The yuan remained mostly unchaged against the dollar at 6.8272

USD – At the dawn of this New Year, the greenback finds itself on the defensive against all of its major counterparts as evidence of global economic recovery revived demand for riskier assets at the dollar’s expense. With holiday-thinned trading conditions throughout most of last week, trading is now fully active with volume and liquidity returning back to the currency markets. A string of better-than-expected data last week bolstered sentiment that the world’s largest economy is well on its way toward a robust recovery: Dallas Fed Manufacturing (3.8% in Dec. vs. 2.0% exp.); Consumer Confidence (52.9 in Dec. vs. 50.6 prior); Chicago PMI (60.0 in Dec. vs. 55.1 exp.); Initial Jobless Claims (432K for wk. of 12/26 vs. 460K exp.). This morning’s ISM Manufacturing report (55.9 in Dec. vs. 53.6 prior)—a key metric of the national industrial sector—further exacerbated global risk appetite, putting pressure on the world’s reserve currency. As has been the case for the vast majority of the past year, an inverse correlation between equity markets and the USD is once again emerging as a definitive trend. With the DJIA trading at the highest level in 12-months (10,570.50), America’s currency has experienced a precipitous decline over the past two weeks, vis-à-vis its higher-yielding counterparts, namely the commodity-linked currencies of the AUD and NZD. With the economic recovery picking up steam, and incipient inflationary pressures on the rise, markets are now fully pricing-in an aggressive monetary tightening by the Fed in the months ahead. Current Fed Fund Futures are forecasting a 41.4% chance of a 25-bps rate hike on or before the 6/23/10 FOMC rate announcement, as compared to 40.3% just 1 week ago.
Markets will have plenty to digest this week with another battery of key economic data releases, culminating with Friday’s NFP and Unemployment Rate announcements.

EUR – The euro recovered from recent lows against the dollar as hopes that the global economy is recovering attracted investors towards higher-yielding assets. The Euro Zone manufacturing index rose to 51.6 in December from 51.2. European investor confidence also improved as it increased to -3.7 in January from -5.5. Over the previous week, the euro had fell against the dollar as positive economic data from the US increased speculation that the Fed would remove stimulus measures.

GBP – The pound continued to rally against the dollar as the previous days’ comments from Prime Minster Brown continued to spur demand. In the short term, Kraft’s hostile bid for Cadbury is also underpinning the pound. Given the time of year, cable traded within a fairly wide range of $1.6047 to $1.6236 for much of the European session. In 2009 the pound posted its first annual gain against both the dollar and the euro since 2006, and gilts had their first loss in a decade, as evidence mounted that the UK is emerging from its longest recession on record. The pound pared its advance during the second half of 2009, as the Bank of England boosted its so-called quantitative-easing program—a debt-buying plan—to 200B pounds ($324 B) to revive the economy as Britain trailed the return to growth in the US and Germany.

JPY – The yen is trading near four month lows against the US dollar on optimism that the US economy may reveal better growth in 2010. Concerns about Japanese fiscal health also hurt the yen. Standard & Poor said Japan’s credit rating could be in danger if the country’s massive debt burden is not reduced. BoJ Governor Masaaki Shirakawa recently said the Central Bank will keep interest rates at zero and is ready to act promptly to fight deflation.

CAD – The loonie reached as low as 1.0368 vs. USD last week before closing-out 2009 at 1.0534 (1.58% range) as markets squared positions and placed bets on renewed commodity and equity interest for the New Year. Crude oil remained high as well, posting a steady rise of 2.7% ($77.84 – $79.92) to close the decade. A cold December sent natural gas on a strong path to close the year, ranging 4.4% for a 2009 high of $6.023 on seasonal demand. The 2009 y/y economic outlook was as follows: GDP -3.2%, Consumer Pricing 1.5%, Jobless Rate 8.5%. The BoC predicted in October that the economy will grow 3% in 2010, with consumer spending accounting for more than half of the expansion.

MXN – The peso ended 2009 on an “about face” of late, losing 2.4% for the last week of trading (12.8247 – 13.1271 vs. USD) for its worst showing since early November. Inflation concerns have begun of late after Mexican bonds hit a six-week low following Petroleos Mexicanos, the state-owned oil monopoly, raising prices for the lowest grade of gasoline.
Telmex, as the fixed-line telephone company controlled by billionaire Carlos Slim is known, has slid 21% this year, the lone company among 35 in Mexico’s benchmark stock index to fall. Mexican GDP rose to 3.8% in Q4’09. Month-over-month unemployment dropped to 10.47% in November from 11.83% in October.

CNY – The yuan remained mostly unchaged against the dollar at 6.8272. The manufacturing index in China rose to 56.6 in December, higher than forecast 55.4. The yuan is expected to remain largely unchanged into the New Year with some calling for it to remain flat until the National People’s Congress in March 2010.

Last Week’s Currency Highs and Lows and Forecast