The euro is largely range-bound

USD – The dollar is underpinned today by upbeat news on the US economy. Consumer spending rose 0.4% in July, the fastest pace in 4 months and snaps a string of bad economic news that had cast gloom on the economic recovery. Markets were also reassured by comments from Fed Chairman Bernanke last week that the central bank would do what is necessary to spur economic recovery while playing down the likelihood of the economy slipping back into recession. Concern mounted last week after several reports pointed towards a slowdown in the economy. GDP was reported at a modest 1.6% in the second quarter, down from 3.7% in the previous quarter while Durable Goods orders slid -3.8% in July. The hangover from the housing market also appeared to linger as both new and existing sales tumbled -12.4% and -27.2, respectively in July. Today’s positive economic news provides some solace for the economy but investors will be looking for follow through.
Attention will focus on the all important jobs report Friday for further signs the recovery remains intact.

EUR – The euro is largely range-bound as risk appetite stemming from concerns about the US recovery remains the currency’s primary driver. The single currency traveled narrow ranges last week between $1.26-1.28 as gloomy economic news in the US tempered risk appetite despite signs that the Eurozone recovery was intact. New Industrial Orders rose an above forecast 2.5% in June while the Purchasing Manager’s Index (PMI) remained firmly above the 50 growth threshold at 56.1 in August. The positive economic news comes largely on the back of Germany as the country remains the engine of growth for the region. Strong performances by Germany and France are in stark contrast to the other member countries which continue to struggle. Standard and Poor’s downgraded Ireland’s credit rating to AA- and assigned the country a negative outlook. The 2 speed nature of the recovery appears likely to limit euro gains as a stronger euro may threaten Germany’s export led recovery.

GBP – Sterling continues to hover around the 1.5500 level following a week in which it tested support levels on Tuesday at 1.5380. GDP came in slightly better than expected at 1.2% on Friday fostering the move back above 1.5500. Following last week’s GDP release, the British Chamber of Commerce raised its 2010 growth forecast to 1.7% (from 1.3%) and its 2011 forecast to 2.2% (from 2.0%). As such, they expect the BoE to begin hiking rates by mid 2011. If this holds true, then expect cable to strengthen in the coming days as there is a lack of economic releases in the UK this week. Near term target is 1.5700 with support back at 1.5500.

JPY – The yen rose against all 16 of its most-traded counterparts on speculation the BoJ’s decision to increase credit-easing measures won’t be enough to weaken the nation’s currency from a near 15-year high. Japan’s currency headed for a fourth straight monthly advance versus the dollar even as Prime Minister Naoto Kan said the nation is preparing a 920 billion yen ($10.8 billion) stimulus plan and the central bank added 10 trillion yen in liquidity injections. Later in Asia trading, the JPY sold off following an emergency meeting of the BoJ during which the Bank said that it will expand a “special funding operation” that will make certain inordinately low cost money will be made available to the nation’s banks. The BoJ did say that the strong yen was detrimental to the economy but otherwise this was not the major policy statement that the market had hoped for. The yen bounced off its session lows and appears to be trending closer to 80 whether the BoJ wants it or not.

CAD – The loonie weakened on signs of a slowdown in the global economy, which had some investors taking profits, and trimming bets that the Bank of Canada would raise rates on September 8. This Tuesday’s release of Canada’s Q2 GDP data will provide more clues on the interest rate move. Expectation is for a fall in growth to the 2.5% level, which is still favorable compared to the U.S.’s 1.6% level. Today, Canadian producer prices were below forecast and edged up only 0.1 percent in July from June, while the Q2 current account deficit widened more than expected. The loonie is expected to remain strong amid a relatively strong sovereign position and a weaker USD. However, any loonie gains will remain vulnerable to the shift in global growth sentiment.

MXN – The Mexican peso dropped 2.88% against the dollar last week as a result of disappointing US data releases. Despite an increase in risk appetite flows, the peso’s strength continued to be dependent on the economic outlook of the North American region.
Last week, the effects of the US economic slowdown became apparent as reports showed Mexico’s trade deficit widened for July and retail sales in June dropped 3.5% from May.
Mexico’s Bi-Weekly CPI posted a mere 0.09% gain vs. the previous 0.13% and forecasted 0.21%. Furthermore, unemployment rose to 5.7% from the previous 5.05% and 5.50% eyed.

AUD – The Aussie was one of the best performing majors this week, rising briefly above 0.9000 level against the US dollar this morning before risk aversion weighed. Despite gains, market participants remained focused on Japan’s less than aggressive stance on increasing its quantitative easing, limiting Asian stock and Aussie gains. Ahead this week, all eyes will be on the release of US employment, Chinese manufacturing, and Australian GDP figures. Should data hold up, we should see another risk rally supporting the Aussie above today’s highs of 0.9032.

Last Week’s Currency Highs and Lows and Forecast