USD -The dollar rose from a one-month low against the currencies of major U.S. trade partners after German Chancellor Angela Merkel spurred refuge demand when she said dreams of an imminent resolution to the crisis aren't likely to be fulfilled at an Oct. 23 summit. At this weekend's meeting, G20 finance ministers called upon the European authorities to deal with their escalating sovereign debt problems in a more timely and effective manner to reduce significant downside risks to global growth. G20 officials still perceive that increasing the capacity and flexibility of the EFSF as a crucial step to address the ongoing crisis of confidence helping to avoid contagion. The market has been living of such hope for the last couple of weeks now which has resulted in the US dollar and yen giving back some of their recent safe-haven related gains. A mixed batch of US data is on for this week, kicking off with Empire Manufacturing this morning. The release came in at a disappointing -8.48 vs. a forecast of -4.00. Also released this morning, Industrial production came in unchanged at 0.20%. Philly Fed is due on Thursday and is expected to show major improvement over the prior release. Housing data releases are also due and will likely remain volatile.
EUR -The euro backed away from its recent highs vs. the dollar after a week of gains following the release of today's soft NY Fed Manufacturing report. The single currency slid from a 1 month peak at 1.3914 overnight, achieved amid signs of progress toward a bailout package for Greece last week helping ease risk aversion. Last week's Slovakian approval of the European Financial Stability Fund (EFSF) expansion heightened optimism that the region could cooperate toward an orderly solution for Greece. But an S&P downgrade of Spain to AA- from AA last Friday also highlighted the mounting challenges facing the region. Markets will be looking ahead to the European Union Summit this weekend for further information.
GBP -Sterling begins the week slightly lower against the USD, but is relatively well supported, benefitting as one of the primary alternatives to the EUR. While the BoE has ratcheted up its asset purchasing program, and may expand its policy easing steps in the coming months, the pound has gained as investors shift capital out of the troubled EUR and into currencies like the USD, JPY, AUD, CAD and GBP. The market will pay particularly close attention to British CPI data due on Tuesday with persistently high inflation having been the main inhibitor to further economic stimulus over the past 18 months. Retail sales will also be closely watched, set for release on Thursday with a modest gain expected.
JPY -The yen is flat to Friday's close but still within its two-month range. US-Japan bond yield spreads have moved higher but USDJPY has been slow to react. Today industrial production increased 0.6% m/m and 0.4% y/y. Speculation over what the Ministry of Finance / Bank of Japan might do to limit JPY strength continue to increase; however, the Japanese case is significantly different from the Swiss experience and do not expect the announcement of a USDJPY or EURJPY floor.
CAD -The CAD pulled back from a three week high against the USD this morning on the worsening outlook for the Eurozone. Nevertheless, the loonie remains near its strongest levels in two weeks as investors scale back their expectations for an economic slowdown in the US, Canada's main trading partner, and on the rising price of oil, the nation's primary export. The week ahead holds little major data out of Canada, with leading indicators on Wednesday and CPI on Friday. As such, the CAD will derive its direction from overall market risk sentiment and the price of oil.
MXN -The Mexican peso remained range-bound last week, trading between 13.14 - 13.52. Mexican peso bond yields dropped the most in more than a week after Mexico's central bank kept its benchmark interest rate unchanged and signaled they may lower borrowing costs in the near term. Despite news of possible monetary easing, the peso's strength will be driven largely by confidence sentiment from Europe's debt crisis.
AUD -The AUD snapped a three day gain this morning ahead of the release of minutes from the RBA's last policy meeting when Bank Governor Glenn Stevens signaled that there's room to cut interest rates if necessary. Futures are currently pointing to at least a 0.25% cut to the RBA's benchmark rate (currently 4.75%) by the end of the year. While slowing growth in China, Australia's main trading partner, will provide resistance for the Aussie in the near term, G10-leading yields and resilient commodity prices will relegate the Aussie to its recent ranges.