USD – This week should be relatively quiet with respect to US data releases after last week’s busy schedule. Markets rallied last week in relief over the budget deal, which averted the immediate fiscal cliff. However, concerns over the upcoming negotiations on spending cuts and the debt ceiling might start to take hold in markets in coming weeks. This week, there are only a few data releases worth noting. Tomorrow, the NFIB Small Business Optimism will be released. As a major source of private employment, an increase in small business sentiment could be a positive sign for the US economy. Finally, there are a few Fed speeches this week, which are of some interest. Esther George and James Bullard, who both speak on Thursday, have become voting members of the committee and, therefore, more attention should be paid to their speeches. The US dollar continues to remain firmer following the release last week of the less dovish than expected FOMC minutes that hinted at a potentially earlier than expected end to the Fed’s ongoing open‐ended quantitative easing program. The rate of improvement in the US labor market will likely prove of key importance in determining the timing of the end of Fed asset purchases. In that respect the US employment report for December released last Friday provided only a little further insight. The household survey, which drives the unemployment rate, showed that the US economy has added around 2.41 million jobs in 2012 at an average of 201k per month. In recent months employment growth in the household survey has stalled although this likely reflects payback after an employment growth surge totaling 1.16 million in September and October. As a result, the unemployment rate has stabilized at 7.8% since the end of Q3 after falling from 8.5% at the end of 2011.
EUR – The euro begins the week under pressure despite improved economic sentiment in Europe. The single currency slid to 3‐ week lows vs. the dollar at $1.3016, hovering just above Friday’s recent lows of $1.30. An improved Euro Zone economic sentiment index which rose to ‐7.0 from ‐16.8 the previous month did little to help the euro. France also announced that it would reallocate EUR 2 billion from its budget towards state aided job creation. Joblessness in France is at 13 year high at 10.3% although many economists have stated that France needs structural job reforms vs. quick fixes. Markets will be watching a Spanish debt sale on Thursday as the country tests investor appetite for the first time this year. Spain is expected to remain conservative, auctioning only shorter dated 2 year debt, as the market refocuses attention on the troubled country after an easing of risk aversion following the passing of the fiscal cliff in the US.
GBP – Sterling is flat from Friday’s close, trading at the lower end of its one month range ahead of this week’s key releases and events including trade figures, a BoE policy announcement, and industrial production data. The BoE will probably hold interest rates and their QE program steady in its policy decision on Jan 10th. Near term movement in GBP is likely to remain driven by developments in the euro area. However, domestic factors are likely to come into focus in the second half of the week.
JPY – While the Japanese Yen is slightly firmer this morning, it is doing so after touching 88.41 on Friday, its weakest level in two and a half years. While calling for a weaker JPY by Prime Minister Abe has been a driving force for the weakness, it was compounded by the Fed’s minutes, which stated that they may end bond purchases in 2013. This (stoppage of bond purchases) will result in widening yields, already seen at 1.13 percentage points last week, the most in 9 months and thus will continue to attract more funds into dollars. With Japan’s economy expected to grow at .65% this year versus an expected growth rate of 2.0% in the US, market participants are expecting the JPY to trade above 90 within the first 3 months of the year.
Commodity Currencies –Commodity currencies slightly gained as stock markets and commodity prices stalled after a strong run‐up last week. The Australian dollar improved slightly against the USD after briefly gasping above the 1.0500 handle. However, gains were short lived as we saw AUD/USD dip back below 1.0480 as market sentiment may be turning this week after Oct's deficit widened to its highest level in 4.5 years, marking the 11th straight month of deficit and posting the largest short‐fall since March 2008. The Canadian dollar is stronger vs. the USD today as it held on to gains reached late last week. This comes after strong job growth and a partial deal reached in US debt talks. In addition, Canadian's Dec. PMI rose to 52.8 from 47.5 in Nov. However, inventories rose to 55.6 from 48.2 and the deliveries index increased to 47.9 from 46.0, as prices rose to 62.9 from 53.1. This suggests that despite the increase in new orders and production, factories had difficulty selling out their inventory in a timely pace. If prices consistently rise and purchasing managers notice supplier deliveries take longer, it's a warning that inflation pressures may soon spread into the economy. In other news, Tiff Macklem, who is widely expected to replace the departing Governor Mark Carney as head of the central bank, may hint at a future monetary policy when he speaks about economic growth at a university on Thursday.
RMB – USD/CNY barely edged higher rising just 0.01% to close at 6.2296 just above Friday’s close of 6.2303 as the PBoC stepped in to stem the rising currency. Despite corporates favoring the yuan, the central bank has been utilizing state banks to buy dollars to halt the currency’s rise after almost a month and a half of straight appreciation where the currency hit the top of its trading band. After seeing the currency net an appreciation of 1% in 2013, analysts expect another year of modest appreciation Look for the PBOC to take another step by widening their trading band from the midpoint above the current 1% level later in the year.
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