The euro is at the lower end of recent ranges below $1.4000

USD – America’s currency, together with the JPY, were once again the beneficiaries of “safe haven” capital flows last week, as an unexpected decline in US consumer confidence exacerbated the market’s propensity towards risk aversion during periods of economic uncertainty. The University of MI Consumer Confidence Index (preliminary) experienced a precipitous drop (64.6 in Jul. vs. 70.8 prior), revealing a souring of sentiment on both current conditions and future outlook. A sprinkling of sanguine data, notwithstanding, the greenback continued to be in demand: Initial jobless claims fell below the critical 600K threshold for the first time since January 2009 (565K for wk. of 7/4 vs. 614K prior), while the US Trade Balance Index narrowed further (-$26.08B in May vs. -$29.2B prior). Nevertheless, deflation concerns weren’t completely pushed aside as the y/y rate of import price growth remained persistently near the record low of -17.5% (-17.4% in Jun.), amidst a drop-off in economic activity and falling oil prices ($58.40 as of this printing). Markets will have plenty to digest this week as they look to key indicators reflecting three of the most important gauges of economic growth: Advance retail sales, industrial production, and housing starts. However, the predominant “event risk” for the week will likely be this Wednesday’s release of minutes from the Fed’s 6/24 meeting. Though interest rates were kept steady at 0.0% to 0.25% (as expected), market participants will likely scour the comments contained in the minutes to garner any specific insight as to the status of the Fed’s “quantitative easing” program—a stepping-up of which will inevitably cause a weakening of the USD.

EUR – The euro is at the lower end of recent ranges below $1.4000 as markets have become more cautious ahead of US companies’ earnings reporting. The single currency slid from highs at $1.4072 last week despite signs that the Eurozone economy was stabilizing.
German manufacturing orders improved 4.4% in May while industrial output rose by 3.7%—the fastest pace in 16 years. Similarly, France also reported an above-forecast 2.6% rise in industrial output in April. Despite the positive economic news, the euro will likely remain on the defensive as market attention focuses on the US economy and signs of continuing recovery.

JPY – The yen gained ground this morning rising to 91.74 (per $) after Masaharu Nakagawa, the Japanese finance official from the opposition party, stated that Japan should consider buying IMF bonds instead of dollars to diversify its foreign reserves. Japan’s Prime Minister Taro Aso called for national elections on August 30th, which will likely result with the end of the Liberal Democratic Party’s almost fifty-year hold on power. The JPY will likely continue its strengthening trend in the weeks ahead as investors abandon bets against the currency.

GBP – The sterling declined over the last two weeks as economic data added to evidence that the economy remains in a recession. Wednesday’s jobless claims are forecasted to rise by 41,300 in June, after increasing by 39,300 in May. However, so far this year the GBP has climbed more than 23% against the USD, albeit from previously very weak levels. The UK economy is in a consolidation phase, and the important financial sector is now dusting itself down after the storm, though reportedly Lloyds Banking Group Plc may announce further losses. The prospect of historically low housing costs has already lured some buyers out of the woodwork chipping away at a substantial backlog of demand that has built up during the financial crisis. Aided by the fiscal support measures already introduced, UK households are expected to keep consumption at sensible levels, so making a healthy contribution to aggregate growth in the economy.

CAD – The loonie saw a range of about 1.3% last week (1.1558-1.1710) reaching a two-month low on a continually mixed outlook for both crude oil and US economic recovery.
Some traders speculate that the currency has an opportunity to trade higher based simply on five weeks of declines. For the Canadian economy, however, hurdles remain with Canadian Finance Minister Jim Flaherty commenting that budget deficits will remain through 2014 generating shortfalls of C$156B ($134B) over the next five years, according to a new report, which was later confirmed by the Parliamentary Budget Office. New building permits for residential and non-residential construction are down 29% and 19.5% (YOY) respectively.
However, they rose 14.4% and 15.3% respectively for the month of May showing signs of a re-igniting construction sector. Crude oil is currently retracing a two-month low of $58.40 for August delivery after reaching $60.86 last Thursday. Many traders feel crude oil has run its course testing the near-term top-of-the-market and will remain pressured.

MXN – The Mexican political and economic landscape saw an eventful period last week.
Mexico’s Institutional Revolutionary Party headed to a victory over President Felipe Calderon’s National Action Party in mid-term elections, marking a comeback after it had ruled the country for 71 years. The PRI will likely become the largest political group in the lower house of Congress. It had 36% of the vote, while the National Action Party had 27%, according to preliminary results from 65% of voting locations. President Calderon, whose party was the biggest in the lower house, will now have difficulty winning approval for legislation that would strengthen public finances by reducing dependence on oil revenues, leading some to speculate that action may lead to a credit rating downgrade. Finance Minister Agustin Carstens commented that GDP may shrink this year at a pace similar to the contraction during the 1995 peso crisis, when it fell 6.2%.

CNY – The yuan was slightly lower vs. the dollar at 6.8337. It fell following a fall in the currency in the offshore hedging markets, implying a more modest yuan appreciation of 0.37% over the next 12-months.

Last Week’s Currency Highs and Lows and Forecast