USD – The dollar has consolidated within its recent ranges over the weekend against most of its major counterparts as stocks struggle to gain traction after Friday’s steep selloff. Nevertheless, the outlook for the US economy has improved as data continues to surprise to the upside most notably in the housing and manufacturing industries. While no major data is due today, investors are looking ahead to a full week with the Richmond Fed manufacturing index due on Tuesday and new home sales and the house price index both on Wednesday ahead of a key FOMC decision. While no change in Fed policy is to be expected with interest rates already close to zero and QE3 underway, the market will be paying close attention to the accompanying commentary and any guidance they may give on the possible extension of “Operation Twist.” Investors will also look for the Fed’s most recent assessment of when rates may rise with the current forecast being not until the middle 2015. Thursday sees the release of Chicago Fed, weekly jobless claims, pending home sales, and most notably durable goods orders. The week then closes out with GDP, personal consumption and U. of Michigan Confidence all due on Friday. With the general improvement in US data expected to continue, the dollar’s direction will be increasingly driven by developments abroad as demand for its relative safety wanes.
EUR – The EUR has begun the week on a strong note after Spanish PM Rajoy secured an electoral victory in his home district of Galicia. A loss could have proved disastrous for the Rajoy administration as a public sign of discontent with the government’s fiscal consolidation and reform agenda. However, with Rajoy maintaining his mandate, investors fear that it could further delay a Spanish request for ECB aid. Consequently, yields on Spanish government bonds are higher for the third-straight session with the 10-Yr rising to the highest in more than a week at 5.5%. However, the results are a double-edged sword in that while it may delay any requests for external aid, the political affirmation was likely a necessary hurdle to overcome before tapping the ECB’s Outright Monetary Transactions bond program. Rajoy continues to emphasize that he needs reassurance that the “bailout” mechanism actually exists before lodging any requests, but he’s likely to face increased pressure from Spanish business as the economy languishes. Consequently, the EUR will likely remain range-bound until more details regarding a possible Spanish bailout request materialize.
GBP – Sterling is higher today against the dollar, but lower versus the euro as risk aversion eases a bit. Investors are focused on the growing divide between the UK and the rest of the EU nations. PM Cameron is insisting on no further budget increases for the EU and has pledged to veto a rise above inflation. As Cameron put it, “I have not put in place tough settlements in Britain in order to go to Brussels and sign up to big increases in European spending.” The growing divide could prove to be a positive for the GBP as investors increasingly seek alternatives to mainland European assets. The market will be focused on a British GDP report due on Thursday with the economy expected to return to growth for the first time in 2012.
JPY – The yen is lower against the dollar for the eighth day, the longest such streak in seven years after a report showed Japanese exports falling by the most since after the earthquake and tsunami in 2011. The JPY fell further after Economy Minister Maehara urged the BoJ to take “more action” to support the Japanese economy; a rather clear reference to further easing and possible currency market intervention. With the next BoJ meeting not until the 30th, the yen will likely extend its slow and steady decline against most of it major counterparts.
Commodity Currencies – The commodity linked currencies began the week mixed with the CAD and AUD falling while the MXN and other emerging market currencies rise. The CAD edged back towards parity with its US counterpart on speculation that the BoC’s stance is becoming increasingly dovish. With the Canadian economy showing moderate signs of slowing, and after last week’s unexpected drop in headline inflation, investors are of the view that BoC Governor Carney will likely deemphasize a possible hike in interest rates in the coming months. Similarly, the AUD is lower ahead of a report this week that may show Australian inflation slowing to the slowest in 13 years, giving the RBA room to lower rates further in the coming months. On the other hand, higher-yielding EM currencies, like the MXN, are higher this morning as the easing of risk aversion prompts investors to seek higher yields. Moreover, a report this morning showed Mexican retail sales jumping by 4.8% versus last month’s 2.6% and much higher than the 3.4% that was expected.
RMB –The Chinese yuan is flat this morning despite last week’s drop in open market operations. The People's Bank of China (PBC) conducted reverse repos last week which had a net drain of about 87B yuan and dropped China's main benchmark rate to a five-week low. However, the yuan's near-term trajectory now largely depends on the direction of the euro. If the euro continues to strengthen against the dollar, the yuan will likely follow it to reach new historical highs. In addition, some traders believe the US election will persuade the PBC to set somewhat stronger CNY fixing rates in the coming weeks.
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