USD - The currency markets ended last week on a mixed tone. In the US Q4 GDP was unexpectedly revised down to a 2.8% annualized gain. A noteworthy area of revisions was personal consumption, now estimated to have risen at a 4.1% pace, while final domestic demand was revised down to a 3.1% pace. The dollar's reaction to the data was moderately negative. This morning, the USD fell to its lowest level since November against six major US trade partners on bets Federal Reserve Chairman Ben Bernanke will signal to Congress the central bank plans to maintain economic stimulus at his semi-annual testimony on monetary policy tomorrow. The dollar remained lower versus most major peers even after the Institute for Supply Management-Chicago Inc.'s business barometer unexpectedly rose to 71.2 this month, the highest level since July 1988, from 68.8 in January. U.S. consumer spending rose less than forecast in January, accelerating 0.2% amid increasing fuel and food costs, data from the Commerce Department showed today. Another report showed European inflation stayed above the ECB's 2% target for a second month in January. In the US, all eyes will be on Friday's nonfarm payrolls report for February. The data is expected to show a gain of 160,000 (up from 36,000 in January), with the ADP report (Wednesday) and weekly jobless claims (Thursday) providing some advance signals. The unemployment rate, meanwhile, is forecast to tick back up to 9.1% from 9.0%. Also closely watched in the US will be February's manufacturing and services ISMs, with strong numbers anticipated.
EUR - EUR is surprisingly strong, gaining 0.4% against the USD and moving towards a break above the February 2nd, 1.3862 high. This week's highlight will come with the ECB meeting on Thursday, as market participants have been building their expectations for a shift in tone from President Trichet. However, today's softer than expected January CPI print should provide some relief to inflation hawks. It was a significant drop in clothing costs (-0.6% y/y and -13.3% m/m) that was responsible for the largest portion of downward pressure. Still with oil having risen significantly over the last week, inflationary pressures are likely to continue. In tomorrow's European session, Eurostat will release its February CPI estimate (consensus is calling for 2.4% y/y). Near-term risk for EUR are the slew of US data today and tomorrow's European PMI and CPI estimate releases.
GBP - Sterling is trading at recent highs as rising oil prices have stoked bets that the Bank of England will be forced to raise rates this year to curb inflation. CPI growth, which was 4% last month, has been above the central bank's target of 2% for 14 consecutive months. The futures market is pricing in a 67 basis point rise in short term interest rates by the end of the year, with the first move coming as early as May. This is the third time in the last two weeks we have traded at or near 1.6250 - with a break of that level resulting in a move toward 1.6400.
JPY - The yen is slightly weaker today with Japan's January industrial production increasing 2.4% m/m and 4.7%y/y, well below consensus, while housing starts rose just 2.7% y/y. However, somewhat offsetting this was surprisingly strong retail trade, which increased 4.1% m/m and 0.1% y/y. There is limited data expected for the rest of this week, which is likely to leave the focus for yen on risk aversion and movement in the USJapan bond yield spreads.
CAD - The loonie started the week at a three-year high against the USD after a report showed that Canada's economy grew more than forecast on surging exports. GDP growth registered 3.3% in Q4, led by a 30% increase in crude oil shipments, causing many investors to begin pricing in a hike in Canadian interest rates. However, continued geopolitical risks, weakening Canadian retail sales, a slower than previously forecast US expansion and a stronger CAD may cause the BoC to pause before tightening policy. Elevated oil prices will buoy the Canadian dollar in the near term, but unless the economy shows clear signs of continued recovery, its gains may only be temporary.
MXN - The Mexican peso continued to advance against the greenback last week as geopolitical factors surrounding the Middle East boosted crude oil prices rise above $97/bbl. As long term effects of political unrest remain unclear, the crude oil market along with emerging market currencies should remain supported in the near-term. Domestically, Mexico showed a very strong increase in exports in January of 28% y/y, as evidence of trade balance figures, which posted a gain of 63mm vs. the previous -218mm. Consumer price index for the second week of February also showed positive growth of 0.21% vs. the previous 0.17%.
AUD - The AUD begins the week back towards the top of its recent ranges as investors' risk appetite recovers. While fears over unrest in North Africa and the Middle East have begun to subside, commodity prices have remained at elevated levels. Higher prices for raw goods provide support for the Aussie, but a strong currency does threaten the country's export industry as Australian goods become relatively more expensive. In the week ahead, investors will take note of Australian retail sales, current account balance, housing market data and GDP. High commodity prices, resurgent risk appetite, and a hawkish outlook from the RBA will likely keep the AUD well supported, at least for the near term.