USD - The USD is continuing to build on its gains from late last week, even in light of the fairly supportive macro-financial environment today. US equities are up, further supporting the USD as are copper and oil. Gold is down modestly in light of the stronger USD. With the greenback's gains, NZD, AUD and GBP are best supported today while NOK, SEK & EUR are the most prominent laggards. US yields are supporting the USD with the US 2yr Treasury yield increasing to a nearly eight month high just below 0.77%, an increase mirrored along the yield curve's term structure. The now fivesession rally in the 2yr's yield (off of lows of around 0.55% on January 31st) was certainly helped by last week's US economic data, which included the ISM results and the employment numbers. Though the greenback didn't really respond to the data in the same direction as yields until late in the week, it seems that in the near term the USD is now moving in line with them.
EUR - The euro starts the week by sliding for a fourth day in a row against the USD after disappointing data out of Germany. Factory orders unexpectedly fell in the region's largest economy by 3.4% from the previous month, and were down to a 19.7% gain year over year. While investors have grown thick skin to disappointing economic data out of the region's periphery economies like Greece and Ireland, bad numbers out of Germany, the Eurozone's stalwart engine of growth, has shaken investors' confidence in the common currency. Another wasted summit at which Eurozone officials were unable to resolve their differences over the region's rescue fund is also weighing on the euro, but the spread between periphery and core national bond yields actually narrowed as the weak German factory orders pushed yields on German bonds to a 10-month high. GBP - The GBP strengthened against all of it's 16 most actively traded peers last week as speculation persists that the Bank of England will have to raise borrowing costs this year. This is based on above-target inflation, which is currently almost twice the 2 percent target. While it is unlikely the BoE will hike this week at its meeting on the 10th, the market certainly thinks they will have to act sooner rather than later, especially with the yields on two year notes trading at a two year high. This week's key releases include Industrial Production and PPI, but most eyes will be on the rate announcement on the 10th and any policy maker commentary.
JPY - The yen is entering the North American trading session having lost 0.2% against the USD, but is flat against the EUR. After the release of Friday's nonfarm employment report, US two-year yields reached 0.79%, their highest level since last June. This has subsequently widened the USJapanese 2-year bond yield spread to 0.55%, also the highest level since last June. However, USDJPY, which is typically interest rate sensitive, has failed to react, creating an interesting divergence. The ability for USDJPY to remain low in the face of rising interest rate spreads is unlikely to last. Accordingly, we would expect near-term upside pressure on USDJPY.
CAD - The CAD begins the week on strong footing as bets increase that the Bank of Canada will tighten monetary policy as soon as this spring. The probability that the BoC will hike by a quarter of a percent from its current one percent benchmark by May jumped to 72% this morning, from 61% on Friday, and 47% two weeks ago. The improving optimism comes after last week's jobs report showing that employment in Canada increased in January by four time as much as forecast. The BoC has been cautious to tighten further after last year's round of rate increases led the CAD to pass parity with the USD, which officials were afraid would weigh on the country's nascent economic recovery. However, rising commodity prices combined with strong demand for Canada's natural resource exports will keep the loonie well supported above parity with the USD in both the near and long term.
MXN - The Mexican peso extended its largest weekly gain against the greenback since September after the unemployment rate in the US dropped to the lowest level since 2009. During Mexico's first-ever published minutes last week, policy makers commented they expect inflation to continue slowing this year as considerable capital inflows are causing the nation's currency to strengthen. Despite current peso strength, minutes last week did not express any interest of following their regional peers in trying to stem currency gains. Governor Agustin Car maintained his expectation that inflation will slow within its target range this year even as prices come under pressure in other Latam economies.
AUD - The AUD is little changed from last week's close, consolidating towards the top of its recent ranges as the investors assume higheryielding positions. Despite more than a month of flooding that has slowed Australian exports, the Aussie has remained well above parity with the USD for more than a week now as Asian investor interest has provided significant support. However, surprisingly weak retail sales, registering +0.2% versus an expected +0.5%, and the cost of recovery from a month of storms in coal-producing Queensland, will make it increasingly difficult for the AUD to break its recent high of 1.0253, the strongest levels seen since it was free floated in 1983.