USD - The near term reversal in the Greenback gained momentum on recent dovish comments from Fed officials, hinting at further stimulus. The market remains rightly wary of the threat of QE3, as the previous programs resulted in temporary USD weakness. However with the global growth outlook likely to weaken further, a further injection of USD liquidity is unlikely to encourage a pickup in capital outflows, proving less dollar-negative than previous bouts of QE. Comments from FOMC member Tarullo late last week suggested that QE3 would likely take the form of significant purchases of mortgage backed securities, in a more focused attempt to lower mortgage rates. While lower mortgage rates may ease funding strains in the US housing market, it will not solve the fundamental problem of oversupply nor alleviate the ongoing labor markets woes. The main US data release this week will be the first estimate of Q3 GDP, with growth expected to show a reasonable pick up from Q2's annualized rate of 1.3%. Other data of note include the personal income and spending report for September, as well as new and pending home sales. The latest durable goods, house prices, and consumer confidence reports are also expected. However, currencies will likely remain choppy until we get a clearer picture of economic outlooks on both sides of the Atlantic.
EUR - The euro backed away from 6-week highs vs. the USD as investors cautiously await the continuation of a European Union summit Wednesday and contemplate signs of another recession in Europe. The single currency climbed to a high of $1.3950 in early trading amid hopes European leaders would come to agreement on a bailout package for Greece, but it gave up its gains after a final decision was deferred until Wednesday. Although some progress was made during the weekend meeting, differences on a bank recapitalization plan and how much in losses bondholders should incur remain under debate. The uncertainty over the debt crisis over the past few months is also taking its toll as Europe reported that business activity continued to contract in October. The Euro Zone Purchasing Manager's Index (PMI) slid into further negative territory at 47.2, from 49.1 previously, in a sign that the economy is tipping into its second recession in three years. The slow growth complicates an already difficult situation for Europe. Last week, Moody's warned that it could place a negative outlook on France for a potential downgrade of its Aaa credit rating if slower growth stressed its finances. Given the challenges facing the region, Wednesday is shaping up to be a key day for the euro with markets hopeful for a resolution.
GBP - The pound appreciated toward its strongest levels in two weeks as uncertainty that European leaders will forge a durable solution to the debt crisis boosted the relative allure of the British currency. Data supporting this move included the budget deficit narrowing in September by more than economists had forecasted. This week is light on economic releases, so the market will focus on this week's European Summit, where Prime Minister Cameron is arguing he should be in attendance while French President Sarkozy is insisting that only members of the euro-nations should attend.
JPY - JPY has risen 0.2% against the USD, a marked contrast to the expectations of market participants, as officials continue to talk of intervention to combat record strength. Last Friday USDJPY fell to 75.82, a record low for the pair, surpassing the previous low of 75.95 on August 19th. The fall in USDJPY was likely driven by concerns over the outcome of the weekend's EU meetings. Official action remains limited to assisting exporters hurt by yen strength. USDJPY is currently trading at the lows of its two month range between 75.82 and 77.86, and near term resistance is expected at 76.81, the 50 day Moving Average.
CAD - The CAD begins the week at its strongest levels in nearly a month as fears of an imminent global economic slowdown ease. A better-than expected Chinese PMI report has supported the optimism as the report showed Chinese manufacturing moving into expansionary territory for the first time in five months. The rising price of oil, Canada's main export, has also pushed the loonie higher with crude having risen by more than 17% so far in October. In the near term, the CAD will likely remain well supported with the improvement in risk appetite.
MXN - The Mexican peso remained range-bound last week, fluctuating between the 13.15-13.80 levels. Trading is being driven largely by headline risk from the European crisis, and price action could become volatile as we approach the second EU summit this week. Domestically, Mexico's consumer prices rose 0.61% in the first half of October, the fastest pace in 11 months, on higher electricity costs. The Finance Ministry estimated that economic growth will slow this year to 4% from 5.4% in 2010 as a global economic slowdown reduces sales to the US which imports 80% of Mexico's exports.
AUD - The AUD extended its recent gains, having now risen by nearly 9.5% from its yearly lows reached at the beginning of October. While this past weekend's Eurozone summit produced little major results, apparent progress towards a broader plan to support the region's weakest members has encouraged investors to seek the Aussie's higher yield. The strong PMI report out of China, Australia's main trading partner, has also buoyed the AUD as a pickup in Chinese manufacturing will likely translate into increased demand for Australian commodity exports.