The Dollar had its worst week in 4 months last week as it erased all the gains of the previous week and we are back to the same values as hose we saw at the turn of the year. It brings into question the initial enthusiasm for the USD at the start of the year and poses the question, what next?

Well the answer to that for today is ‘not a lot’ as the US markets are closed for Martin Luther King Day. That also means few other markets will be operating at full capacity and trading will be light. Light doesn’t mean dead though because volatility is often the characteristic of quiet markets. There are a number of US Dollar related data releases this week; though most influential for the USD and all other markets for that matter will be keen to see the Chinese economic growth data for the last quarter of 2010. In fact that kind of overshadows most data releases of the week.

China has purportedly been trying to slow its economy for the last 6 months or so and there is a feeling that they are succeeding to some degree. Certainly the last set of trade balance data would suggest imports are down. That has implications for suppliers like Australia and New Zealand and for the commodity markets as well. That data is due on Thursday.

China’s performance and business confidence in China has implications for the Eurozone as well; the EU is a large scale importer from China and recent moves by the Chinese authorities to boost their EU bond holdings have underpinned the recent Portuguese and Spanish bond auctions. The financial links are plain to see but, whilst China and Japan are investing in EU debt, the far eastern states are openly expressing concerns about the stability of the Eurozone and the Bank of Japan Governor Masaaki Shirakawa has been quoted as saying European financial markets remain unstable due to the continuing debt crisis. Credit ratings agency, Fitch clearly agrees after they cut Greece’s sovereign debt rating to BB+; a level commonly referred to as ‘Junk’. That can’t be good for relations within the EU finance ministers who are meeting this week to discuss just such issues. The disparity between the strength of certain members of the currency sharing bloc couldn’t be better highlighted than this move by Fitch at a time when Germany’s regional governments are starting to upgrade their growth forecasts for this year and next.

Sterling had a mixed week last week; tugged along by its approximate alignment with the EU; Britain’s largest trading partner, but rattled by continuing concern over the potential for damage caused by the UK government spending cuts and the January 4th VAT rise. This week brings plenty to keep Sterling traders busy. The Pound has touched both the top and bottom of its recent trading ranges in the space of a week so another volatile week would not be a surprise. So both tomorrow’s release of the December inflation report and the release of employment data on Wednesday have the potential to be market moving events.

Elsewhere, fluctuating commodity markets are causing volatility in the Australian, New Zealand and Canadian Dollars as well as the South African Rand. All four currencies have weakened a little in the last week and Sterling is pressing each against the top of its trading range. If the UK data is positive this week, we could be on the cusp of a proper advance in the Pound but it is too early to be counting unhatched chickens just yet. Let’s see what tomorrow’s UK inflation data holds.

Meanwhile, violence on the streets of Tunis, landslides in Brazil, floods in Queensland, and what do the news papers focus on; Colin Firth getting a special trophy, Katie Price falling out with yet another hapless fool and Helena Bonham Carter wearing odd shoes.

Of course they should have been reporting on the news that the Italian parliament has decreed that Italian is the official language of Italy. That might not sound controversial but 75 members of parliament voted against it; mainly because they speak Venetian and not Italian. I don’t think anyone is going to make them change though.


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