USD – After a slow two‐week period following the holidays, the pace of Fed rhetoric and US economic data will pick up this week, providing investors with a look at the probable direction of policy and data for the final two months of 2012. The major event this week will be Fed Chairman Ben Bernanke’s speech this afternoon, where he will probably reinforce the dovish direction of central bank policy. Meanwhile this week, we will see a number of first‐tier data reports that will touch on retail sales, inflation, regional manufacturing, residential investment, and consumer confidence. Retail sales report tomorrow may fall short of expectations for December, largely reflecting disappointing auto sales which edged down slightly. Strong increases in electronic and non‐store sales may have reflected the earlier start to Black Friday and Cyber Monday’s
promotions, limiting further gains during the Christmas shopping season. Sales of building materials should remain positive, given the rising trend in housing starts and sales, combined with post‐Sandy rebuilding, which should translate to a small uptick in the Industrial Production release on Wednesday. The CPI data which also releases Wednesday may remain non‐eventful, even if core inflation moves up a notch. Expect some follow‐through in December from November’s industrial production bump, and a strong trend for permits that should show a pick‐up in housing starts that month.
EUR – The euro is at 11‐month highs vs. the dollar on fading prospects for an ECB rate cut and signs that the recession in Europe is bottoming. The single currency remains near overnight highs of $1.3403 as positive risk sentiment is helping the euro on a strong start in the new year. The euro was bolstered last week after the ECB left rates unchanged at its policy meeting amid upbeat comments by ECB head Mario Draghi which dampened the outlook for further rate cuts. The euro largely shrugged off news today that industrial production in the region declined for the third straight month in November to ‐0.3%. But gains in some of the components of the report raised hopes that manufacturing may have bottomed and is primed for a rebound. Markets will be on the lookout for further signs that Europe is on the mend which will likely underpin the euro in the near term.
GBP – Sterling remains range‐bound against the dollar, staying between 1.6000 and 1.6200. Anticipation is building over how Prime Minister Cameron will shift the UK’s relationship with the EU and whether or not the UK will contemplate a referendum. The pound has started trading in tandem with yield spreads again, with both the 2 and 10 year gilts trading off of their recent highs. This week brings both PPI and CPI on the 15th, so we should have a better idea of the UK inflation picture and whether or not the BOE will continue to keep rates at record lows.
JPY – The JPY touched its weakest level against USD since June 2010 after Japanese Prime Minister Shinzo Abe reiterated that he will seek a bold policy leader to head the BoJ. Pressure and expectations for next week’s BoJ meeting (January 21/22) continue to pressure USD/JPY higher. The market is re‐pricing USD/JPY in anticipation the BoJ/Government will deliver a joint statement to pursue a 2% inflation target which includes expanding the asset purchase program and push further an aggressive policy to accompany last week’s fiscal stimulus announcement. Earlier today, Japan’s vice finance minister Nakao, commented that the yen is correcting from a previous excessive rise. The next near‐term target will be breaking the psychological level of 90.00.
Commodity Currencies – The Australian dollar gained against the USD, despite weak domestic data. Home financing data fell 0.5% in November, decreasing the number of commitments to buy new homes. In addition, the number of loan commitments for building homes fell 1.8%. Retail sales figures fell 0.1%, widening the Australian trade deficit. Expect the Aussie dollar to continue to strengthen against the dollar with support from the ongoing strength in commodity prices and an improving Chinese economy, Australia’s top export market. The Canadian dollar softened against the USD after the BoC business poll show a weak economic outlook for the country. Canadian businesses are concerned about demand over the next year, resulting in less pressure on their production capacity in Q4. Signs of greater slack in the Canadian economy
suggest that the BoC will be in no rush to raise its benchmark interest rate, which is currently at 1.0%. Investors expect the BoC to keep the interest rate on hold until later this year.
RMB – China's yuan (CNY) weakened after two straight trading days at record highs reaching 6.2130. The Offshore market (CNH) also weakened slightly to 6.1860, but traders continue to be bullish, focusing on continued appreciation of the currency. Look for the yuan to push higher on the heels of last week’s strong export figures, coupled with the People’s Bank of China’s statement released over the weekend, indicating the increased
development of its capital accounts.
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