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The euro is building upon last week's gains, rising above $1.58

Tue, Jul 1 2008, 06:12 GMT
by Union Bank of California Team

Union Bank of California

USD – Last Wednesday’s FOMC interest rate announcement served as the catalyst for a broad-based dollar sell-off as the Fed’s ambiguous rhetoric left markets not-fully-convinced that it was serious about its war against inflation. In the immediate aftermath of Fed’s monetary policy meeting, oil prices skyrocketed to above $140/bbl, while US stocks and the greenback experienced a precipitous decline. Marginal amelioration in the Durable Goods Order Index (0.0% in May vs. -0.5% prior), together with a slight uptick in Existing Home Sales (4.99M in May vs. 4.89M prior), did little to buoy the dollar last week, as it was overshadowed by the FOMC event. Markets will have plenty over which to ruminate during this data-heavy, yet holiday-shortened week for the world’s largest economy. This morning’s sanguine Chicago PMI release so far has led the charge of the impending battery of economic indicators (49.6 in Jun. vs. 48.0 exp.). The key headline event for this week will be Thursday’s NFP jobs report, occurring at the same time as the post-rate announcement news conference by the ECB. The potential combination of progressively worse US economic data along with the relentlessly restrictive ECB monetary policy may create even further weakness for the greenback in the days ahead.

EUR – The euro is building upon last week’s gains, rising above $1.58, after the Fed decision to leave rates unchanged. Markets sent the single currency higher after the Fed statement provided little clarity about potential rate hikes to counteract inflationary conditions that have been the recent focus of the Central Bank. Attention has shifted to the upcoming ECB meeting on Thursday where markets are anticipating a 0.25% rate hike, from 4%, which continues to underpin the euro. Despite this, Eurozone economy remains mixed as the region continues to tackle rising inflation amid lackluster growth. Eurozone PMI fell to 49.5—the lowest level since June 2003. Meanwhile, German import prices rose 2.4% in May, bringing the annual rate to 7.9%. Additionally, energy-led inflation has become closely correlated with euro gains as a stronger euro helps offset rising oil costs, which are priced in dollars. Market focus will be on the ECB this week and whether it will follow its tough anti-inflation rhetoric with a rate hike.

JPY – The yen has strengthened against most major currencies today in response to the surprise upgrade by Moody’s Investor Services of Japan’s local currency debt. A string of Japanese economic data last past week suggests that inflation is rising more than expected, and that GDP growth will stall in Q2. Inflation, excluding fresh food, rose to 1.5% y/y in May from 0.9% y/y. Together with increasing energy prices, this means that inflation in June could reach as high as 1.9% y/y. Thus, a breach of the BoJ’s target for price stability (0%-2%) in the coming months can no longer be ruled-out. GDP growth looks set to slow significantly in Q2 to zero growth. Hence with zero growth and rising inflation the BoJ may begin to focus a more on inflation expectations, but interest rates are still not expected to be raised until H2 09.

GBP – Sterling rose last week, climbing to 1-month highs at 1.9950, despite continuing signs that the economy is slowing. 1Q08 GDP rose a modest 0.3%, the lowest level in 3 years to bring the annual rate to 2.3%. British home loan approvals fell to its lowest since 2005 indicating that the “credit crunch” and housing downturn are providing little relief to consumers. The UK savings rate dipped to its lowest in 50 years as beleaguered consumers feel the pinch from rising energy and food costs. Despite rising inflation, BOE Governor King commented last week that he wanted to avoid an economic slowdown that would bring inflation below target, prompting markets to pare back rate hike expectations. The pound is expected to be underpinned in the current environment of dollar weakness.

CAD – The loonie fell 0.2% to 1.0131 per USD this morning on concerns that growth will slow as consumers cut spending, and the price of gasoline increases. The currency strengthened 1.2% in the Q2 after weakening 2.6% in the first three months of 2008. The CAD stalled this year as the US-led economic slowdown spread to Canada.

MXN – The peso weakened slightly but stayed within recent ranges despite data showing inflation levels reaching three-year highs and consumer sentiment falling to its lowest level in five years. The peso has held steady due to last week’s Mexican central bank announcement that it would be hiking rates for the first time in eight months.

CNY – The Chinese yuan continued its climb to all-time peaks, rising to to 6.86. The yuan has risen 2.3% in 08Q2 in its third largest quarterly rise since the July 2005 revaluation.

Last Week’s Currency Highs and Lows and Forecast

Published on  Tue, Jul 1 2008, 06:23 GMT