Euro: Taking Another Stab at 1.60
The fourth time may be the charm for the Euro which is once again trying to rise above 1.60. There was no major Eurozone economic data released this morning, but rising inflationary pressures has sparked speculation that the next move by the European Central Bank may be a rate hike instead of a rate cut. Even though economic data has been slowly deteriorating, the fact that price growth is well above the ECB’s target level is making the central bank increasingly uncomfortable. ECB member Liikanen reminded the markets this morning that Eurozone inflation risks are real but despite comments such as these, a rate hike from the ECB is very unlikely. We are already beginning to see consumer spending slow and there are rumors that the big moves in LIBOR rates suggest that European banks are underreporting their losses. Therefore the ECB may not want to risk tipping over their own economy by raising interest rates. Wednesday’s PMI numbers will shed more light on how well the Eurozone economy has been holding up. The tightening ranges of the EUR/USD reflect indecision and the market’s uncertainty about whether the next big surprise will come from the Eurozone or the US economy. Meanwhile the Swiss franc is up sharply today following stronger than expected inflation numbers. Producer prices grew 0.6 percent last month, which was double the market’ expectations, driving the Swiss franc to a 17 year high against the Japanese Yen. The market’s interpretation of Swiss economic is better seen CHF/JPY these days than EUR/CHF because EUR/CHF has become a carry trade currency.

US Dollar: Giving Back Gains
With no US economic data released today, the greenback has given back a portion of Friday’s gains. Bank of America, the nation’s second largest bank became the latest victim of subprime related losses. They reported a 77 percent drop in net income as provisions for credit losses hit $6 billion. In order to raise capital, the Bank has been forced to sell part of their highly lucrative stake in China’s Construction Bank. In 2005, they invested $3 billion into the bank and now that investment is worth $16 billion. The plethora of bad news from the US financial sector has weighed on US stocks as well as the US dollar. Activity should pick up tomorrow with existing home sales due for release. Mortgage applications have been rebounding, which suggests that home sales could improve as well, but house prices may continue to be the Achilles heel for real estate. Watch out for more job cuts by Bank of America, which will exacerbate what should be a quickly deteriorating labor market.

Australia Reports Strong Inflation, Bank of Canada Expected to Cut Rates by 50bp
On the back of strong economic data, the Australian dollar gained ground against the greenback, taking the New Zealand dollar up with it. Australia’s PPI figures came in much hotter than expected, as it grew at the fastest pace in almost a decade. This phenomenal increase, attributed to the recent global rise in commodity prices, has resulted in increasing speculation of a rise in CPI figures expected to release midweek, as consumers bear the brunt of rising input prices. This could be a cause of concern for the RBA, as hiking interest rate in the future to deal with inflation is not a viable option, but rise in inflation could delay any notion of slashing rates in the near future. On the other hand, New Zealand’s Visitors Arrival figures, reported in the negative territory, implying that the once robust economy is set to face a slowdown, thus raising speculations that RBNZ would have to cut interest rates to deal with the situation. Canada reported their International Securities Transactions figures which rose at the fastest pace since 2007. This along with record oil prices drove the Canadian dollar higher despite the possibility of a 50bp rate by the Bank of Canada tomorrow. Spillover effects from the US economy have analysts calling for a back to back half point rate cut.

British Pound Sells Off Following Bank of England Announcement
The Bank of England announced today that they plan on swapping GBP50 billion worth of UK bonds for mortgage securities in an effort to add liquidity to the lending market. For a long time, the Bank of England has refused to follow in the Fed’s footsteps because they did not want to foster an environment where banks and financial institutions would start relying on central bank bailouts. Their laissez-faire attitude received significant criticism, causing the central Bank of England to finally buckle under the weight on political and economic pressure. Taking a page out of the Fed’s book, they have swapped their safe and secure UK gilts for slightly riskier mortgage backed securities. The market has not taken this move positively as the British pound is down over 200 pips from its high.

Listless Trading in the Japanese Yen
The Japanese Yen made a comeback today against the US dollar, as investors continued to unwind their carry trade positions. Japan’s Tertiary Industry Index fell more than expected, with major spending declines in the real estate sector, followed by deterioration in the financial and insurance sectors. In contrast, Japan’s leading Economic Index and Coincident Index figures came in strong, for the first time in seven months, leaving investors feeling hopeful about a revival in the near future. In spite of figures indicating growth, Japanese government officials cut its regional economic assessment for the first time in six years, due to weak corporate activity, indicated by declining business sentiment and capital investment. Looking ahead, Merchandise Trade balance figures are expected to increase due to strong demand for exports and also Consumer Price data.

Kathy Lien is the Chief Currency Strategist at FXCM.