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US Dollar, Japanese Yen Consolidate Gains Ahead of Q4 Earnings for Major US Banks

• Canadian Dollar Up on Signs of Growing Foreign Investment, Ahead of Bank of Canada’s Rate Decision
• British Pound Holding Strong as Traders Anticipate End of Quantitative Easing – UK CPI on Tuesday
• Euro Mostly Weaker - German ZEW Survey May Reflect Conflicting Sentiment
• New Zealand Dollar Mixed as Commodities Gain, House Prices Fall for First Time in Six Months

US Dollar, Japanese Yen Consolidate Gains Ahead of Q4 Earnings for Major US Banks
The US dollar and Japanese yen pulled back across the majors in a period of consolidation following their rallies on Friday. Overall, none of the moves were significant since the day was characterized by low-liquidity due to US market closures for the Martin Luther King, Jr. holiday. Looking ahead to the rest of the week, event risk is going to be limited, but perhaps the biggest issue to keep an eye on is that of optimism on the financial sector. On Friday, traders learned that Q4 revenues at JPMorgan were disappointing, and with majors US banks like Citigroup (Tuesday), Bank of America (Wednesday), Wells Fargo (Wednesday), and Goldman Sachs (Thursday) all due to release their own earnings later this week, speculation on and reaction to the outcomes are likely to trigger sharp moves in the equity, bond, and forex markets alike.

Related: Discuss the US Dollar in the DailyFX Forum, Top 5 Events for the Week of January 18

Canadian Dollar Up on Signs of Growing Foreign Investment, Ahead of Bank of Canada’s Rate Decision
The Canadian dollar gained on a day of fairly quiet trading, and got an extra boost from the latest report on international securities transactions in Canada, which showed that foreigners flocked to Canadian bonds during November as they bought a net C$12.904 billion. While there were net declines in foreign purchases of stocks and money market paper, they were relatively small, and thus the overall balance still managed to rise to $10.538 billion during the month, up from C$5.949 billion in October. Even bigger event risk looms for the Canadian dollar on Tuesday, though, when the Bank of Canada is expected to announce that they are leaving rates at 0.25 percent. After the Bank left rates unchanged on December 8, they repeated that they would maintain a neutral stance through June 2010, and while this is likely to remain the case once again, the bigger issue to keep in mind is that the Bank may issue revisions to their GDP and CPI outlooks. Indeed, upgrades to their previous forecasts for GDP to rise 3.0 percent in 2010 and 3.3 percent in 2011 have the potential to lead to a sharp rally in the Canadian dollar. However, downgrades to these forecasts, or indications that CPI will not return to their 2 percent target until after Q3 2011 could weigh heavily on the currency.

Related: Discuss the Canadian Dollar in the DailyFX Forum,

British Pound Holding Strong as Traders Anticipate End of Quantitative Easing – UK CPI on Tuesday
The British pound remained strong on Monday as traders anticipate that the Bank of England will shut down their Asset Purchase Facility next month. On Tuesday, the release of the UK’s consumer price index (CPI) is projected to show that headline inflation grew 0.3 percent during the month of December, while the annual rate is projected to jump to a nine-month high of 2.6 percent from 1.9 percent. Such an outcome would leave CPI above the Bank of England’s 2.0 percent target, and would likely add to speculation that the central bank will officially end its quantitative easing program in February.  As a result, an increase in CPI in line with or above expectations has potential to push the British pound higher. If the reading is lower than anticipated, though, the currency is likely to pull back.
    
Related: Discuss the British Pound in the DailyFX Forum

Euro Mostly Weaker - German ZEW Survey May Reflect Conflicting Sentiment
The euro was mostly weaker across the majors, and only managed to gain against the greenback, which ultimately marked more of a consolidation than a clear turn amidst limited event risk. On Tuesday, the German ZEW survey is projected to show that investor sentiment on the current situation and economic outlook was a bit conflicted during January. Indeed, the index gauging sentiment on the current situation may rise to a 13-month high of -56.2 from -60.6, while the index measuring confidence in the economic outlook may slip to a six-month low of 50.0 from 50.4. All told, the data is likely to be indicative of the “bumpy road” that the Euro-zone economy faces, as stated by European Central Bank President Jean-Claude Trichet last Thursday.

Related: Discuss the Euro in the DailyFX Forum,

New Zealand Dollar Mixed as Commodities Gain, House Prices Fall for First Time in Six Months
The New Zealand dollar was mixed on Monday as commodities edged higher while REINZ reported that house prices fell 0.9 percent during the month of December, marking the first decline in six months. All told, the data suggests that the economy remains under pressure, even though the Reserve Bank of New Zealand has not budged on monetary policy by leaving rates at a record low of 2.50 percent since April 2009. The data didn’t have much of an impact on rate expectations, but that could change on Tuesday. Indeed, a report may show that the steady rise of inflation in New Zealand sputtered out in Q4, as the nation’s consumer price index (CPI) is projected to go unchanged from Q3. That said, the annual rate of CPI growth is anticipated to rise to 2.1 percent from 1.7 percent, and with Credit Suisse overnight index swap (OIS) rates are already pricing in 200 basis points worth of rate hikes by the Reserve Bank of New Zealand over the next 12 months, weaker than expected results has the potential to push the New Zealand dollar lower as the markets will shift to price in fewer rate increases. However, CPI proves to be strong, the currency is likely to rally in response.

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Written by: Terri Belkas, Currency Strategist for DailyFX.com
E-mail: tbelkas@dailyfx.com
 

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