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Greenback's Decline Continues

Sun, Jun 29 2008, 22:03 GMT
by Hans Nilsson

CMS Forex

Greenback's Decline Continues

• The dollar traded lower against major currencies Friday as equity sell-offs continued and oil prices hit new highs. The yen and Swiss franc rose as increased risk aversion sparked new carry-trade unwinding. The Australian and Canadian dollars advanced on rising commodity prices. Sterling continued its ascent following yesterday’s technical breakout.


• The EUR/USD was higher but unable to penetrate the 1.58-handle resistance as US personal income and personal consumption were higher than expected while European sentiment continued to deteriorate. The pair is supported by the lax US monetary policy; however, slowing economic growth in the EMU and particularly in the PIGS countries (Portugal, Italy, Greece and Spain) has kept the EUR/USD flat for many weeks. If the Fed realizes that its negative real interest rate policy is counterproductive (as it causes commodity inflation) and if the Fed raises its interest rates moderately, the EUR/USD will fall. The pair has strong support at the 1.54- handle and resistance in the 1.60-area. We expect the pair to trade in this range until the Fed hikes rates or US recessionary conditions worsen.

Financial and Economic News and Comments

US & Canada

• US personal consumption expenditures (PCE) increased $77.4 billion, or 0.8% m/m in May, the biggest gain since 1.0% m/m in November 2007 and slightly beating consensus expectations, fed by rising inflation and the round of income-tax rebates, following an upwardly revised 0.4% m/m increase in April, data from the Commerce Department showed. PCE rose 5.4% y/y.


• US personal income increased $225.7 billion, or 1.9% m/m in May, the largest gain since 3.2% m/m in September 2005 and far outpacing consensus expectations, following an upwardly revised 0.3% m/m increase in April. Personal income rose 6.4% y/y. Disposable personal income (income after taxes) increased $600.3 billion, or 5.7% m/m, in May. DPI rose 10.7% y/y.


• The overall PCE deflator (consumer inflation) rose 0.4% m/m in May, up 3.1% y/y. The core PCE deflator, which excludes food and energy, increased 0.1% m/m in May. The core PCE deflator rose 2.1% y/y, above the Fed’s inflation comfort zone of 1.5%-2.0%. After adjusting for inflation, real consumption increased 0.4% m/m in May, up 2.2% y/y.

• US consumer confidence dropped to a 28-year low on energy costs and rising unemployment. The Reuters/University of Michigan final index of US consumer sentiment fell to 56.4 in June, the weakest level since May 1980, from 59.8 in May. The measure averaged 85.6 in 2007.

Europe

• The UK Q1 GDP rose 0.3% q/q, the least in three years and lower than the 0.4% q/q reported on May 23, weighed down by the weakest services expansion in 12 years, final data from the Office for National Statistics showed. The economy expanded 2.3% y/y.


• The European Commission euro-area sentiment index fell more than forecast to 94.9 in June, the lowest since May 2005, from 97.6 in May, according to data from the European Commission. The index peaked at 111.6 in May 2007.

Asia-Pacific

• Japan’s household spending fell 3.2% y/y, the most since September 2006, the statistics bureau said. Job vacancies declined to a 3-year low with the ratio of jobs for each applicant sliding to 0.92. Core consumerprice index, which excludes fresh food, rose 1.5% y/y in May after rising 0.9% y/y in April. Core CPI for Tokyo rose 1.3% y/y in June. Overall, the figures show increased recessionary risks with accelerating inflation in Japan.

• Japan’s industrial production rose 2.9% m/m in May, the first increase in three months, on increasing demand for passenger cars and mobile phones, the Ministry of Economy, Trade and Industry said. Despite the recovery, the METI downgraded its assessment of industrial output for the first time since December, saying it “remains at the same level but on a weak note.”

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Published on  Sun, Jun 29 2008, 22:08 GMT