Canada: Inflation Tame in December

Overall Canadian consumer prices rose 2.4% from year ago levels in
December, just a tad below market expectations for a 2.5% gain, and up
from 2.0% in the prior month.

Energy prices (+10.5% y/y) exerted the most upward pressure on
consumer prices in the month, led by elevated gasoline prices (+13%),
but also with gains in natural gas and electricity.
Excluding food and energy, inflationary pressures were mild in the
month, with consumer prices rising modestly to 1.6%, from 1.5% in the
prior month. Price pressures remained modest among most major
components, except for transportation where prices for motor vehicles
have been gaining strongly for the last year.

The Bank of Canada's (BoC) core measure of inflation, which excludes
eight most volatile components including food and energy, edged up in
the month, rising 1.5% from year ago levels, up from 1.4% in the prior
month, but below market expectations for a reading of 1.6%.
Nevertheless, core inflation remains well below the Bank of Canada's
2.0% target.

*Key Implications*
Today's inflation report was below market expectations, but in line
with the BoC's expectations outlined in January's Monetary Policy
Report (MPR). In the most recent MPR, the Bank of Canada upgraded the
U.S. outlook, but only marginally altered the Canadian inflation
outlook, emphasizing the risks. This had markets beginning to price
out a March rate hike from the Bank of Canada. Today's soft inflation
report suggests there is little urgency for the Bank of Canada to lift
the overnight rate from its current low level of 1.0%.

Going forward, the only significant inflationary pressure will likely
stem from food prices. Much like we are seeing on the international
scale, rising agricultural commodity prices are likely to feed into
higher grocery bills for Canadians in the coming months. Nonetheless,
outside of food, inflation pressures will remain under wraps.

Expectations that crude oil prices will remain flat during 2011,
suggests that energy price pressures will abate in the coming months.
Further, a cooling in the Canadian housing market, moderate consumer
spending, and a Canadian dollar above par will likely keep inflation
in check for the first half of 2011. All said, we expect inflation to
continue to average just 1.5% over the first half of 2011, and only
gradually climb to 2.0% by mid-2012.

A modest outlook for inflation, in combination with the risks to the
global financial system outlined in the BoC's monetary policy report
gives the Central Bank plenty of room to remain on hold until July of
this year, and when it does start to raise rates, it can move at a
gradual pace. Markets may finally be starting to accept this view.
Source: ActionForex.Com

READ MORE - Canada: Inflation Tame in December

Will China's Strong Data Mean More Tightening and Weaker AUD, NZD, CAD?

*Stronger Than Expected Growth Creates Worries over More Hawkish Bank
of China*
In the Asian session we saw China release its monthly economic
indicators on inflation, production, sales, and GDP. Growth
accelerated to an annual pace of 9.8% during the 4th quarter, which
was faster than expectations of 9.4% growth. Industrial production and
retail sales also both came in above expectations for December. Output
rose 15.7% on the year when forecasts called for a 15.5% gain, and
sales were up 19.1% on the year, compared to a forecast of 18.7%.
Consumer inflation meanwhile tempered a bit, falling down to 4.6% from
5.1% for December, as expected.

Usually, positive news from China is taking as a boost for global
equities and commodity currencies as it means the world's economy is
growing at a faster clip. That wasn't the case today, as the data may
have been a bit too good, showing investors and traders the
possibility that the country's economy is overheating. If growth
continues at this pace, inflation is likely to rise yet again. For all
of 2010, China grew 10.3%, stronger than the 9.2% pace seen in 2009.
The aim by Chinese official is to keep inflation at 4% during 2011,
giving us a guidepost for whether the bank will be more aggressive or
passive as we move forward throughout the year.

Chinese authorities have been tightening monetary policy - by raising
reserve bank requirements and the benchmark interest rates. While more
tightening is expected regardless, today's data suggests that the bank
of China may have to be even more aggressive.

*Commodity Currencies and Gold Fall Back in Today's Trading*
The news was therefore taken poorly by commodity currencies like the
AUD, NZD, and CAD.

Here's a quick glance at the AUD/USD pair. After rallying most of the
week, we topped off around the 1.0070 area, and in the Asian session,
in the wake of the news, the AUD slid down to 0.99.

Commodity currencies were weaker against both the US Dollar and the
Euro. Global equities were generally down and both gold and oil fell
back, pressuring that commodity bloc of currencies. With gold erased
its rally from the first half of the week, falling down to $1356, from
$1371 at its peak today, the USD may be in the driver's seat for
today's session.
Source: ActionForex.Com

READ MORE - Will China's Strong Data Mean More Tightening and Weaker AUD, NZD, CAD?

The Bank of Canada Sees Better Global Outlook and "Competitive Challenges" ...

Today's Monetary Policy Report (MPR) filled in the gaps in yesterday's
statement, which accompanied the Bank's announcement that the policy
rate would be held at 1% for the third consecutive meeting.

Yesterday's announcement alluded to a "somewhat faster" pace of global
growth than the Bank's projection in its October MPR. The announced
upgrades to the Bank's views resulted in the world growth forecast
rising to 4.0% in 2011, up from the Bank's previous projection of
3.5%. The 2012 world growth forecast upgrade was more subdued with
only a 0.1 percentage point (pp) increase to 3.9%. The Bank also
revised up its forecast for the U.S. economy, boosting the 2011 growth
rate by 1 pp to 3.3% while trimming the 2012 forecast by 0.1 pp to
3.2%.

The upgrades to the U.S. forecast reflected the effect of a
strengthening in activity late in 2010 as well as the announcement of
additional monetary and fiscal policy stimulus that occurred after the
Bank's October forecast was made. The Bank assessed that the U.S.
stimulus packages would be positive for Canada's outlook although
estimated a slight 0.2 pp add to Canadian growth in 2011 and a 0.1 pp
increase in 2012. Today's report confirmed that the Bank expects
Canada's economy to grow by 2.4% in 2011 and 2.8% in 2012. These
forecasts are broadly in line with the consensus projections released
earlier this month that showed private forecasters expect growth of
2.5% and 2.7% during the two-year period. RBC's forecast is for the
Canadian economy to post solid gains of 3.2% in 2011 and 3.1% in 2012
therein implicitly expecting more of a lift from the U.S. recovery.

The MPR indicates that the Bank expects business investment to play a
lead role in the recovery going forward with the contribution to
economic growth rising to 1.1 pp in 2011 (from 0.9) and 1.2 pp in 2012
(from 1.1). The update shows consumer spending making a slightly
larger contribution to GDP growth in 2011 although it will still be
much smaller than in 2010. The weight from reduced residential housing
investment was also cut back mildly relative to the October outlook.

The Bank acknowledged "the beginning of the expected rebalancing of
demand" referring to the increased role of business investment as a
support for growth as fiscal stimulus unwinds and household spending
is constrained by overextended balance sheets. Government spending
will make no contribution to GDP output in 2011 and will act as a drag
in 2012.

The trade sector was characterized as contributing "more" to growth
going forward (this follows an estimated 2.3 pp drag in 2010) although
net exports are estimated to add just 0.1 pp to the economy's output
in 2011 and a more substantive 0.7 pp in 2012. In the prior forecast,
the Bank predicted that net exports would provide a 0.3 pp boost to
activity in 2011 and 0.8 pp in 2012. While this is positive for the
economy, the Bank indicated that even with a stronger U.S. economy,
"competitiveness challenges" limited the upgrade to its projection for
export growth. Additionally, the persistently high value of the
Canadian dollar and poor productivity performance will also affect
export growth. The Bank assumed that the Canadian dollar will continue
to trade around parity during the forecast horizon when preparing its
forecasts. The other factor that will limit the support from net
exports will be stronger import growth as Canadian businesses increase
investment in an effort to alleviate competitiveness pressures and
increase productivity.

Even with the mild upward revisions to Canadian growth this year and
next, the central bank maintains that the output gap will close by the
end of 2012, and at which time, the core inflation rate will move to
2% target. The fact that the economy slowed more aggressively in the
second half of 2010 than the Bank expected means "a little more excess
supply in the near term" that will be offset by the marginally faster
pace of growth ahead. Canada's economy posted a 1.0% annualized gain
in the third quarter of 2010 disappointing the Bank's forecast of
1.6%; therefore, the Bank lowered its call for a fourth-quarter 2010
gain to 2.3% from 2.6%.

Despite providing a slightly more upbeat assessment for growth
prospects, at home and abroad in 2011 and 2012, today's report shows
that the Bank of Canada is maintaining a very cautious approach in the
removal of monetary policy support as the risks to the outlook are
"elevated". The list of risks deemed to be most prominent span from
events within the domestic economy ("competitive challenges",
weakening in the housing sector, high consumer debt loads, more
aggressive deceleration or acceleration in consumer spending) to
external events that could affect commodity prices or delay the
rebalancing within the global economy. The Bank's assessment is that
the balance of the risks to the inflation outlook remains roughly
balanced and that there will be a "gradual reduction in monetary
stimulus" in the projection period. Against this backdrop, should the
Canadian economy outperform the Bank's forecast in the near term, as
we expect it will, then a return to a policy of implementing gradual
rate hikes will not be far behind. We expect that the core inflation
rate will remain below the 2% target for much of 2011 and 2012.

Although this will not prevent the Bank from moving rates up, it will
keep the pace gradual with the overnight rate rising to only 2.00% by
the end of 2011.
Source: ActionForex.Com

READ MORE - The Bank of Canada Sees Better Global Outlook and "Competitive Challenges" ...

There is plenty going on in Canada this week

!! FX Market Overview !!
So Ricky Gervais has won again; his acerbic taunts towards the primped
and preened stars at the Golden Globes clearly ruffled a few feathers
and there can be no doubt they upset a few of the glitterati but
everyone is talking about it; probably as much as the Colin Firth win,
and that, as far as I can tell, is all Ricky Gervais ever wants.

A quiet day for data and a closed session for the US public holiday
meant the markets were generally quite muted yesterday. However, the
devil finds work for idle hands as they say and traders were
definitely idle. The work they found to do was to sell the US Dollar
which retreated against the Pound to the highest level we have seen in
two months.

The Pound's advance had a lot to do with this morning's release of
the UK inflation data. After a series of commodity price rises and
higher producer price inflation, we expect the inflation number to
have risen to 3.6% or thereabouts and that does reignite the debate
over just what the Bank of England's monetary policy is based on
because it cannot still be an inflation only remit when their task is
supposed to be about maintaining inflation at or near 2%; they are
consistently failing in that endeavour. However no one is expecting
any hike in UK interest rates before May. Nevertheless, if the BOE is
expected to raise rates before the US Fed and the ECB, then Sterling
could well strengthen further.

Sterling also gained ground against the Euro in spite of a growing
feeling that the Eurozone Finance Ministers will agree measures to
expand their financial support package and allay fears over the
default of any of the peripheral economies of the Eurozone. Having
said that, this morning's rumour mill suggests the agreement is less
comprehensive than that and that we may see a euro sell off because
traders will be disappointed by the result. We also get the German ZEW
survey of business confidence today and that is likely to highlight
the two-speed nature of the Eurozone with.

There is plenty going on in Canada this week as well though with the
Bank of Canada's interest rate decision today and their monetary
policy report tomorrow. No change is forecast on interest rates and
many traders will largely ignore today's event as they wait for the
more detailed assessment of the Canadian economy due tomorrow. In the
meantime, oil prices are very volatile and the US Dollar likewise so
the Canadian Dollar is being buffeted a tad.

And finally two stories seemed to arrive with a certain degree of
synergy; Mrs Trabelsi, the wife of the former Tunisian President is
reported to have made a withdrawal of £38 million in gold bars from
Tunisia's central bank before fleeing the country. No one seems at
all surprised by the event after years of avarice and showy wealth at
the country's expense but it is a salutary tale. Thankfully though,
just as this story broke, we also heard that a former Swiss bank
employee has passed CDs to wikileaks detailing all manner of tax
evasion by customers of the Swiss bank. Perhaps Mrs Trabelsi's
stolen gold will be found after all.

!! Quotes !!
"It's the one thing I actively don't like: just being recognized."
*Ricky Gervais*
"She said, 'I'm your biggest fan,' and I said, 'Who are you?' She
said, 'Paris Hilton.'"
*Ricky Gervais*
Source: Fxstreet.com

READ MORE - There is plenty going on in Canada this week

Bank of Canada Nips Expectations of any Impending Rate Hikes, CAD Slides

*Bank of Canada, While Upping Growth Forecasts, Highlights Headwinds
to Economy*
The Bank of Canada held rates steady today at 1% and while it did
increase its growth outlook for 2011 and 2012, it seems that the
bank's Governor Mark Carney, continued to try and beat back the
strength of the CAD. He did this today by saying that any future
interest-rate increases would be "carefully considered." The BOC
statement also pointed to possible headwinds for the Canadian economy
including the strong Canadian Dollar and also fallout from the trouble
in the Euro-zone.

The Canadian economy does rely on a good percentage of its growth on
exports, and by having a higher Canadian Dollar, Canadian exports
become less competitive and as a result the Canadian current account
is posting 20-year deficits.

"Net exports are projected to contribute more to growth going
forward, supported by stronger U.S. activity and global demand for
commodities. However, the cumulative effects of the persistent
strength in the Canadian dollar and Canada's poor relative
productivity performance are restraining this recovery in net exports
and contributing to a widening of Canada's current account deficit
to a 20-year high."

On the bright side, the global economy is recovering faster than
expected according to the statement, helped by a pick up in US
consumer spending and some better growth in Europe. However,
"Ongoing challenges associated with sovereign and bank balance
sheets will limit the pace of the European recovery and are a
significant source of uncertainty to the global outlook."

The bank expected the economy to expand 2.4% in 2011 and 2.8% in 2012,
which was better than it had forecast in its October Monetary Policy
Report. Underlying inflation remained subdued and inflation
expectations remain "well-anchored". The Bank puts out its next
MPR tomorrow (Wed. 1/19).

*USD/CAD Surges Higher Post-Statement*
The currency markets decided to focus on the last sentence of the
statement: "Any further reduction in monetary policy stimulus would
need to be carefully considered." That gives the implication that
the bank will wait a few more meetings before considering tightening
monetary policy. The first chance for a hike therefore could be March.
We will have to see if the situation in Europe improves as we see that
is a major focal point for policy makers.

The concerns about the strong Canadian Dollar and the uncertainties
about the Euro-zone also weighed on the USD/CAD pair following the
release. We should also keep an eye on commodity prices, as worries
that China may tighten its monetary policy and cool growth could have
an adverse impact on commodities. We see that oil prices remain above
$90 a barrel, and the move above that level was coincident with the
USD/CAD falling below parity.

The statement was a bit of splash of cold water to investors that had
been expecting to see the Bank of Canada perhaps begin to soften its
stance to raising interest rates, thanks to some stronger readings
from both the Canadian economy and from its main trading partner –
the US.

The USD/CAD which had moved below the 0.99 level in 2011, saw a strong
move in today's session, though we still remain within the context
of a downtrend for the pair. From a low overnight near 0.9835 (a 2 and
1/2 year low), we rose all the way to 0.9930. Out next important pivot
to the topside is the 0.9970 area. We can see that we broke out of a
downward sloping channel we had set up during the beginning of the
week.

From my perspective this is a bump in the road for the Bank of Canada.
With events in Europe seeming to calm a bit, growth in the US picking
up, and oil prices higher, the CAD should remain supported. Therefore,
this move upward should prove to be temporary. What today's release
might do however is cap the gains the CAD may have going forward until
we get a more hawkish BOC. We didn't get that today and instead, as
has been the case over the past month or two, the statement tried to
undermine CAD strength.
Source: Fxstreet.com

READ MORE - Bank of Canada Nips Expectations of any Impending Rate Hikes, CAD Slides

Inflation fears send euro surging

The single currency has found its wings following inflationary
concerns expressed by two ECB members in what may yet become a rerun
of the monetary tightening fears surrounding the U.S. in the fourth
quarter. The return to a focus on economic fundamentals is a boon for
the euro as ECB President Trichet deflects the burning sovereign debt
issue, warning implicitly that interest rate medicine might yet be on
the agenda sometime in 2011. The shift in emphasis from indebtedness
to inflation is a clever and well-timed ploy.

*Euro* – The euro rose this week by the most in two years driven by
the threat of inflation. At the same time Mr. Trichet has tossed the
ball back into the court of European politicians with a message that
they should speed up the reengineering process surrounding the scope
of the bailout package. The euro rallied to its best level against the
dollar since December 14 and reached $1.3457. Subsequently the single
currency has pared gains and settled back to $1.3346 ahead of a raft
of U.S. data. Mr. Trichet yesterday said that the ECB had "never
pre-committed not to move interest rates," and has caused investors
to suddenly fast-forward expectations of monetary tightening into this
year rather than next.

*U.S. Dollar* – Investors face consumer price data on Friday, which
could present a challenge for the dollar given the tame nature of the
series. Expectations for the December reading shoot up to 0.4% today,
which in light of changing expectations for what the ECB might do
could challenge the dollar later. Also on the agenda is retail sales
data for December where analysts are looking for an unchanged 0.8%
increase on the month. The dollar index has rebounded this morning to
stand at 79.27 as the dollar makes gains against commodity dollars,
the euro and the yen.

*Aussie dollar* – Thursday might have been a better day for the
Aussie unit, but two pieces of Chinese news helped wreck a two-day
rally. The Aussie trades towards its session low in New York buying
98.65 U.S. cents although above its worst point of 98.04 in ongoing
response to the Queensland flooding. Overnight the Peoples Bank of
China announced a further 50 basis point increase in the amount of
capital banks need to hold by lifting the reserve ratio requirement
across the nation's lenders. The ongoing move should help to dampen
bankers' ability to lend. In the China Securities Journal it was
suggested that the authorities are considering fresh price control
measures. Right now, Australia is looking inbound at the devastation
caused by its floods. Economists are struggling to estimate the impact
on growth from the catastrophe but it's safe to say that the
export-reliant nation needs restriction in overseas demand from its
number one market like it needs a hole in its head.

*British pound* – The pound is little changed but trades marginally
higher buying $1.5853 to end a week in which it rallied from a low
point of $1.5475. The pound remained buoyant following some fairly
ugly producer price data, which fits pretty well into the increasingly
bearish picture exerting itself on trading patterns. If anything the
data supports the call from some corners for the central bank to lift
interest rates, yet on the other hand the data series is more volatile
and certainly more elevated than consumer prices, which admittedly
have remained above target and stickily so for the past nine months.
The pound should remain supported by losses across the short sterling
strip as more investors sense that borrowing costs and therefore the
reward for holding the pound stays firm. The euro lost out to the
pound and buys slightly less pennies at 84.26.

*Canadian dollar* – The challenge to risk this morning has caused a
ditching of Canadian positions sending the local dollar down from
$1.0110 U.S. cents to $1.0025 ahead of U.S. data. Equity indices
around the world fell following a weakening in the U.S. initial claims
for unemployment series. The sudden emphasis on inflation has served
to undermine risk appetite and has investors worried over monetary
tightening, which could dent growth. This is one of those hazardous
speed bumps that investors have to deal with is the boost to yield
from rising interest rates while simultaneously having to worry about
the knock-on impact on growth.
Source: Fxstreet.com

READ MORE - Inflation fears send euro surging

The Canadian dollar extended gains against the USD

The *US dollar* continued its downward trend against the euro and
pound, falling to a fresh 1-month low against the currencies following
weaker-than-expected U.S. jobs data. The jump in U.S. jobless claims
to their highest level since October dented optimism about the U.S.
economy, exacerbating the dollars losses.

Today's successful Spanish bond auction eased some of the concern
over the debt problems plaguing the euro zone's most-indebted
countries, allowing for some room for the euro to strengthen 1.1%
against the USD.

The *euro* rose against the dollar for a fourth straight day in a
rally that could continue after solid Spanish and Portuguese bond
auctions eased concerns about an escalation of the Eurozone debt
crisis, though some analysts still believe that gains may be limited.
German Finance Minister Wolfgang Schaeuble said yesterday that
Eurozone countries are working on a "comprehensive package", which may
be agreed by February or March, to solve the bloc's debt crisis. The
euro remains vulnerable to selling if debt problems resurface.

The *British pound* climbed to a fresh one-month high against the
dollar as expectations that a rise in UK interest rates may come
sooner than expected. The Bank of England kept rates at a record low
but rising inflationary pressures and higher UK yields have prompted
money markets to price in a strong chance of a rate hike as early as
May.

British industrial output grew in November at its slowest annual pace
since July, despite ongoing strength in manufacturing. Manufacturing
output grew slightly faster than forecast, matching October's monthly
rate of 0.6% which was the strongest since March.

The *Japanese yen* continues to trade within recent ranges against the
majors.

The *Canadian dollar* extended gains against the USD, despite a weak
U.S. employment data report. Signs of stronger growth in the United
States, the destination for most of Canada's exports, have helped
the Canadian dollar higher in recent weeks.
Many traders believe that as long as oil continues to rise and the
U.S. economy regains some footing, you should see some more selling of
euro and buying of Canadian dollars.

The *Mexican peso* firmed to its strongest levels since October 2008
after solid demand at a Portuguese government debt auction eased
concerns about Europe's debt crisis, boosting riskier assets.

The *Australian dollar* managed to stay afloat despite worse than
forecast jobs data which saw December jobs increase only 2.3k compared
to the 25k expected increase. Though floods are still pressuring the
currency and economy lower, new jobs will be created to assist in the
cleanup of the destruction.
Source: Fxstreet.com

READ MORE - The Canadian dollar extended gains against the USD

Euro hopes fanned by Commissioner's revamp pep talk

European session pressure on the dollar came to a brisk halt in early
New York trading with the euro, pound and yen each surrendering gains
to the greenback in rapid succession. Investors were encouraged over
the prospects for a Portuguese auction following comments penned by EU
Monetary Affairs Commissioner Ollie Rehn who urged cohorts to soon
consider reinforcing the scope of the Eurozone?s current and emergency
backstops and enhancing the degree of flexibility of the measures.

*U.S. Dollar -* Earlier losses for the dollar have rapidly given way
as investors digest the words of Commissioner Rehn. ?We need to review
all options for the size and scope of our financial backstops,? wrote
Rehn in the Financial Times. But the obstacles to an agreement remain
sizeable not least because the decision to raise the lending ceiling
of the ?440 billion emergency fund would set off a new round of
required parliamentary approval. Given that path would neither be
smooth nor swift, the dollar has overturned an earlier wave of
selling. The dollar index is flat at 80.75.

*Euro -* The euro rallied to its highest since last Thursday in
European trading reaching $1.3045 as French and German officials
praised the efforts of the Portuguese government in taking tough
measures to rein in its public spending and reducing its budget
deficit. French Finance Minister Christine Lagarde told domestic
television that Portugal was making more progress than it had
committed to, urging its leaders to continue since ?structural reforms
are necessary.? German Chancellor Merkel told reporters that Portugal
had taken ?very important measures? and appears to be taking them
seriously. The euro was also inspired by hopes that officials will
next week discuss the effective lending capacity of the Eurozone's
rescue fund. When the EU established the ?440 billion European
Financial Stability Fund in May last year, in order to maintain a
top-notch credit rating the fund was restricted to lending around ?250
billion. Hopes that the EU will discuss enhancing its flexibility
helped soothe worries beyond a request for assistance beyond a nation
the size of Portugal.

Such earlier optimism appears to have done its usual trick and was
enough to drive the shorts out of the market triggering stops as they
hit the exits. The euro has subsequently eased to an unchanged value
of $1.2975.

*Japanese yen -* The yen strengthened in Asia against the dollar
reaching ¥82.98 following a thirteenth straight decline in bank
lending.

Bank of Japan data showed outstanding bank loans fell by 1.9% in
December following a 2.0% decline in November. Bankers face a hard
time finding companies wanting to borrow to fund investments meaning
the central bank will maintain its ultra-low borrowing costs for as
far as the eye can see. The current account surplus in the year
through November also declined according to a separate report making
for the first year-on-year decline in three months. As equity prices
remained elevated around the world for a second day demand for the yen
fell allowing the dollar to turn losses into gains on the day reaching
¥83.32.

*British pound -* The pound fell from its highest in a month following
the largest trade deficit since 1980 when records began. Having
touched $1.5681 ahead of the £8.7 billion shortfall in trade the
pound has fallen back to an unchanged reading of $1.5600. The November
trade report was expected to narrow to £8.3 billion following a
reading of £8.6 billion in October. The pound also gave up small
gains against the euro and trades slightly weaker per euro at 83.22
pence. The Bank of England starts a two-day meeting on Wednesday to
discuss the health of the economy against a backdrop of stubborn
inflation.

*Aussie dollar -* Reserve Bank board member Warwick McKibbin told the
Sydney Morning Herald that he expects growth to be pared by as much as
1% as a result of the floods hitting Queensland. The rising waters are
expected to continue for two more days before levels subside.

Australia?s dollar took another pounding overnight and reached a
one-month low at 98.04 U.S. cents. However, broader appetite for risk
building on strengthening demand for equities around the world on
Tuesday helped the Aussie unit reverse course in midweek trading
lifting it to 99.23 cents in European trading. The local dollar was
also helped by housing data released earlier. As equity prices
gathered steam demand for the Japanese yen also waned allowing the
Aussie to rally to ¥82.33.

*Canadian dollar -* Swollen by growing confidence in the world
recovery and rising commodity prices the Canadian currency today
traded up to $1.0136 the strongest since May 2008. The Canadian unit
is also benefitting at the expense of the Aussie dollar as the
Queensland floods take their toll. The Aussie has shed five cents
recently against its commodity-sensitive counterpart reaching a
four-month low at 97.05 Canadian cents this morning.
Source: Fxstreet.com

READ MORE - Euro hopes fanned by Commissioner's revamp pep talk

Canada: ECONOMIC INDICATORS REVIEW

Canada – Factory sales were up 1.7% in October after falling 0.5% in September. Although sales advanced in 14 of 21 industries, gains were mostly reflective of price increases, volumes having remained largely trendless since last May.

Industry capacity utilization rose for a fifth quarter in a row to reach 78.1% in 2010Q3. This is more than 10 percentage points higher than the cyclical low of 67.8% attained in 2009Q2. The Q3 gain was largely reflective of improved activity in the manufacturing sector, where capacity utilization now stands at 81.2%.

The number of new motor vehicle sold in October declined 0.3% to 134,427 units. Preliminary data suggest sales remained unchanged in November.

In 2010Q3, labour productivity registered a slim gain of 0.1% in Canada, compared with 0.6% in the United States. The Composite Index of Leading  Indicators climbed 0.3% in November. Contributing to the push was a sharp turnaround in the housing index, which progressed 2% after retreating for six straight months.

United States – The FOMC met for the last time this year and, as expected, left its policy stance unchanged.
Retail sales jumped 0.8% in November after springing 1.7% (revised) in October, leading most observers to conclude that the holiday shopping season had got off to a strong start.

Industrial production grew 0.4% in November with gains in machinery, computers and electronics, and utility production.

Capacity utilization stretched to 75.2%.
After remaining flat for 3 months running, core CPI eked up 0.1% month over month in  November. The rent index recorded its largest increase (+0.2%) since March 2009. On a 12-month basis, core CPI sped ahead 0.8%. The all-items index moved higher 1.1%.

Housing starts vaulted 3.9% to 555k in November. October starts were revised up 15k to 534k. However, building permits were down 22k from the previous month to 530k, suggesting starts will remain at depressed levels until spring.

Business inventories swelled 1.9% in October. The index of small-business sentiment hit 93.2 in November, its highest level in 3 years, while both the Empire State Manufacturing Survey (10.57 vs. -11.14 in November) and the Philly Fed index (24.3 vs. 22.5 previously) fared better than expected.  In November, the Index of Leading Indicators rose 1.1%, recording its largest gain since March.

READ MORE - Canada: ECONOMIC INDICATORS REVIEW

The AUD rallied against most of its major counterparts

USD - The FOMC holds its last policy meeting of the year tomorrow. No interest rate or asset purchase changes are anticipated but markets will be closely watching the tone of the post meeting statement to see how the central bank views the impact of its latest round of quantitative easing, particular in light of the very recent rise in US Treasury yields. After last week's lack of US data releases, this week has a full slate. Tomorrow, headline retail sales for November are expected to surprise on the upside, as in particular gasoline sales have gone up, driven by higher oil prices. That said the details of the report should be soft, with retail sales ex autos rising a modest 0.1% much lower than consensus expectations. On Wednesday, core CPI is expected to remain modest, increasing 0.1 % m/m. In addition, the first figures for manufacturing confidence in the form of local business surveys from New York and Philadelphia Fed are due. A considerable rebound in empire manufacturing from -11.1 to 4.8 is anticipated. On the other hand, the Philly figures may fall back somewhat, after last month’s massive gain. Data for the housing market is expected to remain weak, but a slight increase in both housing starts and building permits is projected.
The same goes for the NAHB index where a one point increase is anticipated.

EUR - EUR is up today recovering in the European trading session from some mild downside pressures during Asian trading. There is no real Eurozone data out today, leaving EUR at the mercy of the ebb and flow of the USD. EUR speculative futures positioning from the Chicago Futures and Trading Commission showed the net short EUR position pushing further into negative territory as longs exited the market. In the near term, support for EURUSD has come in through the 1.3165 to 1.3180 range during the past four sessions, though the topside has seen pressure as intraday highs have displayed a propensity to generally register at lower levels over the past few sessions. Until the downside support range breaks, or the topside constriction is challenged, EURUSD seems to be range bound.

GBP - The Bank of England's Monetary Policy Committee kept rates steady and left the stimulus plan at 200 billion pounds. PPI input came in at 0.9% (exp 0.5%) while PPI output came in at only 0.3%. While this is a negative sign, sterling has shaken the news off and is trading at recent highs against the greenback.
A test of 1.6000 should surface this week and there will be strong resistance there. This week brings CPI and retail sales, and strong numbers here will certainly that level.

JPY - With the 2 year yield spread between the US and Japanese government bonds persisting at its highest level in months, driven by the sharp rebound in US yields, USDJPY has been urged higher and came close to besting the late November high in the pair near 84.41. The rapid move in US yields and the concurrent co-movement in USDJPY has caused the correlation between rates and the currency pair to rebound from two month lows, denoting the upside pressure on USDJPY that is likely to continue should the US short term rates dynamic persist.

CAD - As expected, the Bank of Canada left rates unchanged at last week's policy meeting. Capacity utilization rose for the fifth consecutive month, helping the strength of the loonie. We continue to see tighter and tighter tighter-day trading ranges – suggesting one of two things: the market is in holiday mode or that the market is having trouble getting excited about the CAD. Our guess is the latter, as .9980 has held three times recently and it appears more unlikely we will push through parity. This week is light on economic releases so look for another week of narrow trading ranges.

MXN - The Mexican peso strengthened against the greenback this morning as manufacturing and exports continued to support the recovery momentum of Mexico's economy. At the headline level, manufacturing IEEM rose to 54.0 from market estimate of 53.7, while non-manufacturing IEEM gained to 53.5 vs. the 53.1 forecasted. New orders jumped to their highest levels in 4 months (56.7), while employment hit its highest reading in the entire year (54.0).

AUD - The AUD rallied against most of its major counterparts as stocks and commodities gained after China refrained from raising interest rates. The currency rose after the rate move predicted by market participants failed to occur even as China's inflation accelerated to the fastest pace in 28 months. China is Australia's largest trading partner and investors speculated an increase in interest rates would damp exports to the nation. As a result the AUD is trading just under par with its US counterpart at 0.9940.

Last Week's Currency Highs and Lows and Forecast

Currency	Highs and Lows Last Week	Forecast
EUR	1.3442 – 1.3165	1.3600 – 1.3184
JPY	84.35 – 82.34	84.46 – 82.82
GBP	1.5871 – 1.5656	1.6092 – 1.5641
CHF	0.9916 – 0.9660	0.9790 – 0.9577
AUD	0.9965 – 0.9753	0.9990 – 0.9729
CAD	1.0141 – 1.0012	1.0147 – 0.9934
DKK	5.6626 – 5.5518	5.5992 – 5.4301
NZD	0.7671 – 0.7435	0.7625 – 0.7471
MXN	12.5334 – 12.3216	12.5417 – 12.1964
SGD	1.3193 – 1.3012	1.3210 – 1.2900
TWD	30.376 – 30.034	30.475 – 29.586
ZAR	6.9891 – 6.8226	6.9326 – 6.6873

U.S. Economic Indicators

Date	Indicators	Previous	Expected
12/15	FOMC Rate Decision (December 14)	1.8	3.9
12/15	Producer Price Index (November)	0.40%	0.60%
	Advanced Retail Sales (November)	1.20%	0.60%
12/15	Existing Home Sales (October)	0.90%	1.00%
12/16	Mortgage Applications (December 10)	-0.90%
	Industrial Producation (November)	0.00%	0.30%
12/16	Initial Jobless Claims (December 11)	421K	425K
12/17	Housing Starts (November)	519K	550K
	Leading Indicators (November)	0.50%	1.10%

http://www.unionbank.com/

READ MORE - The AUD rallied against most of its major counterparts