USD - Following a bit of a slow week in US markets, quite a few interesting events are on the agenda this week. Tomorrow, the last FOMC meeting of the year will be held. No major surprises, policy-wise, are expected, but there could be changes in the communications strategy. In particular, Fed vice chairman Yellen, who is also heading the task force on FOMC communication, and Chicago Fed president Evans, will be speaking in favor of changing the strategy, might clarify how Fed policies will be affected by changes on economic activity. However, it remains unclear whether the task force is far along with its work to present a new strategy as early as next week. Also Tuesday, the retail sales report for November is expected to remain on track, expected increase 0.5%, with the main driver being car sales. Core sales are expected to look weaker than last month, as chain store sales figures have been losing steam over the past few months. On Friday, core CPI is expected to remain modest, but slightly over consensus, increasing 0.2% m/m due to the rent-of-shelter component, which has remained surprisingly strong over the past couple of months. The first figures for manufacturing confidence in December will be released in the form of local business surveys from New York and Philadelphia Fed. Following last week's surprisingly strong ISM figures, moderate increases in both surveys are to be expected, with the Empire figure rising to 4.6 and the Philly figure increasing to 7.0.
EUR - The euro slid to 2-month lows vs. the dollar after last week's European summit failed to restore market confidence. The single currency fell to lows at $1.3178 as European equities declined. Italy and Spain's borrowing costs also spiked prompting the ECB to intervene to prop up Italian debt through bond purchases. European leaders with the notable exception of the UK agreed to a new fiscal compact with greater fiscal integration including enforcement of debt and deficit rules and powers to reject national budgets. Britain, fearing the impact on its financial sector and loss of autonomy over its economy, declined to take part in the agreement. Market response has been skeptical given the lack of a concrete action plan and prospects for further summits to develop the plan. After S&P warned last week that it may downgrade the debt of 15 European nations, Moody's has now announced the same, placing further pressure on the euro. Given the mounting challenges, the euro is likely to remain pressured in the near term.
GBP - The pound begins the week well within its recent ranges, weakening slightly against the USD while gaining against the EUR. Last week, PM David Cameron split from his mainland neighbors, opting out of a new EU treaty that will build greater fiscal ties within the Union, citing Britain's best interests and sovereignty for the snub. The abstention has encouraged investors to extend the shift of capital out of the Eurozone and into the relative safety of British government assets, driving the yield on 10-Yr Gilts to a new all-time low. In the week ahead, investors will take note of key CPI and RPI data, both expected to show a modest decline.
JPY - 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 is lower this morning as Moody's announced that it too is reviewing the Eurozone nations' credit rating saps investor risk appetite. The loonie also fell to its lowest level against the USD this month as crude oil, Canada's main export, declined by as much as 2.25%. A Canadian government report also showed that the nation will not be able to eliminate its budget deficit by 2015 as previously forecast without implementing austerity measures, albeit limited compared to those necessitated in the struggling European countries.
MXN - The Mexican peso has remained weak as worries of European's debt crisis keep risk aversion high. Domestically, Mexico posted m/m inflation rate above the 1% mark in November, while the consumer price index rose by only 0.32% m/m. Industrial production rose 3.3% in October from a year earlier, moderately lower than the 3.9% forecasted growth, amid the negative outlook on European's debt crisis. The peso will likely remain pressured in the near-term.
AUD - The AUD begins the week at the bottom of its recent ranges on increasing risk aversion and after a report showed that Australia's trade surplus shrank by more than expected. The sharp slowdown is in line with RBA Glenn Stevens comments after the Bank lowered interest rates last week to 4.25% citing considerable turbulence [in global financial markets] and further material slowing in global growth. With little economic data due this week, the Aussie will likely continue to track overall risk appetite, but with its downside limited by the growing attractiveness of Australian AAA-rated assets.