Tuesday, January 25, 2011

The CAD remains stronger than the USD

*USD –* After last week's USD weakness - it slipped from 1.3387 to
1.3621 against the EUR - we are anticipating a more neutral week and a
period of consolidation. This week could prove to be key in terms of
setting the tone for US markets, with the FOMC holding its first
policy meeting of the year on Wednesday, and advance Q4 GDP data due
for release on Friday. No major changes to the Fed's stance are
expected, despite the fact that the annual rotation of voting members
has meant a shift in a more hawkish direction. The new voters in the
FOMC remain skeptical about the benefits of the Fed's asset purchase
program, but they have signaled that they aim to stick with Chairman
Bernanke's plan to buy USD600bn in treasury securities. Improvement
in the labor market has continued, albeit at a gradual pace, and
despite GDP growth running close to 4% q/q AR in Q4 last year, it will
take time for the unemployment rate to normalize in a non-inflationary
environment. Besides the FOMC meeting, we will get the first estimate
of Q4 GDP growth will be released later in the week, expected at 3.5%
q/q AR driven by strong growth in personal spending. On Thursday we
will get an update on the housing market, with both house price data
and home sales, followed by consumer confidence data, a new round of
regional PMIs and information on business capex from the durable goods
orders report.

*EUR –* The euro climbed to 2-ms highs following signs the Eurozone
economy continues to expand. The single currency rose to highs at
$1.3686 today after strong services and manufacturing Purchasing
Manager's (PMI) reports. The Eurozone Services PMI rose to 55.2 in
January, marking 17 months above the 50 threshold denoting expansion
while manufacturing PMI eased slightly to 56.9. But more
significantly, the input price component of the report surged to a
79.8 from 74.1 previously, the largest increase on record since the
report's inception in 1997. The rise in input prices lent support to
ECB President Trichet's warning over mounting inflation in the
region which has eased. The euro should remain supported in the near
term as price pressures and the ECB's potential monetary policy
response overshadow worries over the fiscal health of member

*GBP –* Speculation over the monetary policy has been the
significant driver of cable's strength thus far in January. The
currency has rallied just over 3% since the first of the year as the
market begins to expect higher rates. This sentiment has however waned
in recent days, as current news has led the market to believe the
tightening moves might be less aggressive. This week brings GDP
tomorrow, with expectations being 0.5% for the 4th quarter, a slight
decrease from 3Q. If it comes in stronger, look for a break above

*JPY –* USDJPY was essentially flat, trading in a notably tight
range and essentially on top of its 50 and 100-day moving averages
(83.06 and 83.04, respectively). Technicals are fairly bullish for
USDJPY and there is an ongoing gap between Japanese and US interest
rate spreads, which will likely send the dollar higher.
*CAD –* The CAD remains stronger than the USD, but began the week
with a steep drop against all 16 of its major counterparts. The loonie
stumbled as crude oil shed over $1/barrel after OPEC signaled it will
boost production to meet increased global demand. If commodity prices,
oil in particular, do stabilize, the CAD's recent run above parity
with the USD may be short-lived. Last week, the BoC disappointed
investors by leaving interest rates on hold and signaling that future
tightening would be "carefully considered" with the country's
economic recovery threatened by a strong currency. With CPI data due
on Tuesday (expected at 0.1%), gains in the currency have mostly
offset inflationary pressures, further supporting the BoC's recent
dovish stance. Improving global investor sentiment, and strong
economic data out of the US will however provide support for the CAD
in the near term.

*MXN –* The Mexican peso gained modestly against the US dollar last
week as the US posted better than expected housing and manufacturing
data. However, domestic figures are pressuring the peso as Mexico's
January core consumer prices rose less than expected (0.21% vs. the
previous 0.30% and 0.27% eyed). On Jan 21, the central bank kept its
benchmark interest rate unchanged at 4.5% for a 16th straight meeting,
stating that a stronger peso had partially offset recent increases in
some costs that were fueled by rising global prices for raw materials,
further signaling the bank will begin raising rates towards the end of

*AUD –* The AUD starts little changed from where it ended last
Friday after a volatile week of range-bound trade. Despite broad USD
weakness, the AUD has been unable to break above the key parity level,
with disappointing economic data providing formidable resistance. PPI
data showed a mere 0.1% increase (QoQ), far short of the 1.3%
registered last quarter, and the 0.5% expected for this reading. With
CPI data on tap for later Monday afternoon (expected at 0.7%),
investors fear that the strength of the AUD has eroded inflationary
pressures, thus significantly reducing odds that the RBA will tighten
policy any time soon. However, with relatively buoyant commodity
prices, and generally improved sentiment about the health of the
global economy, the dip from disappointing PPI, and potentially weak
CPI, may only be temporary with the AUD's relatively high yield
still attracting more than adequate demand.

Source: Fxstreet.com

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