The BoE will be meeting on Thursday and again no policy changes are anticipated

USD – America’s currency continued to be the beneficiary of the broad deterioration in financial market risk sentiment, as it soared to multi-month highs vis-à-vis all its major world counterparts, save the JPY. Moreover, the trickling of mostly sanguine economic data releases throughout last week and this morning further exacerbated the dollar’s rally: Consumer Confidence Index (55.9 in Jan. vs. 53.6 prior); Durable Goods Orders Index (0.3% in Dec. vs. -0.4% prior); Initial Jobless Claims (470K for wk. of 1/23 vs. 450K exp.); New Home Sales Index (342K in Dec. vs. 370K prior); Personal Income (0.4% in Dec. vs. 0.5% prior); ISM Manufacturing (58.4 in Jan. vs. 55.5 exp.). However, the most optimistic and market-moving announcements last week were the robust Q4’09 GDP (5.7% vs. 2.2% prior and 4.8% exp.) and the FOMC rate decision (Fed Funds steady at 0 to 0.25%, with a hawkish bias citing the suspension of “quantitative easing”). The DJIA plummeted to a 3-month low of 10,067.33 at last week’s close, which further underpinned the greenback. With uncertainty still prevalent in US and global financial markets, the USD will continue to remain buoyed by “safe haven” flows. Given the lingering questions with respect to the veracity and magnitude of the nascent economic recovery, market participants are skeptical of any near-term monetary tightening in the US. Current Fed Funds Interest Rate Futures reveals only a 19.3% chance of a 0.25% increase, compared to a 52.8% probability merely 1 month ago.
Currency markets are likely to remain fairly range-bound until the advent of the significant event risk for this week—the US NFP and Unemployment Rate releases. The greenback will likely continue to take its cues from the equity markets, while awaiting some definitive direction from the employment data releases at week’s end.

EUR – The euro remains near 7-month lows vs. the dollar after falling through $1.40 last week on concerns over the fiscal health of Greece and other struggling member countries. The single currency was boosted today following better-than-expected manufacturing data in the region. The Eurozone PMI rose to 53.7 (vs. 53.4 exp.). The report highlighted strong performances by Germany, France and Italy but continuing difficulties for Greece, underscoring the notion of a “2-speed recovery” in the Region. Concerns over Greece’s fiscal difficulties were allayed after an EU official said that the country’s deficit cutting plan was ambitious but achievable. The euro is likely to remain under pressure as fiscal concerns of the lesser performing economies mount.

GBP – The BoE will be meeting on Thursday and again no policy changes are anticipated. There had been some speculation that the MPC would extend its quantitative easing activities, though this now seems unlikely, despite last week’s disappointing Q4 GDP estimate (-3.2% y/y). The minutes from last month’s meeting showed that two MPC members, who voted in November for a larger amount of asset purchases than the current GBP200B target, dropped their comments in December. UK data of note this week include the January PMIs for manufacturing (56.7 vs. 53.9) released today and for services (Wednesday). Today, consumer credit data came in at 0.1B vs. a forecast of -0.4B.

JPY – Concern of deflation continues to put pressure on the yen to stay weak this past week. Despite improving unemployment data, poor Manufacturing PMI along with a less-than-expected increase in Production data suggest that a weaker yen is necessary for further recovery of the world’s third largest economy. The yen fell back to the previous week’s low, depreciating 2% against the dollar, trading much above the 90.00 level as global economic recovery gains momentum. Positive US economic news releases increased investor’s risk appetite for higher yielding currencies, putting much pressure on the yen.

CAD – The CAD climbed from a six-week low versus the almighty Greenback as equities and crude oil advanced, making currencies linked to economic growth more attractive to investors. It appreciated for the first time in five days on speculation its 1.6 percent decrease in January will be hard to sustain. In January, the loonie posted its biggest monthly drop since falling 6.1 percent in June, weakening as traders bought the US dollar to hedge against losses in stocks and commodities. There are no CAD data releases until Thursday – so look to broader market moves for cues on CAD moves - when the Ivey Purchasing Managers Index is released. On Friday we will get employment and housing data; however, US employment data to be released the same day, may cause the CAD to resume its decline.

MXN – The peso firmed after US factory activity rose in January to its highest since August 2004, indicating that Mexico’s top trading partner is recovering. Trading is thin today due to a Constitution Day holiday in Mexico. January consumer confidence data will be released on Thursday. The data is expected to rise slightly even though consumer’s purchasing power remains weak. Last week, Finance Minister Ernesto Cordero said Mexico plans to buy US dollars in order to boost international reserves. Interest rates are expected to remain at six-year low of 4.50% until 2011.

AUD – The Aussie climbed back from 5-week lows after housing prices in the country posted the largest gains in 6 years. AUD rose to highs at $0.8880 after housing prices jumped 5.2% in 09Q4. The Royal Bank of Australia is widely expected to continue to raise interest rates by 0.25% on Thursday, bringing rates to 4%. Markets are projecting interest rates will rise to 4.5% in response to strong domestic conditions, boosting the outlook for the Aussie dollar.

Last Week’s Currency Highs and Lows and Forecast