Last week the greenback extended its gains from the prior week to emerge

USD – Last week the greenback extended its gains from the prior week to emerge as the clear favorite of the world’s major traded currencies. Bolstered by the combination of souring global risk sentiment and ameliorating economic fundamentals, the USD was poised to reach its highest level against the EUR and GBP since May of last year. Concerns stemming from sovereign credit risk in the Eurozone, and even concern over the US’s own mounting budget deficits (topping over $1.2 trillion), sparked a powerful sell-off in the DJIA throughout last week (9,984.10)—the lowest level since October 2009—which in turn helped to underpin the dollar. The battery of key economic data releases last week, collectively, have helped to paint a picture of a nascent, yet definitive, economic recovery in America; though the employment situation in the world’s largest economy is admittedly still a drag on overall growth: ISM Manufacturing (58.4 in Jan. vs. 55.5 exp.); Pending Home Sales Index (1.0% in Dec. vs. -16.4% prior); ISM Services (50.5 in Jan. vs. 50.1 prior); Factory Orders Index (1.0% in Dec. vs. 0.5% exp.). The closely watched employment figures last week sent a mixed signal to the markets, instilling both a sense of confidence and foreboding: Initial Jobless Claims (480K for wk. of 1/30 vs. 455K exp.); NFP (-20K in Jan. vs. +15K exp.; Dec. revised to -150K vs. -85K orig.). The disappointing employment data, notwithstanding, the official headline Unemployment Rate unexpectedly fell to 9.7% in Jan. (vs. 10.0% prior), ostensibly evidencing the long-awaited turnaround in the US labor sector. 

EUR – The euro remains near 8-month lows vs. the dollar as sovereign debt concerns continue to hang over the Eurozone. The economies of Greece, Portugal, and Spain have come into the spotlight as fiscal concerns in these struggling countries predominate and threaten to derail a Eurozone recovery. The euro clawed back above $1.37 today after falling steeply to a low of $1.3583 last Friday. Despite this, investor concerns remain as Greek labor unions threatened strikes in protest of government austerity measures. The ECB left interest rates unchanged last week at 1.0% and expressed confidence that its member countries can resolve their fiscal issues. The euro will remain under pressure until these concerns are allayed.

GBP – The pound gained some ground against the almighty dollar during Friday’s London session, following higher than expected Producer Price data as measured by the PPI Index. Input prices increased by 2% in January, taking the annual rate to 8.4% and Output prices also rose during the same month (0.30%/2.50% MoM/YoY). Nevertheless, the GBP ran into some resistance against the USD around 1.5750 and subsequently collapsed to a low near 1.5550 following a surge in demand for the USD against the euro and GBP. Wednesday’s release of the Bank of England’s Quarterly Inflation report should be this week’s the main highlight in the UK. Together with updated growth and inflation forecasts, the report should provide further insights into last week’s decision by the MPC to halt its quantitative easing program and to keep interest rates steady.

JPY – The Japanese yen outperformed major currencies this past week as risk aversion remained high. The yen appreciated 1.3% against the US dollar, 3.1% against the euro, and 3.7% against the British pound last week as concerns of Eurozone deficits and talks of a slowdown in Chinese bank lending lead investors to move to the yen for safety. Positive releases from Japan’s cabinet office released on Friday also supported the yen, with an estimate report predicting Japan’s deficit will shrink to 7.1% of GDP by next year. Meanwhile, Consumer Confidence and Gross Domestic Product (GDP), releasing next week, are expected to improve slightly.

CAD – The loonie and crude oil followed their familiar correlated path last week as the markets continued to digest mixed data from the US and other G20 countries. The Canadian dollar began the week strong diving 1.6% to reach a two-week low of 1.0550 before retreating over 2% to close the week’s session at 1.0780, its worst reading since November of last year. Canadian stocks, however, benefited from some positive US manufacturing numbers led by Cenovus Energy Inc. and Goldcorp Inc., the country’s second-biggest gold producer, gained 4.3%. Canadian unemployment dropped 0.2% to 8.3% in Jan. from an 8.5% reading in December.

MXN – The Mexican peso, believed by many analysts to be the most undervalued currency in Latin America, saw the ebb and flow of USD safe-haven activity as well charting down 2% for a mid-week low of 12.8333 but inevitably relinquished those gains and gave up an additional 1.2% for a session high of 13.2456, its worst showing since November of last year. Mexico’s bonds rose last week in response to Central Bank Governor, Agustin Carstens’ comments that long-term inflation expectations are “anchored,” raising speculation policy makers have no immediate plans to raise interest rates. The central bank held its benchmark interest rate at 4.5% for a fifth straight meeting on Jan. 15.

AUD – In what was a volatile end to the week the AUD traded to a high around 0.8710 ahead of the U.S employment report before dropping rapidly to a low of 0.8580 following a disappointing non-farm payroll result. Speculation that the ECB would step in to bail out Greece and the approaching Group of seven (G7) meeting over the weekend triggered a late bounce in the Aussie dollar to finish the week around 0.8620. In early trading today the AUD gapped higher to trade back above the 87 cent handle following Greece supportive comments from the G7 and speculation that a more detailed plan will be developed over the course of this week.

Last Week’s Currency Highs and Lows and Forecast