Thursday, March 3, 2011

The currency markets ended last week on a mixed tone

*USD –* The currency markets finished last week on a mixed tone. In
the US Q4 GDP was unexpectedly revised down to a 2.8% annualized gain.
A noteworthy area of revisions was personal utilization, now estimated
to have risen at a 4.1% pace, while final domestic demand was revised
down to a 3.1% pace.
The dollar's result to the data was moderately negative. This
morning, the USD fell to its lowest level since November against six
major US trade partners on bets Centralized Reserve Chairman Ben
Bernanke will signal to Congress the central bank plans to maintain
economic stimulus at his semi-annual testimony on monetary policy
tomorrow. The dollar remained lower versus most major peers even after
the Institute for Supply Management-Chicago Inc.'s business
barometer unexpectedly rose to 71.2 this month, the highest level
since July 1988, from 68.8 in January. U.S. consumer spending rose
less than forecast in January, accelerating 0.2% amid increasing fuel
and food costs, data from the Commerce Department showed today.
Another report showed European inflation stayed above the ECB's 2%
target for a following month in January. In the US, all eyes will be
on Friday's nonfarm payrolls report for February.
The data is expected to show a gain of 160,000 (up from 36,000 in
January), with the ADP report (Wednesday) and weekly jobless claims
(Thursday) providing some advance signals. The unemployment rate,
meanwhile, is forecast to tick back up to 9.1% from 9.0%. Also closely
watched in the US will be February's manufacturing and air force
ISMs, with strong numbers anticipated.

*EUR –* EUR is surprisingly strong, gaining 0.4% against the USD and
moving towards a break above the February 2nd, 1.3862 high. This
week's highlight will come with the ECB meeting on Thursday, as
market participants have been building their expectations for a shift
in tone from President Trichet. But, today's softer than expected
January CPI print should provide some relief to inflation hawks. It
was a significant drop in clothing costs (-0.6% y/y and -13.3% m/m)
that was responsible for the largest part of downward difficulty.
Still with oil having risen significantly over the last week,
inflationary pressures are likely to continue. In tomorrow's
European session, Eurostat will release its February CPI estimate
(consensus is calling for 2.4% y/y). Near-term risk for EUR are the
slew of US data today and tomorrow's European PMI and CPI estimate

*GBP –* Sterling is trading at recent highs as rising oil prices
have stoked bets that the Bank of England will be mandatory to bring
to somebody's attention rates this year to curb inflation. CPI growth,
which was 4% last month, has been above the central bank's target of
2% for 14 consecutive months. The futures market is pricing in a 67
basis point rise in small term interest rates by the end of the year,
with the first go coming as ahead of schedule as May.
This is the third time in the last two weeks we have traded at or near
1.6250 – with a break of that level resulting in a go toward 1.6400.

*JPY –* The yen is slightly weaker today with Japan's January
industrial production increasing 2.4% m/m and 4.7%y/y, well below
consensus, while housing starts rose just 2.7% y/y. But, somewhat
offsetting this was surprisingly strong retail trade, which increased
4.1% m/m and 0.1% y/y. There is limited data expected for the rest of
this week, which is likely to leave the focus for yen on risk aversion
and movement in the US-Japan bond yield spreads.

*CAD –* The loonie started the week at a three-year high against the
USD after a report showed that Canada's economy grew more than
forecast on surging exports. GDP growth registered 3.3% in Q4, led by
a 30% increase in crude oil shipments, causing many investors to start
pricing in a hike in Canadian interest rates. But, continued
geopolitical risks, weakening Canadian retail sales, a slower than
previously forecast US expansion and a stronger CAD may cause the BoC
to pause before tightening policy. Elevated oil prices will buoy the
Canadian dollar in the near term, but unless the economy shows clear
signs of continued recovery, its gains may only be temporary.

*MXN –* The Mexican peso continued to advance against the greenback
last week as geopolitical factors surrounding the Middle East boosted
crude oil prices rise above $97/bbl. As long term effects of political
unrest remain unclear, the crude oil market along with emerging market
currencies should remain supported in the near-term. Internally,
Mexico showed a very strong increase in exports in January of 28% y/y,
as evidence of trade weigh figures, which posted a gain of 63mm vs.
the previous -218mm.
Consumer price index for the following week of February also showed
positive growth of 0.21% vs. the previous 0.17%.

*AUD* *–* The AUD starts the week back towards the top of its recent
ranges as investors' risk appetite recovers. While fears over unrest
in North Africa and the Middle East have begun to subside, commodity
prices have remained at elevated levels. Higher prices for raw goods
provide support for the Aussie, but a strong currency does threaten
the country's export industry as Australian goods become relatively
more expensive. In the week ahead, investors will take note of
Australian retail sales, current account weigh, housing market data
and GDP. High commodity prices, resurgent risk appetite, and a hawkish
outlook from the RBA will likely keep the AUD well supported, at least
for the near term.

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

*U.S. Economic Indicators*


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