USD - This will be a fairly quiet data week for the US. The event will likely be negotiations on extending the payroll tax cuts and extended unemployment period. Agreement is so far not in sight but a deal will likely be struck at the last minute. Durable goods orders will give input to investment spending in Q4. They have softened a bit recently, although still showing decent spending. Initial jobless claims will also be interesting to watch following two weeks of sharp declines. If the tendency is confirmed it gives more reason to be more upbeat on the US labor market. Updates on the housing market feature heavily in the US this week with the NAHB index (December), as well as starts, permits, new and existing home sales (November) all due for release. Last but not least the final Q3 GDP release is due on Thursday and should come in at 2.00% annualized.
EUR - The euro remains under pressure in subdued trading as the approaching holidays thin market activity. The single currency is holding just above $1.30 after falling to 11?month lows at $1.2944 last week on falling confidence that Europe's leaders will be able to resolve its fiscal issues. Expressing the growing lack of confidence, ratings agency Fitch warned last Friday that it could downgrade France and six other countries over concerns that a solution to the debt crisis is technically and politically beyond reach. Moody's also cut Belgium's rating by two notches from Aa1 to Aa3, citing risks to growth and costs of bank bailouts. Eurozone finance ministers met today in a teleconference to draft details of the fiscal compact announced by European leaders last week in an effort to have the document ready by late January. With waning confidence that Europe can find a comprehensive solution to its challenges, the euro will likely to remain under pressure with the holidays offering a temporary reprieve from the inevitable march low.
GBP - The pound has weakened against the dollar as a report showed U.K home sellers cut asking prices for a second consecutive month, adding to fears the economy is losing momentum. The pound also declined against the EUR on speculation that as the debt crisis in the euro?region increases, the fallout will have a negative effect on the British economy. As unemployment increases and retail sales fall, pressure will stay on the pound as the Bank of England strengthens its case to add to its asset purchase program.
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.
Commodity Currencies ? The CAD begins the week 0.4% higher than where it closed last Friday as a modest return of risk appetite and the rebounding price of oil both provide support. While the Canadian economy is performing relatively well as compared with its G10 counterparts, the strengthening loonie is a hindrance. A joint report from the Big 3 automakers released this morning showed that they plan to invest $13.3B in US plants over the next few years, leaving investment in Canadian auto plants at the lowest level since the early 1980's. Investors will get a good overview of Canadian economic activity this week with CPI due tomorrow, retail sales on Wednesday and GDP on Thursday. The AUD continues to consolidate in its new lower ranges as expectations mount that the RBA is turning more dovish. Minutes from the central bank's last meeting are set to be released Tuesday morning, with most expecting signs that policymakers may ease monetary policy further to buffer the impact of a slowdown in global demand.
MXN ? The Mexican peso remained near last week's close of 13.81?13.87 levels as the Eurozone crisis continues to be in the backdrop of investor's concern, pressuring risk appetite and higher yielding currencies. There has been optimism over today's discussion between European finance ministers over additional funding through the IMF. However, any optimism is currently being offset by falling Asian equities. With little economic news out from the region, the peso will likely continue to be pressured by near?term risk aversion.
RMB ? The offshore CNH continues to trade at a discount to the onshore CNY, but the spread between the two markets has narrowed considerably. The disparity between the two had widened over the past several weeks as investors close out long CNH hedges before year end. The RMB as a whole continues to appreciate as Chinese officials increase access to domestic markets for foreign investors and look to increase the yuan's role as an international settlement currency. Both CNH deliverable and CNY non?deliverable forwards are now trading at a premium. This reflects China's relatively high interest rates, making hedging 2012 exposures quite attractive with steady appreciation expected to continue.