Wednesday, February 2, 2011

The FOMC meeting last Wednesday sprang no big surprises

*USD* *–* The FOMC meeting last Wednesday sprang no huge surprises
as the proclamation showed the same dovish language as in December. It
is very unlikely that the Fed will terminate its asset hold curriculum
ahead of schedule and the first Fed funds rate hike is not expected
until mid-2012. This morning's data releases showed Personal
Spending in the U.S. rose more than forecast in December, capping its
strongest quarter in more than four years. Buys, which account for
about 70% of the economy, increased 0.7% after climbing 0.3% the prior
month. Personal income increased for a following month, rising 0.4%,
matching the median forecast. This week's US calendar will be
dominated by two major data releases. Tomorrow, the manufacturing ISM
index for January is expected to show yet another strong reading,
increasing to 57.5 from 57.0. On Friday the employment report is
anticipated to show a considerable increase in nonfarm payrolls, gain
of 165,000 in non-farm, and 180,000 in private payrolls is expected.
On the other hand, unemployment is expected to increase slightly,
since last month's major drop in unemployment was partly driven by
an exceptionally large decline in the size of the labor break down.
There will be a few Fed speeches this week, most notably Bernanke
language on Thursday. Given last week's dovish FOMC proclamation, we
expect the Chairman's comments to remain cautious stressing the slow
progress in labor market conditions.

*EUR* *–* The euro rose vs. the dollar on persistent inflation
concerns amid a backdrop of geopolitical uncertainty from unrest in
Egypt. The single currency climbed to highs of $1.3739 overnight,
gaining over 1.5 cents after Eurozone inflation rose 2.4% in January.
The spike in inflation came largely from rising commodity prices and
is above the ECB's target of 2%, which prompted a warning last week
from ECB officials that they may take measures to curtail inflationary
pressures. Meanwhile, global investors are cautiously monitoring
events in Egypt which could prompt a bout of risk aversion and result
in a euro reversal if the circumstances continues to deteriorate. Amid
this backdrop, volatility is likely to continue this week as inflation
concerns at home and geopolitical concerns abroad pull the single
currency in opposite directions.

*GBP –* The GBP starts the week off on solid impose a curfew after
last week's shaky performance. Sterling's go higher has been
prompted by increasingly hawkish commentary from BoE policymakers. The
Bank has been divided on policy for months, but it now appears that
the faction calling for higher interest rates is gaining support as
British inflation pushed to an eight-month high of 3.7%. With
increasing odds that the BoE will bring to somebody's attention
interest rates from their current ultra-accommodative levels as soon
as this summer, the pound will likely remain well supported in the
near term. But, as BoE Governor, Mervyn King, noted, the uptick in
inflation may be offset by government spending cuts and slow economic
growth, which could cap any significant gains for the pound.

*JPY –* The Japanese yen strengthened across the board late last
week as the turmoil in Egypt sent investors flocking into the
safe-haven currency. The fundamentals, but, painted a grimmer economic
outlook as Japan's sovereign debt rating was downgraded for the
first time in 9 years by Standard & Poor's agency. Household
spending dropped 3.3% from December of the previous year, and jobless
rate for December fell slightly to 4.9% from 5.1% in November.
Consumer confidence tumbled to a 10-month low in December, dragging
overall retail sales lower. Consequently, the yen will likely give up
these gains when market risk sentiment recovers.

*CAD* *–* The CAD starts the week locked near parity with the USD
despite encouraging growth data. GDP jumped by 0.4% MoM in December,
besting expectations of a 0.3% gain, and bringing 2010 annualized
growth to a healthful 3.0%. While the country's commodity exports
remain strong, Canadian officials worry that the stronger loonie could
be prohibitive to growth, and as such no pressing tightening of policy
is to be expected. In the near term, the CAD will likely remain locked
in narrow ranges to either side of parity with the USD with its
direction dictated by commodity prices and future growth prospects.

*MXN –* The Mexican peso finished last week weaker against the
greenback as tensions in Egypt heightened risk aversion spurring a
selloff of emerging market currencies. Ironically, Egypt's crisis
brought back some gains for the peso this morning as the pressures in
the crude oil market spiked prices to trade at $89.69/bbl. Internally,
Mexico's retail sales for November dropped to 2.4% vs. the previous
4.4% and 4.0% anticipated. Market participants will be focusing on
next Friday's central bank policy minutes for further direction of
the USD/MXN.

*AUD* *–* The AUD has struggled throughout the first month of the
new year as Australia deals with the most costly natural disaster in
its description. Recovery from the devastating floods in Queensland is
projected to top $5B in reconstruction costs, and the hindrance on
exports and the domestic economy is expected to cut 0.5% from GDP this
quarter. In light of the slowed growth, the RBA will likely slow the
pace of interest rate hikes, which will diminish from the future
appeal of the high-yielding Aussie should other central banks start to
tighten policy. But, in the near term, rising commodity prices will
provide downside support.

*Last Week's Currency Highs and Lows and Forecast*

*U.S. Economic Indicators*


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