US Industrial production unexpectedly rose in February

USD – US Industrial production unexpectedly rose in February, due in part to gains in demand for computers and semiconductors that signal the pickup in US business investment is being sustained. Production climbed 0.1 %, the eighth consecutive increase, as utility use and mining increased, a report from the Federal Reserve showed today.
Manufacturing in the New York region expanded in March for an eighth consecutive month, boosting factory payrolls. The Empire State index fell to 22.9 from 24.9 in February. The Fed’s employment gauge climbed to the highest level since October 2007. International demand for long-term U.S. financial assets weakened in January as China and Japan reduced their positions. Net buying of long-term equities, notes and bonds totaled $19.1B, compared with purchases of $63.3B in December. The amount of spare capacity is among reasons analysts anticipate Fed policy makers meeting tomorrow will reiterate a pledge to keep interest rates low. Manufacturing output declined 0.2 % after increasing 0.9 % in January.
The Fed meets tomorrow with no change in official US rates anticipated. However, markets will be anxious to see if the policy committee retains the “extended period” phrase in its post meeting statement. Although economic conditions are improving, the Fed may feel that it is too soon to make any changes to its policy stance. Data-wise, it is a packed schedule including the NAHB indices for March, as well as last month’s CPI, PPI. Also of interest will be the latest housing starts and building permits numbers.

EUR – The euro gave back three days of gains and fell on worries that any possible financial aid package for Greece would not be enough to bail Greece out of debt. So far, the euro has fallen 4.3 % this year against the US dollar. The European Union finance ministers will meet this week to discuss Greece’s financial problems. The euro is expected to remain weak as there is no quick fix to Greece’s debt crisis. Meanwhile, Eurozone employment fell in the fourth quarter suggesting the region is still sluggish.

GBP – The pound is off to its worst annual start in 13 years and this trend may continue as the UK’s budget deficit approaches the Greek shortfall that had a devastating impact on the EUR. The pound hit a two-week high on Friday night at $1.5216 after a report revealed that UK house prices rose at their fastest pace in seven years, easing recent concerns about the economy. On the data release front, there is a packed schedule in the UK, with the highlight of the week likely to be Wednesday's release of the minutes of the last BoE policy meeting.
Policy was left on hold but markets will be watching the tone of comments from the MPC given recent indications that it stands ready to act again should the need arise. Other releases to watch include the unemployment report for February, as well as the public sector net borrowing requirement for the same month.

JPY – The yen is trading slightly weaker ahead of the BoJ board meeting on Tuesday and Wednesday. The BoJ is pressured by the government to ease monetary policy to tackle deflation even though it recently raised its economic forecast for the first time in eight months. Japan’s policy rate is currently at 0.1 %. Further monetary easing would limit yen gains and support exports. However, yen losses may be limited by repatriation flows ahead of Japan’s fiscal year-end on March 31.

CAD – The loonie continued its downward trajectory last week as capital once more rolled into higher yielding investments and out of “safe-haven” USD. The Canadian dollar gained better that 1.5% vs. its southern counterpart pushing from 1.0318 early in the session all the way down to 1.0159 (its strongest since July ’08) before closing the week at 1.0193. Crude oil saw mixed trading gaining 3.34% for a session high of $82.90, just sort of the January 6, 2010 high of $83.18, before giving up 0.70% to ultimately close at $82.32. Natural gas continued its struggles of late with mixed trading but ultimately settled to close the week down 3.4% (week-over-week) at $4.35 a GJ. On the data front; Housing Starts saw a slight bump to 196.7K for Feb. vs. prior 186.3K and unemployment saw a slight drop month-over-month to 20.9K for Feb. vs. 43K, which dropped the overall rate from 8.3% to 8.2%. In continuing efforts to reduce the budget shortfall Canadian Finance Minister Jim Flaherty announced last week that the country is studying the sale of government assets in a bid to fill that gap. “Governments end up owning some things that they don’t need to own,” Flaherty told reporters in Ottawa.

MXN – The peso saw a slight retreat early in last week’s session but ultimately held its commodity linked high yield status by retracing and gaining an additional 1.3% for a close of 12.5348, its strongest mark since November of last year (12.4825). With crude oil (1/3 of Mexico’s annual revenue) maintaining strength, as well as a healthy rebound in manufacturing and employment. Mexico’s economy will probably grow 5.2% this year and some economists are calling for Mexico to lead the economic rebound in Latin America. On the data front; Consumer Prices decreased month-over-month (0.58% Feb. vs. 1.09% prior) while year-over-year they increased to 4.83% vs. 4.46%. Industrial Production saw a year-over-year increase from 1.6% to 3.6%. 

AUD – With few economic data released this week, the Australian dollar was largely driven by risk appetite along with the anticipation of an interest rate hike by the Reserve Bank of Australia in April. The Australian dollar strengthened 0.5% on speculation that the RBA will again increase interest rates by another 25 basis points to 4.25% due to below average borrowing rates. Earlier this week, the Australian dollar rose to a 7-week high against the dollar and yen, continuing its streak of being the strongest performing currency for the past year. Scheduled for Tuesday, RBA's Monthly Minutes will give market participants further insight of interest rate decision. 

Last Week’s Currency Highs and Lows and Forecast