USD – The dollar begins the week mixed against its major counterparts with no major economic US data to provide direction. Investors are still encouraged by last Friday’s surprisingly upbeat nonfarm payrolls and unemployment reports and are hopeful that Democrats and Republicans are close to finding common ground in the ongoing fiscal debate. Despite the lack of bipartisan consensus thus far, market participants are generally attracted to the relative stability and outperformance of the US economy. While market volatility has fallen to near record lows as of late, the market remains concerned with Europe’s ongoing struggles with debt, an apparent slow down in East Asian economic activity, and growing tensions in the Middle East. Consequently, the dollar’s ranges have become increasingly narrow with the dollar index gravitating towards the contracting 50‐day and 200‐day MA gap between 80.32 and 80.39. For the week ahead, investors will take note of wholesale inventories and the most recent reading of the trade balance due tomorrow with a modest widening of the deficit expected on signs that exports slowed in November.

Wednesday sees the import price index, monthly budget statement, and the Fed’s last policy decision of 2012. While no changes are expected, investors will be looking for discussion of a possible extension of “Operation Twist” in the months ahead with the current program expiring at the end of the month. The week then closes out with retail sales, the producer price index, and weekly jobless claims all on Thursday and industrial production and the consumer price index both on Friday.

EUR – The euro fell to a two‐week low in early trading before rebounding after Italian PM Monti announced his resignation. After less than a year in office, Monti said he will step down from his post once the country’s 2013 budget is approved by the Italian parliament, triggering an election in mid to late February. The unelected technocratic leader felt he lost his mandate to govern after the center‐right PDL, the largest party in parliament, withdrew their support. Italian debt yields immediately spiked higher after the announcement, but so did yields in other periphery nations. Spanish FM de Guindos expressed his concerns, stating that, “every time there are doubts…for example today in the case of Italy, when there are uncertainties about the political stability of a neighboring country…that immediately affects us.” De Guindos went on to comment that the resulting turbulence in investor confidence could prompt Spain to finally seek ECB assistance. Moreover, investors are concerned that Monti’s resignation could pave the way for former PM Silvio Berlusconi to regain power for a third time, with his recent anti‐Eurozone rhetoric a clear negative for the common currency. However, until there are further concrete developments, the EUR will likely remain relatively well supported in its recent ranges as investors continue to position themselves for a possible US slip over the socalled “fiscal cliff.”

GBP – Sterling edged higher against both the EUR and USD after touching a key support level in overnight trading. With little economic data to persuade investors otherwise, the pound fell as international markets opened, slipping close to the key 1.60 handle against the USD before staging a strong comeback. Monti’s resignation in Italy has provided further support as investors continue to view the GBP and British government assets as a relatively safe alternative as compared with the EUR and Eurozone debt despite deteriorating fundamentals and a weaker outlook for the British economy. For the week ahead, investors will take note of British labor data on Wednesday and continue to monitor the political situation in the Eurozone nations.

JPY – The yen is marginally higher this morning, but remains towards the lower end of its recent ranges as polls show Shinzo Abe’s LDP party maintains its lead ahead of upcoming elections. Data released overnight reinforced Abe’s calls for further government stimulus and BoJ action in the FX market as the Japanese economy contracted by more than expected (‐0.8% vs. ‐0.7% forecast) and the nation’s trade deficit narrowed by less than expected coming in at ‐¥450.3B. The yen has also found support in the wake of Monti’s decision as investors fear further uncertainty in the Eurozone.

Commodity Currencies – The commodity linked currencies are marginally higher as global financial markets post modest gains. Oil pushed higher to $86.50/bbl, gold rose to $1714/oz, and copper reached $370/lb. The CAD jumped to a sevenweek best late on Friday afternoon and has been able to carry the momentum into the new trading week after the Canadian government approved a blockbuster deal that will see Chinese oil producer Cnooc Ltd. take over Canada’s Nexen Inc. for C$15.1B. However, gains have been tempered by a disappointing Canadian housing report this morning with starts falling by more than expected to 196K from 204K last month. The MXN also reached a seven‐week high against the dollar on optimism that US policymakers are moving closer to reaching a deal on fiscal policy. Investors were also encouraged after Mexico’s trade deficit unexpectedly improved to ‐$1.64B from ‐$1.65B in the previous reading. The AUD is relatively flat to begin the week after disappointing trade numbers out of China, the main destination for Australian exports. Nevertheless, the Aussie remains towards the top of its recent ranges with its 3.0% yield attracting continued investor demand.

RMB –The Chinese yuan remained flat despite the weaker than expected trade data. China unveiled its Nov trade surplus of $19.63B, which was lower than the forecast of $26.85B and a notable drop from the $31.99B in Oct. Year to date total exports were $179.38B, a gain of 2.9% vs. the forecast of9.0%. Meanwhile, recent activity in foreign direct investments, that increased renmenbi outflows, has added further downward pressure on the currency.

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