Weekly Summary on USD, EUR, JPY, GBP, AUD, CAD and MXN

By Roger Baettig | December 05 2011 3:09 PM

USD - The market's appetite for risk is strong at the start of a week that will see rate decisions from the world's major central banks including the BoC, the ECB, the BoE, the RBNZ and the RBA. Both the ECB and the RBA are expected to cut rates by 25bps. This week should be relatively quiet in terms of US data releases. This morning the Institute for Supply Management's nonmanufacturing index fell to 52 in November from 52.9 a month earlier. The index has been hovering around 53 since the summer, so hopefully we will shortly start to see a more permanent increase, signaling a robust expansion in the service sector. Fifty is the dividing line between expansion and contraction. New orders from U.S. factory goods fell in October for the second straight month, suggesting a possible softening in the manufacturing sector. Orders for manufactured goods decreased 0.4 percent after a 0.1 percent drop in September. On Friday, trade balance figures are expected to deteriorate somewhat, as exports are being depressed by the uncertainty in Europe in particular. However, a major shift in the balance is not expected.

Sponsorship Link

The Euro is holding fragile gains amid investor hopes of a master plan to save Europe and despite signs of a faltering economy in what is likely to be a momentous week for the euro. The single currency held above $1.34 following last week's coordinated move by G7 central banks including the Fed to provide additional dollar liquidity to the market. The measure was aimed to alleviate pressure on European banks which have faced funding challenges under the ongoing European debt crisis. Europe faces a crucial week ahead of this weekend's summit at which investors are hoping for a way forward for the beleaguered region. Leaders of Germany and France, met today under pressure to agree on a plan to address the region's budgetary difficulties. In Italy, newly elected PM Monti proposed a EUR 30 billion austerity package to address the nation's budget imbalance. Dubbed Save Italy, markets responded positively to the proposals and sent Italian bond yields lower. The Eurozone Purchasing Manager Index (PMI) declined to 47 in November, below the 50 threshold which denotes contraction. European Retail Sales also declined -0.4% in October year over year. Hopes for a package to rescue Europe are holding off pessimism amid signs that Europe is sliding into recession. Given this, the euro is likely to get a pass this week as investors await the outcome of this week's meetings.

GBP - The pound strengthened against the dollar, snapping a two day decline, as optimism that euro-area leaders are acting to ease the region's debt crisis spurred by higher-yielding assets. Over the past three months, sterling has appreciated 1.4% against a basket of currencies. This increase was only surpassed by the USD, the JPY, the CAD and the AUD. The BoE will meet on Dec 8th, with expectations they will leave rates as they are and they will not increase their asset purchase plan at this time.

JPY is flat from Friday's close as markets remain focused on this week's central bank meetings and ongoing developments in Europe. USDJPY continues to trade around 78.00, a level of recent congestion, while technicals remain bullish with the 50 day Moving Average (77.14) poised to cross the 100 day Moving Average (77.16) to the upside. Movement in JPY is likely to remain influenced by broader market sentiment ahead of the release of economic data later this week including trade data and GDP, with both expected to weaken.

CAD - The CAD begins the week higher against most of its major counterparts on optimism that Europe is putting its financial house in order. Along with the modest return of investor risk appetite, the loonie has benefited from the recent rise in the price of oil, the main Canada's main export. Moreover, as other G10 central banks look to loosen monetary policy, the BoC is expected to keep rates on hold or even move them higher in the coming months as Canadian economic grows at twice the pace of the G7 economies and inflation moves has outpaced the Bank's 2% target for 11 straight months.

MXN - Banxico left the O/N rate unchanged on Friday, releasing a more hawkish than anticipated statement, which put upwards pressure on the short end of the Mexican yield curve. MXN is making strong gains this morning, opening 1.1% stronger relative to the greenback on a combination of a more hawkish than expected Banxico, positive global sentiment, and the favorableimpact of last week's FX Commission announcement on demand for domestic bonds.

AUD - The AUD is higher this morning despite increased expectations that the RBA will cut interest rates at their monetary policy meeting tomorrow. Despite the Bank's increased dovishness, Australian interest rates will remain the highest amongst the G10, still making the Aussie an attractive investment. The positive developments in Europe over the past week have helped market risk sentiment and the AUD greatly, but slowing growth in China and Europe will likely weigh on the Aussie in the long term.