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America's currency was back on the defensive again throughout most of last week

Tue, Aug 26 2008, 07:33 GMT
by Union Bank of California Team

Union Bank of California

USD -- America’s currency was back on the defensive again throughout most of last week, as a mixed bag of economic data left market participants questioning both the veracity and timing of an ostensible US economic turnaround, and the direction of monetary policy. While last week’s Housing Starts Index was somewhat encouraging (965K in Jul. vs. 960K exp.), an unexpected worsening of the Leading Indicators Index (-0.7% in Jul. vs. -0.1% prior), coupled with a slightly worse-than-expected Philadelphia Fed Survey (-12.7 in Aug. vs. -12.6 exp.) were enough to set the stage for an aggressive dollar sell-off. Moreover, an Initial Jobless Claims Survey reading persistently above the recessionary 400K threshold (432K during wk. of 8/16) further exacerbated the greenback’s weakening. Notwithstanding the marked increase in wholesale inflation (Jul. PPI: 3.5% vs. 3.0% prior), Fed Chairman Bernanke’s testimony at the Kansas City Jackson Hole Conference cast an optimistic ray of hope that the inflation problem in the world’s largest economy was nearing containment: “the recent decline in commodity prices, as well as the increased stability of the dollar, has been encouraging . . . these developments, together with a pace of growth that is likely to fall short of potential for a time, should lead inflation to moderate . . .” The dollar began to stage a bit of a recovery late in trading on Friday and continues to gain momentum this morning, buoyed by the sanguine showing of the Existing Home Sales Index (5.00M vs. 4.85M prior).
Nevertheless, ominous news of yet another bank failure last Friday—Columbian Bank and Trust Co. of Topeka, KS—is capping the dollar’s gain, drawing equities down and treasuries up. Markets will have plenty to digest throughout the balance of this week as key event risks, namely the Q2 ’08 GDP revisions and the FOMC August meeting minutes.

EUR -- Last week saw the release of PMI data for the entire Eurozone, Germany, and France.
While the PMI for the E-15 in general was practically unchanged from July, French PMI, and especially German PMI, fell noticeably. The most notable observation about the PMI releases is that they suggest that inflationary pressure is receding, and that the Eurozone is on the brink of recession. A potential interest rate cut would only further weaken the struggling euro.
This week brings detailed Q2 national accounts figures for Germany, which will reveal how much of the high-level of activity in Q1 was due to temporary factors that reversed in Q2. Inflation in the E-15 is expected to hold at 4.0% in August and then begin to moderate.

JPY -- The yen was trading in a narrow range this morning, but generally weaker against the dollar after data showed US existing home sales rose more-than-expected in July. JPY is poised to head lower amid Japan’s stalling economy, as acknowledged by BoJ Governor Shirakawa who commented that the nation's economic growth will likely remain “sluggish” due to high energy costs and slowing export growth. The government has suggested that the economy is either heading into a recession or is already in one, ending a growth cycle that began in early 2002. He also added that the Central Bank is watching inflationary expectations and that it expects CPI gains to moderate after accelerating. Shirakawa pointed out the accommodative monetary policies should help the world’s second largest economy avoid a “deep” slowdown, and are helping corporations after BoJ kept interest rates on hold at 0.50% as widely expected last week.

GBP -- Last week didn’t change the general picture of a rapidly weakening British economy.
Retail sales rebounded a bit, rising 0.8% in July, but this was after a drop of 4.3% the month earlier. GDP for Q2 came out weaker- than-expected at 0.0% q/q after rising only 0.2% in Q1. Exports and investments were very weak and private consumption fell slightly. The housing market is also in the doldrums as witnessed by the House Price Index from Rightmove, which fell 2.3% m/m in August. Overall, the picture in the UK is dismal, and the BoE is very much aware thereof, and trying to decide in which direction to take interest rates. Currently, the Central Bank is expected to remain sidelined, as is the weakening pound.

CAD -- The loonie rose against the greenback on Monday, helped by higher oil prices. CAD was supported by crude oil topping $115/barrel this morning after a big drop on Friday.
Canada’s Q2 GDP figure will be released on Friday, which will also be the last major piece of data before the BoC makes its rate announcement next week.

MXN -- Mexico's peso rose the most in almost two weeks on speculation the yield difference between Mexican and US benchmark lending rates will grow past 6.25%. Banco de Mexico raised its benchmark lending rate by a quarter-point to 8.25% on Aug. 15th. It was the third increase since June, pushing borrowing costs to the highest since January 2006. Additional interest rate increases may still occur as the Central Bank strives to keep inflation under control.

CNY -- The Chinese yuan was flat against the dollar on Monday trading at about 6.8431.
According to China Business News, the Government is now considering an economic stimulus package of about yuan 370B, which includes prospects of an easing monetary policy that could also bring about a much slower pace of CNY appreciation.

Last Week’s Currency Highs and Lows and Forecast

Published on  Tue, Aug 26 2008, 10:54 GMT