturing sales data. The loonie is expected to remain firm in the near-term on BOC expectations. However, gains may be limited by concerns about the pace of global economic growth.

MXN - The Mexican peso recovered from a 1-month low against the dollar as both trade balance and industrial production posted favorable numbers. Final trade balance for May rose to 178.9 million vs the previous 178.8 million, but more impressive was industrial production (y/y) at a 8.4% rise vs. the previous revised 6.4% gain. Data aside, the peso remains pressured as weak Chinese import data suggests that global economic recovery may be slowing down.

AUD - The Australian dollar rose to last month's resistance level of near 0.8800 before retreating today following weaker Chinese import data. China reported imports of copper fell for a 3rd straight month, threatening the industrial sector in Australia. However bearish, the Australian dollar remains supported by last week's release of positive trade balance at a 1,645 million gain vs the previous 1,123 million, coupled with favorable employment change of 45.9K vs the previous 22.8K.