Morning Currency Wrap for Thursday January 6, 2011

Unwind Of 2010 Year End Moves Continues  - The Euro retreated to its lowest level against the USD in a week, near the support of its 200-day moving average, on concerns that a slower recovery in some European nations will only worsen the region’s debt crisis. Anyway that's what the sound bites will say but the real reason that the Euro is down is do to cost sharing - the European Commission will today continue with a plan to spread the cost of bank failures to senior bondholders instead of having the public pick up the tab. Since this proposal would by unfriendly to investors, I can't see investors stepping up to buy European bank shares, hence the sell off in the Euro. Meanwhile, the GBP had its own problems after a report showed U.K. service industries unexpectedly shrank in December for the first time in more than 1 1/2 years. After yesterday's disappointing news that construction shrank in December for the first time in 10 months, and add in today news and the evidence points to a possible downturn in the U.K. for 2010 Q4. In the U.S., each economic release keeps points to a slow and steady economic recovery. Faced with rising euro zone government debt issuances in the coming months and a general stabilization in the U.S. economy, investors are riding the USD higher. The USD could sell off after tomorrow's jobs numbers but that should be perceived as a buying opportunity unless the data changes expectations for the U.S. Federal Reserve to keep its quantitative easing in place through June. Keep in mind that the release earlier this week of the minutes of the December FOMC meeting made it clear that by last month the Fed did not view economic conditions as having improved enough to reign in the $600 bln target for June. Fed Chairman Ben Bernanke is set to testify on the economic outlook before the Senate Budget Committee on Friday an hour after the jobs report. In Canada, the CAD continues to remain firm, and at times push higher, as signs of stronger U.S. economic growth bode well for the domestic economy, despite the inability of the price of oil to regain the $90 handle. December employment reports tomorrow will provide the main focus this week, with job growth expected in both the U.S. and Canada.