USD - The FOMC meeting last Wednesday sprang no big surprises as the statement showed the same dovish language as in December. It is very unlikely that the Fed will terminate its asset purchase program ahead of schedule and the first Fed funds rate hike is not expected until mid-2012. This morning's data releases showed Personal Spending in the U.S. rose more than forecast in December, capping its strongest quarter in more than four years. Purchases, which account for about 70% of the economy, increased 0.7% after climbing 0.3% the prior month. Personal income increased for a second month, rising 0.4%, matching the median forecast. This week's US calendar will be dominated by two major data releases. Tomorrow, the manufacturing ISM index for January is expected to show yet another strong reading, increasing to 57.5 from 57.0. On Friday the employment report is anticipated to show a considerable increase in nonfarm payrolls, gain of 165,000 in non-farm, and 180,000 in private payrolls is expected. On the other hand, unemployment is expected to increase slightly, since last month's major drop in unemployment was partly driven by an exceptionally large decline in the size of the labor force. There will be a few Fed speeches this week, most notably Bernanke speaking on Thursday. Given last week's dovish FOMC statement, we expect the Chairman's comments to remain cautious stressing the slow progress in labor market conditions.
EUR - The euro rose vs. the dollar on persistent inflation concerns amid a backdrop of geopolitical uncertainty from unrest in Egypt. The single currency climbed to highs of $1.3739 overnight, gaining over 1.5 cents after Eurozone inflation rose 2.4% in January. The spike in inflation came largely from rising commodity prices and is above the ECB's target of 2%, which prompted a warning last week from ECB officials that they may take measures to curtail inflationary pressures. Meanwhile, global investors are cautiously monitoring events in Egypt which could prompt a bout of risk aversion and result in a euro reversal if the situation continues to deteriorate. Amid this backdrop, volatility is likely to continue this week as inflation concerns at home and geopolitical concerns abroad pull the single currency in opposite directions.
GBP - The GBP starts the week off on solid ground after last week's shaky performance. Sterling's move higher has been prompted by increasingly hawkish commentary from BoE policymakers. The Bank has been divided on policy for months, but it now appears that the faction calling for higher interest rates is gaining support as British inflation pushed to an eight-month high of 3.7%. With increasing odds that the BoE will raise interest rates from their current ultra-accommodative levels as soon as this summer, the pound will likely remain well supported in the near term. However, as BoE Governor, Mervyn King, noted, the uptick in inflation may be offset by government spending cuts and slow economic growth, which could cap any significant gains for the pound.
JPY - The Japanese yen strengthened across the board late last week as the turmoil in Egypt sent investors flocking into the safe-haven currency. The fundamentals, however, painted a grimmer economic outlook as Japan's sovereign debt rating was downgraded for the first time in 9 years by Standard & Poor's agency. Household spending dropped 3.3% from December of the previous year, and jobless rate for December fell slightly to 4.9% from 5.1% in November. Consumer confidence tumbled to a 10- month low in December, dragging overall retail sales lower. Consequently, the yen will likely give up these gains when market risk sentiment recovers.
CAD - The CAD starts the week locked near parity with the USD despite encouraging growth data. GDP jumped by 0.4% MoM in December, besting expectations of a 0.3% gain, and bringing 2010 annualized growth to a healthy 3.0%. While the country's commodity exports remain strong, Canadian officials worry that the stronger loonie could be prohibitive to growth, and as such no immediate tightening of policy is to be expected. In the near term, the CAD will likely remain locked in narrow ranges to either side of parity with the USD with its direction dictated by commodity prices and future growth prospects.
MXN - The Mexican peso ended last week weaker against the greenback as tensions in Egypt heightened risk aversion spurring a selloff of emerging market currencies. Ironically, Egypt's crisis brought back some gains for the peso this morning as the pressures in the crude oil market spiked prices to trade at $89.69/bbl. Domestically, Mexico's retail sales for November dropped to 2.4% vs. the previous 4.4% and 4.0% anticipated. Market participants will be focusing on next Friday's central bank policy minutes for further direction of the USD/MXN.
AUD - The AUD has struggled throughout the first month of the new year as Australia deals with the most costly natural disaster in its history. Recovery from the devastating floods in Queensland is projected to top $5B in reconstruction costs, and the hindrance on exports and the domestic economy is expected to cut 0.5% from GDP this quarter. In light of the slowed growth, the RBA will likely slow the pace of interest rate hikes, which will diminish from the future appeal of the high-yielding Aussie should other central banks begin to tighten policy. However, in the near term, rising commodity prices will provide downside support.