FX Fundamental Weekly for USD, Euro, JPY, GBP, AUD

USD - Happy New Year! The dollar begins the year weaker vs. the major currencies but recouping earlier losses vs. the euro. Optimism amid signs of a global economic recovery sent several currencies including JPY, GBP, CAD and CHF to recent highs vs. the dollar to start the year. The US economy is also showing signs of improvement as today's Manufacturing Purchasing Managers Index (PMI) rose to 17-ms highs at 57 in December, marking further inroads into the 50+ level denoting expansion. Construction spending also rose to 5-ms highs at 0.4% in December raising hopes that the economic recovery could accelerate in 2011. Markets will again look to Friday's employment report for prospects for the job market, arguably the most important and elusive piece of the economic recovery.

EUR- The euro fell by the most in more than two weeks against the dollar amid concern the region's debt crisis will hamper efforts by governments and banks to raise funds this year. The common currency weakened versus all but two of its 16 major peers before France auctions 8.5 billion euros of debt today. The Swiss franc pared its gain against the euro after a gauge of manufacturing unexpectedly fell last month. There will be some downward bias for the euro during this week and even more next week. There is a heavy calendar of debt auctions in the coming weeks so this will be a likely drag for the euro.

GBP - Sterling opens the year trading at 1.5460, which is basically right in the middle of the 2010 range of 1.6362 and 1.4334. We finish here after a strong rally over the past two months as we have moved lower from 1.6270. This move comes despite the strong economic releases seen in the US. Nationwide housing prices increased by 0.4% in December, preventing the index from slipping into negative territory on a y/y basis.

JPY - The Japanese Yen gained over 2% against the dollar over the past week as declining U.S. yields sunk the greenback. The Asian currency fared well versus the other majors despite prevailing risk appetite. However, weakness could signal a shift in momentum as rising commodity prices continue to stoke demand for yields. Meanwhile, a brief rise in U.S. yields to end the year failed to generate support for the buck signaling more downside risks for USD/JPY. The BoJ minutes revealed that the central bank has agreed to examine their asset purchase plan as needed. Their QE response has underwhelmed markets which opened the door for current strength. A more aggressive effort could curb bullish sentiment, especially if they take another stab at intervention. However, committee members expressed concerns over the effect of asset purchases on their finances signaling that they will most likely sit on the sidelines over the short-term. The Japanese economic docket is light this week with vehicle sales as the only release that will garner any real attention. The main event risk for the yen will come from the FOMC minutes and U.S. Non-farm payrolls. Signs of sustainable job growth and a brighter outlook from U.S. policy makers could fuel risk appetite potentially sinking the Asian currency. Conversely, a struggling labor market and hints at further QE could see Japanese traders look to repatriate funds, driving the Yen higher.

CAD - The loonie is starting 2011 stronger than at any point during 2010. After eight straight consecutive sessions of gains against the USD, at .9910, CAD is trading at its strongest level since June 2008. Keep in mind that the pair was mostly range-bound in 2010, so a move to the downside is significant, and we could see further gains in the currency as commodity prices are predicted to remain strong. This week brings employment data in Canada, with 20,000 jobs expected to be added resulting in an unemployment rate of 7.7%.

MXN - The Mexican peso strengthened to gain near 0.5% against the dollar boosted by recovery in exports to its top trading partners. Meanwhile, other Latin American currencies traded higher against the greenback after Asian factory output performed stronger in December, adding positive sentiments about the global economic recovery. Lower interest rates in major economies, trying to spur domestic growth, pushed higher demands for Latin American debt and currencies in 2010.

AUD - Last week the AUD reached the highest level since the currency was freely floated in 1983, as U.S. data spurred speculation global growth is gathering momentum, boosting demand for currencies with higheryielding assets. The Aussie traded above parity with the U.S. dollar for an eighth-straight day after copper prices climbed to record levels, boosting export prospects for the resource-rich nation. An improved global economic outlook is currently underpinning commodity economies such as Australia's and combined with benchmark interest rates of 4.75%, the outlook for the AUD is for further strength. The Aussie had a 14% gain last year against its U.S. counterpart, the second-best performer behind the yen.