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EURUSD

The highly anticipated G7 meeting failed to provide any support for the dollar. To Europe’s content, the statement released by the G7 portrayed their concern about the rapid acceleration in the euro. The statement was aimed at calming the markets and clarifying the Dubai communiqué. The European’s hand in crafting the statement was seen in the addition of the sentence “excess volatility and disorderly movements in exchange rates are undesirable for economic growth.” These are the same words that European officials have been repeating since the euro broke above 1.25 and reflect the G7’s concession to acknowledging the abrupt weakness of the dollar. The lack of supporting comments for the dollar has cleared the way for a possible retest of the previous high at 1.2905. Looking ahead, there is an Ecofin council meeting of European finance ministers scheduled for tomorrow. Rumors are filtering through the market today suggesting that rate cuts and intervention will be discussed at tomorrow’s meeting. Austria’s Grasser tried to deny these claims, saying that these are topics that should be addressed by the ECB.

USDCHF

The US’ hand in crafting the G7 statement is also quite evident, as the statement retained the “flexibility” message and does nothing to suggest that the G7 wants to reverse the dollar’s decline. The lack of any restraint for the dollar indicates that the other G7 member countries understand that the dollar correction needs to continue in order to adjust the US external imbalance. The big event risk this week is Greenspan’s semi-annual Humphrey-Hawkins testimony on the economy. His words and responses to the Q&A session has the means to dictate the direction of the dollar in the weeks ahead. Greenspan is expected to express optimism about the prospects for the economy and job creation, but also caution that inflation remains low, therefore the Federal Reserve has the ability to postpone rate hikes. However, should Greenspan echo Bernanke’s recent comments on deflation (that risks have subsided substantially), the dollar may find moderate support. Onto Switzerland, the unemployment rate remained unchanged in January although the actual number of unemployed individuals fell for the third consecutive month.

GBPUSD

The GBPUSD soared to fresh 11-year highs despite generally weaker economic data. Industrial production unexpectedly slipped -0.1% m/m and -0.8% y/y during the month of December. Manufacturing output also fell for the second month on the back of weaker European demand. The pace of the gains in UK property values are also slowing, as the latest house price data from the Office for the Deputy Prime Minister (ODPM) indicate that the yoy rise in house prices has declined from 9.7% to 8.3%. The latest release reflects the satisfactory effects of the Bank of England’s first rate hike in November. If you recall, the Bank of England raised rates by another 25bp last week. However, improvements in the BRC retail sales index did help to offset some of the weaker data. Looking ahead, we are keeping a close eye on Wednesday’s unemployment and inflation report.

USDJPY

USDJPY remained essentially unchanged following the G7 meeting. Japanese government officials were very vocal in defense of their intervention activities both during the meeting and in private discussions with US Treasury Secretary Snow. Although the second new sentence in the G7 statement (“that lack such flexibility”) is aimed at Asia, Japanese Finance Minister Tanigaki repeatedly tried to clarify that the G7 message was not targeted at Japan. He said the Japanese yen has fluctuated just as much as the EUR has since September, therefore “Japan is NOT one of the countries that are lacking flexibility and that was understood at this G7 meeting.” He also added that, “every G7 country agreed that Japan’s currency regime is flexible.” Tanigaki is effectively telling the market that Japan intends to continue intervening in the yen.