Major Currencies Eye Rate Hike Outlook, Aussie Tracking Gold

by: Ilya Spivak

EURUSD: All Eyes on EZ FinMin Summit for Debt Crisis Relief

Relative borrowing costs came into focus for the euro after last week’s unexpectedly hawkish ECB policy announcement pushed up front-end yields, sending the currency higher. The subtle change in rhetoric seems likely to have been an attempt to talk down inflation expectations after yearly CPI growth printed at 2.2 percent, topping the central bank’s target 2 percent for the first time since November 2008, with an actual rate hike highly improbable while funding troubles persist on the eurozone periphery.

This puts the spotlight on Monday’s meeting of eurozone finance ministers in Brussels, with traders keen to see if policymakers are able to reach consensus a “comprehensive solution” to the debt crisis. On balance, a disappointing outcome looks likely, with German officials hinting they want to push out a final settlement until March. Should this materialize, last week’s gains may prove to evaporate as quickly as they appeared. German ZEW and IFO surveys of investor and business confidence headline the economic calendar.

Strategy: Stay Short from 1.3315, targeting 1.2867. Stop on daily close above 1.3499.

GBPUSD: Inflation, Jobless Claims Data Eyed for BoE Bias Clues

Monetary policy expectations remain in focus for the British Pound as GBPUSD continues to track closely with the UK - US Treasury yield spread. The economic calendar promises to underscore the paralyzed state of the central bank with Consumer Price Index figures expected to show the highest inflation rate in seven months while December’s Jobless Claims print flat having declined only modestly over the previous two months, highlighting the slowdown in the labor market’s recovery through the second half of last year.

The conflict between containing price growth and backstopping the recovery amid the onset of the government’s austerity program is unlikely to get any closer to a concrete resolution at least until minutes from the last Bank of England policy meeting are published next week. This suggests that Sterling may find its near-term catalyst in the eurozone debt crisis if a disappointing outcome to Monday’s summit of the regional bloc’s finance ministers fails to produce results, driving capital out of the single currency and into the UK unit as an alternative medium of exchange. December’s Retail Sales report rounds out scheduled event risk.

Strategy: Flat

USDJPY: Hu Jintao’s US Visit, Corporate Earnings Season in Focus

US Treasury yields remain most prominent in driving Japanese Yen price action, but a relatively light US economic calendar means prices will look to Chinese President Hu Jintao’s visit to the US as well as the start of the corporate earnings season for clues on where things go from here. It is widely known that China is America’s largest foreign creditor, so the outcome of President Hu’s meetings with US President Barack Obama may have significant implications for bond yields, at least in the near term. Meanwhile thirty-eight S&P 500 companies are set to report fourth-quarter earnings throughout the week, giving investors an alternative gauge on the pace of the US recovery following the notable pickup in key economic data over recent weeks. November’s Tertiary Index of service demand stands out on the domestic data docket.

Strategy: Pending Long

USDCAD: Rhetoric Tone Key as Bank of Canada Announces Policy

With the correlation between USDCAD and the 2-year yield spread at the highest in over a year, all eyes are pointed squarely at the Bank of Canada as Governor Mark Carney and company deliver their monthly monetary policy announcement. Although the central bank is widely expected to keep benchmark borrowing costs unchanged at 1 percent, priced-in rate hike expectations for the year ahead are the most robust among the majors and traders will be looking for confirmation of a hawkish bias in the tone of the statement accompanying the rate decision to guide price action. Leading Indicators and Retail Sales figures round out the economic calendar.

Strategy: Flat

AUDUSD: Gold Correlation Hints Aussie Dollar Weakness Ahead

The Australian Dollar’s strongest noticeable relationship at present is its correlation to gold prices, with both the currency and the yellow metal likely to decline in the week ahead as investors’ dominant forecast for the evolution of the global post-Great Recession recovery shift away bullish and bearish extremes. Gold had decoupled from the risk-on/risk-off dichotomy of recent years, reflecting its appeal as a store of value for bulls and bears alike as the former camp called for catastrophic inflation on the back of ultra-loose monetary policies while the latter projected renewed collapse across asset classes as fiscal stimulus expired.

However, investment demand suffered a major setback last week, with gold ETF holdings snapping a rising trend carved out through the fourth quarter to drop to the lowest since mid-September. The reversal follows the recent improvement in US economic data – the bellwether for the global recovery at large – coupled with rising sovereign stress in Europe and looming slowdown in China, which have simultaneously made a back-slide into recession seem unlikely while pointing to a rebound that amounts to a long, hard slog over the years ahead. Interestingly, a shift of consensus toward this kind of recovery bodes ill for the Aussie much the same as it does for gold, hinting other central banks will now get their chance to catch up as the RBA – until recently the leader in post-crisis monetary tightening – sits on its hands.

Strategy: Pending Short

NZDUSD: Spotlight on Rate Hike Forecast as Inflation Soars in Q4

The rising link between NZDUSD and yield spreads puts the spotlight squarely on the outlook for monetary tightening ahead of next week’s RBNZ policy meeting. Wednesday’s release of fourth-quarter Consumer Price Index figureswill shape expectations, with economists calling for the annual inflation rate to jump to 4.1 percent, the highest in over two years. November’s Retail Sales report is also on tap.

Strategy: Pending Short

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours; Short EURUSD