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The Australian dollar is largely range−bound ahead of a national holiday tomorrow

Tue, Jan 26 2010, 08:31 GMT
by Union Bank of California Team

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USD – A mixed bag of economic data last week has left market participants with much to mull over, while calling into question the strength—and even reality—of the ostensible economic recovery: PPI (0.2% in Dec. vs. 1.8% prior; Housing Starts (557K in Dec. vs. 580K prior; Initial Jobless Claims (482K for wk. of 1/16 vs. 446K prior; Leading Indicators (1.1% in Dec. vs. 0.9% prior). Even this morning’s closely watched Existing Home Sales Index (5.45M in Dec. vs. 6.54M prior), while evidencing a cool-off in the housing sector, contrasted with the robust up-tick in the Dallas Fed Manufacturing Report (8.3% in Jan. vs. 3.8% prior), leaving analysts scratching their heads as they ruminate the data’s impact. After a stunning victory by GOP candidate Scott Brown last week during the Massachusetts Special Election to fill the Senate vacancy left by the late Ted Kennedy, volatility roiled the financial markets sending the DJIA to a more-than-12-month-high (10,729.89) and the USD to a multi-month low vis-à-vis its major world counterparts, save the JPY. However, sentiment turned very quickly when President Obama, following the Special Election results, adopted a more populist tone by announcing tighter restrictions on financial institutions—a move that may ultimately regulate the size and trading activities of some of America’s largest banks. Financial markets reacted nervously to the rhetoric causing the DJIA to plummet by more than 500 points throughout the week, and sending the greenback to its YTD high, amid the market’s “flight-to-quality” response into the world’s reserve currency. Markets will have plenty to digest this week as Wednesday’s FOMC rate announcement and Friday’s Advance Q4’09 GDP will take center stage, bringing with them the promise of heightened volatility.

EUR – The euro remains near the lower end of recent ranges after sharp losses last week.
The single currency is holding in the mid-$1.41 range after falling to a low of $1.4025, as US equity market losses and concerns over Eurozone growth sent investors scurrying for “safe-haven” dollars. The Eurozone PMI slipped to 53.6 in January from 54.2 previously. While the report remained above the 50 threshold separating growth from contraction, it showed that the recovery remains gradual. News that E-16 industrial new orders for November were revised upwards to 2.7% is lending support to the euro today.

GBP – EUR/GBP fell from 0.885 to 0.865 last week. GBP was boosted by comments from the BoE’s Andrew Sentence that the gilt purchase program was unlikely to be extended when it expires at the end of January, as well as the Greek deficit problems (EUR weakness).
There has also been a steady stream of GBP-positive numbers in the past week. The labor market has picked up, the housing market is improving and inflation rose to a surprising 2.9% in December. Finally, there have been a number of GBP-positive commercial flows, e.g., acquisitions. The GBP appears fundamentally undervalued, and it could approach $1.85 by the end of the year. However, the path up will not be without obstacles: downgrading of the UK’s creditworthiness if the government fails to present a creditable plan to cut budget deficits to more sustainable levels.

JPY – The JPY remained relatively strong against major currencies, benefiting from “safe-haven” flows, as investors once again became cautious of the unstable global market. Demands for lower-yielding currencies continued as news of China tightening bank lending, coupled with declining equities, led to fears of a slowing global economy. Throughout the week, USDJPY traded in a 1.36% range with a low of 89.79 and a high of 91.88. Later today, Bank of Japan will be releasing interest rate decision. It is expected that policy makers will keep benchmark rates unchanged at 0.10%, keeping the yen at a weaker level in efforts of curbing deflation.

CAD – The loonie charted a steady decline last week as negative data and weak commodity prices let some of the steam out of the currency’s recent charge against the USD. Canada’s currency gave up 3.4% of its near-term gains last week. Crude oil experienced the same fortunes dropping 5.8% to close last week at $74.09/bbl—its lowest mark this year. Natural gas managed to add 7.4% from its weekly low for its second highest level this year at $5.8560/GJ. The BoC, as anticipated, kept their overnight lending rate 0.25% last Tuesday citing that there are still risks to growth and unemployment remains high at 8.5%. Consumer pricing declined seasonally m/m to -0.3% in December from the previous month’s 0.5%.
Year-over-year, however, the index was up 0.3% showing incremental inflationary pressure. Retail sale took a sharp decline last December, falling to -0.3% from the previous month of 0.8%.

MXN – The peso, considered by many analysts to be the most undervalued major currency at present, followed suit vs. the USD, giving up 3.1% form its second highest level of the year (12.6238), falling to 13.0135 to close the week. Some reasons for the “undervalued” view of late for the peso was evidenced last week by incremental increases in inflation (bi-weekly 0.75% from previous 0.25%) and an improved unemployment reading in December of 4.8%, down from November’s 5.26% rate—the lowest in North America. In an announcement last week Mexican Finance Minister Ernesto Cordero said the government expects the Central Bank will keep the benchmark interest rate stable as tax increases are having a moderate impact on inflation, while consumer prices will rise about 5% this year.

AUD – The Australian dollar is largely range-bound ahead of a national holiday tomorrow. AUD is holding in the mid-$0.90 levels after shedding nearly 2% last week on heightened risk aversion. The Aussie is likely to remain constrained as concerns over global growth, particularly China’s tightening of its expansion, weigh on the outlook for commodities.

Last Week’s Currency Highs and Lows and Forecast

Published on  Tue, Jan 26 2010, 08:36 GMT

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