USD - The USD gained against 14 of the 16 most actively traded currencies last week as Egyptian President Mubarak's 30-year rule came to an abrupt end. After three weeks of demonstrations, which remained mostly peaceful, the calls for political change became too strong for the Egyptian dictator to ignore, forcing him to cede power to the military. Global markets have generally embraced the democratic change as a positive for the region with global commerce, oil transport through the Suez Canal most notably, largely unaffected. The dollar also benefited on signs that the US labor market is improving, albeit slowly. With weekly jobless claims dropping by the most in more than two years, investors appear bullish on the US economy. Markets will however closely monitor retail sales, housing, and inflation data due this week combined with the Obama administration's 2012 budget proposal that calls for $1.1 trillion dollars in cuts over the next decade.
EUR - The EUR begins the week by dropping against all of its most-traded counterparts on expectations that officials will again struggle to bridge differences over expanding the Eurozone's bailout fund. The common currency also came under pressure early in the European session on speculation that the restructuring of West LB AG, a German state-owned bank bailed out during the financial crisis, is failing. Further compounding the euro's woes, Ireland's main opposition party said that it wants to renegotiate the country's EU-IMF loans, and Greek officials criticized demands from both the EU and IMF. Portuguese debt also gave investors cause for concern as yields on 10-year bonds rose to 7.37%, short of the 7.64% reached last week, but still providing enough pressure to lead most to believe the third Eurozone member will seek EU assistance.
GBP - Inflation data will be the key driver for Sterling this week. Consumer prices are expected to increase 4.0% on Tuesday. This follows last month's increase of 3.7% - which was the highest reading since November 2008. This, coupled with Wednesday's quarterly inflation release by the central bank, has the market speculating that the BoE will raise rates sooner rather than later in an effort to stave off inflation. Sterling has already gained 2.6% against the greenback this year, currently trading at a key psychological level of 1.60. The data this week should provide further direction for the pair and show whether a move above that level can be sustained.
JPY - JPY has managed to hold on to marginal strength against the USD through European trading, but is moving to near flat as the North American trading day session begins. Q4 Japanese GDP contracted as expected, but while recording a -0.3% q/q and appearing somewhat better than the expected number of -0.5% q/q, a downward revision to Q3's data took away the relative upside growth surprise. USDJPY has recaptured some upside initiative, despite trading slightly lower today, in line with the upside pressure on US-Japanese shorter term yields. Look to 84 as primary resistance, though a trade past this level opens up a shot at the 4.5 month high near 84.50.
CAD - The CAD gained against all of its G10 counterparts last week as strong North American economic data increased speculation that the BoC will tighten monetary policy. The Canadian economy unexpectedly posted its first trade surplus in more than 10 months last week as rising energy and metals prices buoyed the biggest jump in exports in nearly three decades. The BoC has left rates at 1% since late September. At the Bank's December meeting, Governor Carney said that exporters needed to regain competitiveness damaged by a strengthening currency and slowing global demand by investing in productivity. With exporters clearly regaining their competitiveness, markets have begun to expect the BoC to consider tightening policy as soon as next month.
MXN - The Mexican peso recovered from last Friday's weekly low after Mexican Finance Minister, Ernesto Cordero, commented that policy makers may auction off more monthly dollar options. This may help soften the impact any sudden outflow of capital would have on the peso. Despite the recovery, the peso is still under pressure, with USD/MXN remaining well above the 12.0000 support level. Fresh strikes and protests in Cairo over better pay and work conditions has renewed tensions in the Middle East, prompting investors to shy away from riskier, emerging market assets.
AUD - The AUD starts the week back above parity with the USD after falling below the mark last Friday for the first time in three weeks. The Aussie has fallen out of investor favor as of late, with markets on edge over unrest in the Middle East. Investors have also been less willing to buy the AUD ahead of key Chinese data this week that may suggest Australia's largest trading partner may continue to tighten its monetary policy. Trade data this morning has encouraged investors as Chinese imports outpaced exports, but the Chinese New Year holiday likely distorted the data. Investors will be focused on Tuesday's inflation data out of China, with expectations for higher interest rates likely providing significant resistance for even the high-yielding AUD.