Disappointing US Retail Sales Data

The US dollar fell close to a three week low as US retail sales data showed an unexpected decline in December normally the busiest retail sales season of the year. A separate U.S. Labor Department showed that jobless claims rose during the week that ended January 9th. New unemployment claims jumped to a total of 444,000, 11,000 more than the previous week. The dollar extended losses after the Fed’s beige book report that showed modest economic improvement.

Rising Commodity Prices Prompt Loonie Gains

The Canadian dollar rose against its US counterpart as investors speculated that rising commodity prices will spur recovery in Canada. The Canadian dollar advanced 3.5% last month and is on track for parity with the US dollar for the first time since 1976. Commodity linked currencies are expected to gain as rising demand for raw materials will increase due to recovery. US growth is expected to raise demand for Canadian oil and natural gas. The Aussie dollar rose against all of its major competitors today as Australia’s statistics bureau said that the country added 35,200 jobs in December and that the Australian Reserve Bank may raise its rates by a quarter of a percentage point. Jane Foley of Forex.com stated, “The strength of the Australian dollar is again lending support to the Canadian dollar and the New Zealand dollar.”

Trichet’s and Merkel’s Remarks

The euro declined against the greenback after European Central Bank President Jean Claude Trichet said that the outlook for the euro zone region is ‘uncertain’ and added that “Greece fiscal problems won’t get any special treatment.” Germany’s Chancellor Angela Merkel said that Greece’s fiscal problems would lead to a “very difficult phase” for the 16 nation currency. Greek Prime Minister George Papandreou’s government has a plan to push the country’s deficit below the EU’s budget limit in 2012. Referring to Greece, Trichet said, “no government, no state can expect special treatment.” Greek fiscal problems will likely plague the euro for some time to come.

Fed’s Beige Book to be Released

The US dollar fell against 12 of the 16 most traded currencies in advance of the release of the Federal Reserve’s ‘beige book’ which is a summary of regional economic conditions. Many investors see last week’s weak US employment figures as pointing to a prolonged US recovery. Andrew Wilkinson of Interactive Brokers Group stated, “The lackluster momentum for the U.S. recovery has resumed and that seems to be undermining the dollar right now.” The Fed will release the beige book today and the report is used as a basis of discussions at FOMC meetings. Joseph Trevisani of FX Solutions Inc. pointed out the importance of the beige book report and said, “Past Beige Books have said the same thing, that things are slowly getting better, but today’s is probably going to be toned down. The market is really looking for something that will change the current complexion of things, and the Fed has been making some noise about pulling liquidity.”

Pound Gains on BOE Statements

The pound gained 0.7% against the greenback trading at $1.6282. The pound also gained against the euro and yen. The pound was lifted after Bank of England policymaker Andrew Sentence told the Guardian newspaper that the BOE may adopt a ‘wait and see’ approach to it’s program of quantitative-easing. The pound was also bolstered by better than expected UK industrial production data. Adam Cole of the Royal Bank of Canada stated, “The comments from Sentance gave a sniff of a turn in the U.K. rate cycle, and that lifted the pound. It’s a bit premature in our view, but the comments moved the markets.”

Yen Falls Broadly

The Japanese yen fell broadly as stocks rose. Currency experts now say the yen is the currency of choice for carry trades. David Deddouche of Societe Generale SA in Paris said, “The yen is clearly now the funding choice for the carry trades. As long as we stay in the sweet spot for equities, the yen has weakening bias.” On Thursday the US weekly employment figures and retail sales figures are due to be released.

Dollar Sustains Losses

The dollar sustained last weeks losses on Monday pressured by last week’s dismal employment figures and comments by a Fed official who said rates would remain low for ‘quite some time.’ Commodity based currencies were the big winners on Monday and many currency experts say the Aussie and Canadian dollars are on track for parity with the greenback. Increasing US demand for Canadian oil and natural gas and Chinese demand for Australian iron ore and coal helped both currencies to gain in Monday’s trading session. John Kyriakopoulos of National Australia Bank Ltd predicted, “The global economy is going to strengthen, and the recovery is going to broaden out from what has so far been a China-, Asia-led global recovery. We’re forecasting parity for the Aussie dollar, and we actually think the Canadian dollar will go through parity.”

Aussie, Loonie Parity Predictions

The Aussie gained 0.6% trading at 93.04 U.S. cents and was the third best performer in 2009 against the 16 most traded currencies. National Australia, Royal Bank of Scotland Group Plc, JPMorgan Chase & Co predicts the Canadian dollar will achieve parity with the greenback by June 30th 2010. National Australia Bank Ltd predicts the Aussie will achieve parity by March 31st. Commodity based currencies posted 2009’s biggest gains against the US dollar.

Commodity Currencies Big Winners

The most active commodity currencies are he Aussie, loonie, Brazilian real, Norwegian Krone, South African rand and New Zealand dollar. On the positive side history points out that US economic recovery coincides with increases in commodity prices and the Aussie and Canadian dollars. According to the Tihanyi of Bank of Nova Scotia, “A lot of the Canadian dollar gains up to now have been happening in the absence of strong growth in the U.S. Through this year, you’re going to see growth come back to what you might see in a normal year, and along with that you’re going to see a pickup in trade and demand for Canadian products.”

US Employment Figures Dim Rate Hike Expectations

The US dollar posted its biggest decline against a basket of six major currencies on Friday. An unexpected rise in US unemployment pared speculation that the Federal Reserve will raise rates anytime soon. The dollar also pulled back from a four month high against the yen and the euro posted its biggest daily gain vs. the dollar since November. In previous trading sessions the dollar had rallied as investors expected the trend set in November to continue. The revised November jobs report showed a gain of 4,000 jobs and prompted speculation that the Fed would raise rates in early 2010. The Labor Department report showed that US employers cut 85,000 jobs in December 2009. Samarjit Shankar of BNY Mellon stated, “It was undoubtedly a disappointing number. It’s put a dent on rate hike expectations … and is a bit of a setback for investors who were looking for a relatively stable and smooth economic recovery. The U.S. still has a weak labor market, and until that gets turned around, you are not going to have a sustainable recovery.”

Yen May Be Currency of Choice for Carry Trades in 2010

A recent rise in US bond yields coupled with the recent dollar rally is prompting investors to return to the yen to fund carry trades. A carry trade is a strategy using low yielding currencies to purchase assets in higher yielding currencies. The rise in US bond yields is making dollar funded carry trades more expensive. Richard Franulovich of Westpac stated, “I think the yen will reclaim its status as the funding currency of choice in 2010. Even if the Federal Reserve raises rates by 25-50 basis points, that would mean U.S. rates will still be markedly above Japan’s.”

Euro Zone Data May Cause Volatility

Many experts expect volatility in currency markets this week as a slew of Euro Zone data will keep investors busy. Euro Zone data due this week includes, Euro Zone Gross Domestic Product, the Euro Zone unemployment rate and other data including German industrial production.

Dollar at Three Month High vs. Yen

The US dollar advanced to its first monthly gain since June 2009 as government reports show that job losses are ‘abating.’ Despite the year end rally the dollar is down 4.2% for the year. The dollar hit a three month high vs. the Japanese yen and advanced against the euro on positive US economic data that showed signs of recovery. Money manager Thanos Papasavvas said, “We are seeing the dollar recover probably into the first quarter of next year. We would expect the unemployment rate to start to stabilize.” The Dollar Index which tracks the dollar against a basket of six major currencies rose 4% in December to 77.860, the largest gain since January 2009 and the first monthly gain in six months.

IMF Reports Dollar’s Reserve Shares Declining

International Monetary Fund reported on Dec. 30 that the dollar’s share of reserves held by central banks fell to 61.6% the lowest on record down from 71% ten years ago. The euro’s share of foreign reserves rose from 17.9% to 27.7%. Tom Fitzpatrick of Citigroup Inc. in New York offered a somewhat pessimistic assessment of the dollar, “You might get periodic episodes of a little bit of dollar strength. But we really don’t feel any of the underlying parameters for dollar weakness has changed that much.” The yen was the only major currency to fall against the dollar on the year on speculation that the Fed will withdraw stimulus measures sooner than expected. David Tien of Francis Trees & Watts stated, “The surge in growth can continue for a while. The key question is against which currency the dollar’s gain can be the most pronounced. We think it’s the yen.”

Pound Posts Annual Gains vs. Dollar

The pound posted annual gains against the euro and the dollar as economic data showed the UK emerging from the recession. The pound pared second half advances after the Bank of England bolstered its quantitative-easing program, a debt-buying plan, to 200 billion pounds. ($324 billion USD) Most analysts expect the pound to strengthen in 2010.

Dollar Holds Gains

The greenback held recent gains and rose to a two month high against the Japanese yen. The yen was widely pressured by Japanese fiscal concerns after Standard and Poor’s said Japan’s rating was at risk if the government does not take measures to stabilize and reduce Japan’s debt. Trading has been thin in advance of years end holidays in Asia, Europe and the United States. Neil Mellor of Bank of New York Mellon stated, “People are starting to get increasingly worried about Japan’s fiscal situation. Fiscal issues will be the big story at the start of 2010, especially in Japan and the UK.” Investor concerns about how the UK will finance massive deficits have weighed heavily on the pound in currency markets.

Fed Rate Speculation

Greatly improved US economic data has led many traders and investors to speculate that the Fed may raise rates sooner than expected and will also withdraw emergency measures taken at the beginning of the global financial meltdown. When the Fed will raise rates is expected to be a key question and investors are closely watching comments by Fed policymakers for any signs of rate hikes. Traders and investors say that once markets get a sense of timing for Fed exit strategies the yen could become the currency of choice for carry trades. Tomohiro Nishida of Chuo Mitsui Trust and Banking Company stated, “Yield differentials between the U.S. and Japan have started to widen slightly, showing evidence the market is conscious of the prospect of the U.S. exiting its easy policy. With that perception behind the dollar, if the U.S. heads towards the exit, the dollar-funded carry trade is expected to wane as Japan is seen as more likely to ease further.”

Wednesday (Dec. 30th) offered little in the way of economic data as Asian, European and US markets prepare to close for year end holidays.

Markets Quiet at Years End

The US dollar gained on the yen in thin year end trading and rising equities and commodities prompted a rise in risk sentiment among investors and currency traders. European trading was minimal as market participants were off for the year end holidays and UK markets were closed for a public holiday. Markets showed little reaction to the attempted terrorist attack on a US airliner. Monday, December 28th, was the last business day of the year and trading will resume January 4th. Many traders will be focusing on whether the dollar will continue recent gains going into 2010. Antje Praefcke of Commerzbank Corporates and Markets in Frankfurt stated, “Some corporates out of Japan may have been active in the yen, but it’s very, very quiet here, and I think (European) companies will have done 99.9 percent of what they had to do this year already.”

US Consumer Sentiment Report Due

The yen which is traditionally viewed as a safe haven currency was pressured by rising risk appetite. The dollar has gained about 1% against the yen in 2009 after falling nearly 19% in 2008. Market watchers are waiting for December’s US consumer confidence figures and the Standard & Poor’s Case-Shiller home price index for October. Both reports are expected to show continued recovery in the US. Many investors believe that the Fed may raise rates sooner than expected as recent data shows consistent signs of recovery. Johan Javeus of SEB stated, “Anything that points in the direction of the Federal Reserve raising interest rates earlier than previously thought will support the dollar — there has been no indication of this from the Fed but U.S. data recently has been coming in on the strong side.”

Canadian Dollar Gains on Greenback

The Canadian dollar traded at its highest against the US dollar since October and rose to its highest against the euro in thirteen months. The Canadian dollar gained 1.4% against the US dollar in December and gained for the second straight month. In October 2009 the Canadian came within three cents of parity with the greenback and is poised for a yearly gain of 17%.

Iranian Troops in Iraq

The dollar gained yet again against the euro which has been pressured by two Greed sovereign debt downgrades and Austrian banking concerns. The dollar rose on safe haven bids after new reports said that 11 Iranian troops had entered Iraq and raised the Iranian flag over a disputed oil field. Initially Iraq’s deputy interior minister Ahmed Ali al-Khafa denied the reports but said later that there had been a series of incursions by Iran. He said he would seek a diplomatic solution rather than a military one. The Swiss Franc which is considered a safe haven currency rose on rumors of a coup in Pakistan. John McCarthy of ING Capital Markets stated, “It’s Greece, it’s Pakistan and certainly Iran has been one of the factors helping to support the dollar.” The euro hit its lowest since March against the troubled euro.

Pakistan Coup Rumors Trigger Safe Haven Flight

The Japanese yen rose against the euro and the Aussie dollar as the news from Pakistan sent a chain reaction through markets. The currencies later recovered most losses but the euro was down 0.4% against the Swiss franc trading at 1.49571CHF. Tomohiro Nishida of Chuo Mitsui Trust and Banking Company said, “The euro/Swiss was just at the key point on the charts and a rumor about Pakistan seemed to have pushed down the pair. Stops below 1.50 francs accelerated falls in a market with low liquidity and spurred risk avoiding trade at the year-end.” The euro was also down 0.4% against the yen to 128.43 and the Aussie fell 0.5% vs. the yen trading at 9.40 yen.

Dollar to Hold Recent Gains

Most currency experts predict that the US dollar will hold onto last weeks gains. The dollar continues to be supported by evidence of US recovery and the Fed’s decision to withdraw emergency measures in February 2010. Nick Bennenbroek of Wells Fargo stated, “We see the U.S. economy continuing to recover and monetary policy settings starting to move back to normal. Although our economics team does not expect actual rate tightening to take place until late in 2010, the withdrawal of non-conventional measures could start tipping the scales in the dollar’s favor.”

Euro Gains Slightly in Advance of Fed Statement

The US dollar fell slightly against the euro in advance of the results of the FOMC meeting. The dollar is still holding near a 2 ½ month high against the euro. Investors are waiting to see if the data from the FOMC meeting will offer any clue as to when the Federal Reserve may raise rates and withdraw various emergency measures. The euro was up 0.3% on the day at $1.4577 after hitting session peaks of $1.4587. Brian Dolan of Forex.com stated, “Stocks are up, the U.S. data was a bit on the risk-positive side and gold has pressed higher, so the dollar’s taking a bit of a breather. Also, we’re looking for a benign statement form the Fed, with rates on hold and no significant changes, and that should be good for risk appetite.”

Euro Pressured by Banking Concerns, Greek Downgrade

The euro has been widely pressured by banking concerns, the Greek downgrade and a downgrade in the Spanish debt rating. Austria nationalized one financial institution and put the nation’s largest cooperative bank on a watchlist. A spokesman for the bank said that the bank is not at risk of nationalization. The Aussie dollar fell after data showed that Australia’s gross domestic product grew by only 0.2% during the third quarter, much less than expected. The Aussie fell 0.7% on the day against the greenback trading at $0.8991, the lowest in three weeks. Tsutomu Soma of Okasan Securities stated, “Weaker-than-expected growth data as well as comments from a top central banker have curbed bullish views towards the Australian dollar a little. Players, including Japanese institutional and individual investors, sold the Aussie to trim long positions in Australian assets.”

Fed Upbeat About Recovery

The Fed has said repeatedly that rates are likely to remain low for an “extended period.”. Most experts believe that while rates will remain low the Fed will be upbeat about recovery prospects. According to a UBS analyst, “There could be more constructive language on the business outlook in the last FOMC meeting (of the year) but we don’t think they will ease off of the lower-for-longer stance.”

Euro Pressured by Austrian Banking Concerns

The US dollar hit a two month high helped by recent employment and industrial production data. A recent report showed that US industrial production rose in November at a higher rate than had been forecast by economists. The euro was pressured by Austrian banking concerns after the Austria nationalized Hypo Alpe-Adria Bank International AG. An Austrian press report said that the nation’s central bank and its financial market regulator have put the country’s largest cooperative bank, Oesterreichische Volksbanken, on a watchlist. A spokesman said that the bank is not at risk of nationalization and the press report is inaccurate. Lingering concerns about the fiscal health of Greece have also pressured the euro. After having its rating downgraded Greek Prime Minister George Papandreou’ announced spending cuts to ease concerns.

Dubai Bailout Eases Fears

Monday’s announcement of a $10 billion dollar bailout for Dubai eased some banking concerns. Dubai stocks rose 3.4% after the bailout announcement. Abu Dhabi’s Dubai bailout helped to prevent a default on a $4.1 billion bond issued by property firm Nakheel. All this translated into a two month high for the dollar against most major currencies. Michael Woolfolk of BNY Mellon in New York said, “We’ve had a string of very good U.S. data releases compared to Europe, and today’s data suggests inflation is picking up again, so the whisper out there is that the Fed will hike rates sooner than expected.”

Pound Reverses Decline

The pound reversed its decline against the euro and yen as UK economic data showed that inflation rose to its fastest pace in sic months. Some analysts say this weakens the ECB’s argument for keeping rates at record lows of 0.5%. Last week Chancellor of the Exchequer Alistair Darling said that the UK inflation rate would rise about 3% in 2010. The pound gained 0.5% against the euro trading at 89.44 pence per euro. Against the yen the pound  rose to 146.03 yen and traded at $1.6236 against the greenback.