Wednesday, January 19, 2011

EUR appreciated to a one-month high against the USD

*USD -* This week's trading could get off to a slow start with US
markets out for Martin Luther King holiday yesterday. Markets,
however, are expected to remain volatile given the focus on Eurozone
sovereign risk as well as changing interest rate expectations on the
back of recent data trends. The stream of data releases kick off today
with New York Fed's manufacturing index. The release came in 11.92,
below a forecast of 12.50. The NAHB index came in at 17 vs. a forecast
of 17. Data for the housing market is expected to continue to send
mixed signals. On the downside, weak figures for both housing starts
and building permits are anticipated. This can, however, by and large
be attributed to last month's poor weather conditions. Furthermore,
the positive trend in existing home sales should continue. This could
encourage some optimism in the otherwise gloomy housing market.

Finally, Philadelphia Fed President, Charles Plosser, will give
another speech this week. He is the most likely candidate for a
dissenter at the January FOMC meeting, but his comments last week
suggest that he is not yet ready to vote against the FOMC statement.

*EUR -* The EUR appreciated to a one-month high against the USD on
speculation efforts by the region's policy makers to prevent the
sovereign debt crisis from deepening may succeed. Finance ministers
from six countries with AAA credit met to discuss how to best use the
750 billion euro rescue fund, rather than setting aside some of the
money as collateral. They ruled out boosting the size of the fund for

Leading indicators in the Eurozone, meanwhile, include the German ZEW
and Ifo surveys for January, as well as this month's French business
climate index. The Ifo index hit a record high in December, with the
ZEW also coming in better than expected. Markets will be looking to
this month's survey data for fresh confirmation that Europe's
current fiscal crisis is not hitting sentiment in the Eurozone's
largest economy.

*GBP -* Despite a nice rally over the past week, no major currency is
performing worse than the pound since the start of August –
weakening against all 16 highly traded currencies over that period.
The BoE is limited as to what they can do as Prime Minister David
Cameron's budget cuts slow growth while inflation accelerates. Last
week, PPI came in a much stronger than expected 3.4% versus expected
1.7% m/m and today CPI came in at 1.0% versus 0.7% expected m/m. This
confirms the dilemma facing the BoE, and most forecasters are pointing
toward an even weaker sterling by the end of 2011, with some forecasts
looking for as low as 1.3500.

*JPY -* The yen was quiet falling back from 83 levels after failing to
gain a foothold above the level. Support is found on dips with yen
crosses supporting the currency over the last week. Ongoing JPY
strength is attributed by net inflows into the currency related to the
Japanese trade surplus, uncertainty in the rest of the world, the
expected monetary policy in the US and the diversification of foreign
reserves in other countries away from the US dollar and euro.

*CAD -* The CAD begins the week well supported near its strongest
levels against the USD since May 2008. However, the loonie's ascent
has paused, at least momentarily, after the Bank of Canada held
interest rates steady at 1%. BoC Governor, Mark Carney, went on to say
that future interest rate hikes would be "carefully considered"
because strength in the loonie, which would be further exacerbated by
tighter monetary policy, is threatening to slow Canada's economic
recovery. Rising commodity prices, steady economic growth, and an
economic recovery that appears to be gaining traction in Canada's
major trading partner, the US, will all provide support for the CAD in
the near term, with a test of the currency's recent highs to be

*MXN -* The Mexican peso continued to strengthen, rising over 2%
against the dollar since last week as economic indicators signaled
velocity changes in activity continue to develop within critical
sectors of Mexico's economy. IGAE indicated a revised growth of 5.0%
vs. the forecasted 4.3% for October, identifying strong tertiary
activities in the region. Industrial production for November posted a
gain of 5.3% vs. the previous 3.7% and 3.8% eyed, while final trade
balance posted a decline of only - 105m vs the previous -814m.

*AUD -* The AUD starts up 0.5% from where it ended last week on strong
economic data out of the country's main export market, China. A
report over the weekend quoted an anonymous Chinese official stating
that Chinese GDP grew 10.1% last year, up from 9.2% in 2009 and
besting expectations of single-digit growth. If the Chinese economy
can maintain its impressive expansion, broad support will continue for
the AUD with more than sufficient demand for the nation's raw goods
exports. The outlook for the Australian economy has also improved as
floodwaters recede in Queensland, Australia's coal mining hub. The
total cost of the floods has been estimated at as high as $20 billion,
but sentiment has improved as it appears the worst is likely over.
With the AUD's high yield, it will likely again test parity with the
USD in the immediate future with markets generally upbeat about the
global economic recovery.
*Last Week's Currency Highs and Lows and Forecast*
*U.S. Economic Indicators*

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