The greenback continued its precipitous slide throughout last week

USD – The greenback continued its precipitous slide throughout last week, closing-out the final trading session with its tenth consecutive bearish close (on a trade-weighted basis), and falling to a new low for the year relative to its major world counterparts. Notwithstanding the battery of benign economic data releases last week, the allure for the USD as a “safe haven” has all but dissipated, and in turn, the greenback has supplanted the JPY as the favored “carry-trade” currency for funding investments, due to its extremely low interest yield.
Inflation data showed an appreciable uptick in August (PPI: 1.7% vs. -0.9% prior; CPI: 0.4% vs. 0.0% prior), while Advance Retail Sales soared to unexpected heights (2.7% in Aug. vs. -0.1% prior). Even robust improvements in the long-ailing manufacturing sector surpassed market expectations (Empire Index: 18.88 in Sep. vs. 15.00 exp.; Industrial Production: 0.8% in Aug. vs. 0.6% exp.). Housing Starts also edged up to a high for 2009 (598K in Aug. vs. 589K prior), and while this morning’s Leading Indicators Index fell slightly short of expectations (0.6% in Aug. vs. 0.7% exp.), there is a growing sense that a nascent economic recovery is underway. All eyes will be focused on this Wednesday’s FOMC rate announcement. While there is zero expectation for any adjustment to the actual interest rate levels, markets will be closely attuned to the accompanying policy bias statement in hopes to garner any further insight into the near-term direction of US monetary policy, and the health of the world’s largest economy. With mostly second-tier data releases on tap for the balance of this week, the USD will likely take its cues from equity markets, as well as economic and political developments in the Eurozone and Japan.

EUR – The euro is consolidating gains as the economic picture brightens in the Eurozone.
The single currency remains above $1.46 after climbing to year highs of $1.4766 last week. The euro gains come amid broad dollar weakness on increasing risk appetite as confidence in the global economy improves and continuing signs of recovery in the Eurozone. The pace of the Region’s job losses moderated as employment fell -0.5 in Q2’09 from -0.8 previously. Industrial production also showed improvement, declining -0.3% in July from -0.6% earlier. Expressing the increased optimism on the economy, ECB member Axel Weber said the economic freefall had ended but recovery would be bumpy and take time.

GBP – The British pound extended its one-week decline on speculation the UK banking sector is still fragile. The sterling started to fall a week ago on dovish comments from BoE Governor Mervyn who said he would consider rate cuts on commercial banks’ reserves held at the Central Bank. The news raised speculation that the BoE may continue to extend its 175B pound quantitative easing program. Speculation that Lloyds Banking Group, UK’s biggest mortgage lender, needs to raise more capital, and news that UK public sector finances were at its worst for an August on record hurt the sterling further. Meanwhile, UK jobless rate is at the highest since November 1996 at 7.9%, while retail sales and manufacturing orders remain weak, suggesting a fragile economy. Today, data from property website Rightmove showed asking prices for homes in England and Wales were on average 1.5 percent lower this month than a year ago. Interest rates are expected to remain steady at the next monetary policy meeting.

JPY – The yen fell against the dollar on speculation that repatriation of funds from Japanese companies will slow down towards the end of the month, when the fiscal half-year closes.
Analysts predict that Japan will be the only G10 nation that won’t raise interest rates from a record low of 0.1% in 2010. Last week the BoJ left benchmark interest rates unchanged and cited encouraging signs in the economy. Though the newly elected Democratic leaders have voiced their support for the yen, analysts are unsure how they would handle a strong yen as Japan is an export heavy country. Financial markets are closed for holiday through Wednesday.

CAD – The loonie reached a year-to-date high of 1.0599 vs. USD, breaking the psychological 1.06 barrier last Thursday after opening above 1.09 (1.0921 high) on Monday’s session opening. This was in virtual lock-step with crude oil, which traded between $68.10 - $72.96, respectively. Equity markets fueled Canada’s currency as well, with the DJIA reaching its highest level since last October (9846.00), and flirting with another key psychological level of 10K. Prime Minister Stephen Harper said last week, “Canada must end its stimulus spending and return to a budget surplus when the country’s recession ends.” Some analysts are calling for the loonie to reach parity with its US partner by September 2010.

MXN – The peso benefited, though to a lesser extent, from the same elevating conditions as the other commodity based currencies ranging between 13.52 – 13.14 vs. USD—its lowest level since late August. Mexico’s peso rose as retail sales in the US, the buyer of 80% of Mexican exports, surged in August by the most in three years. Mexican lawmakers criticized President Felipe Calderon’s tax and spending proposals for next year, saying they unfairly punish the poor while doing nothing to close business tax loopholes. Calderon needs the PRI’s backing to win approval for his bill. Calderon’s 2010 budget proposal seeks to shore up public finances as the deepest economic slump since the 1930s reduces tax collection and output at the state oil monopoly declines.

CNY – The yuan weakened vs. the dollar to 6.8289. The yuan fell after Chinese authorities reined in last week’s dollar-selloff-fueled gains to send a message that the currency should remain stable in the near term.

Last Week’s Currency Highs and Lows and Forecast