Markets are calling for a 0.9% rise over the next 12 months

USD – America’s currency continued to remain on the defensive throughout last week and this morning, as evidence of economic stabilization (i.e., a “green shoots” recovery) in the US economy, reduced demand for the greenback as a haven. A spate of sanguine economic data throughout the past few weeks, culminated last Friday with the highly anticipated release of Q2’09 GDP (-1.0% vs. -1.5% exp.). However, the news was only superficially encouraging, as a deeper look revealed some disconcerting insight. The previous quarter’s GDP reading was distended to -6.4% (vs. -5.5%), marking the worst reading since 1980.
Furthermore, of all major economic activity measured, only government spending was on the rise. Personal consumption dropped 1.2%, exports fell 7%, and private investment declined precipitously by 20.4%. Without consumer spending (which accounts for ~70% of all economic activity), and amidst cries of reigning-in fiscal spending/stimulus and working down the national deficit, there is a growing sense that the world’s largest economy will not easily be able to recover on its own. Nevertheless, the ostensibly nascent signs of improvement continued to trickle-in this morning: ISM Manufacturing Index (48.9 in Jul. vs. 44.8 prior); Construction Spending (0.3% in Jun. vs. -0.9% prior). All eyes will be focused on this Friday’s NFP report and Unemployment rate announcement. A disappointment in the releases could easily trigger the all-too-familiar flight-to-quality “safe haven” response that would underpin the USD, while a positive development could very well put a definitive end to the risk trend.

EUR – The euro rose to its highs of the year, climbing above $1.44 as optimism over an economic recovery boosted global equities. The single currency rose over $0.02 vs. the dollar overnight, rebounding from last week’s lows just above $1.40 on positive news that Europe’s manufacturing sector may finally emerge from a deep slump. The Eurozone PMI rose to 46.3 in July (42.6 prior)—the second largest rise in the index’s 12-year history. The improving figures raised hopes of a manufacturing rebound and a return to above 50 readings separating growth from contraction. Markets’ are shrugging-off news that German retails sales fell -1.8% in June, preferring to focus instead on the more forward looking German PMI which rose an above forecast 45.7 in July.

JPY – The yen is the worst performer against a basket of currencies this morning as risk appetite continues to rise. Recent strong data out of the US and Europe provided evidence that the global recession is coming to an end, thereby encouraging Japanese investors to buy higher-yielding assets overseas. Meanwhile, Japan’s economic growth has not been as upbeat. Last week, it was reported that Japanese retail sales slid 3% in June. Retail sales were down 6.7% from the previous year, while core consumer prices fell a record 1.7% in the year to June. Strong investor appetite will keep the yen weak in the near term.

GBP – The sterling rose to 10-month highs of $1.6936 on positive signs the economy may finally emerge from its difficult recession. The pound gained over $0.02 vs. the dollar overnight after manufacturing data showed growth for the first time in more than a year. UK PMI rose strongly to 50.8 in July. Positive earnings from UK bank’s HSBC and Barclays also raised hopes the troubled financial sector may finally be on the mend. Markets are awaiting this week’s BoE meeting concluding Thursday. While no change to interest rates is expected, the focus will be on the future of its “quantitative easing” program.

CAD – The loonie rallied to a 10-month high after crude oil climbed above $71/bbl amidst views that the global economy may be on a road to recovery. Although Canada’s economy contracted for the 10th straight month in May, the loonie remains strong. Canadian stock markets are closed today for a civic holiday, prompting investors to eye US equity futures for direction. Later this week, markets will look to employment data on August 7 for further clues on Canada’s growth outlook.

MXN – The peso climbed to its highest levels in a month as the rally in the US stock market buoyed the demand for higher yielding currencies. The currency rose to 13.0910 per USD, its strongest since July 1st. Although the peso strengthened today, the Bank of Mexico said Mexico’s economy is set to contract a total of 7.5% this year—the largest drop since 1932.
The peso outlook also is not so rosy for the balance of 2009, as traders expect it to move closer to 14.00 per US dollar.

CNY – The yuan is modestly higher vs. the dollar at 6.8308. PMI rose to a 1-year high of 52.8. Despite the improved reading, Chinese authorities said the economy was as yet not on solid footing and would take time to recover. Markets are calling for a 0.9% rise over the next 12 months.

Last Week’s Currency Highs and Lows and Forecast