USD buyers moved out of the sidelines this morning bringing an end to this week's uptrend in cable, and the commodity currencies. The reversal in the USD/CAD has been the most significant. EUR/USD also probed the downside while another flat session for EUR/JPY has allowed USD/JPY to again mirror the move in EUR/USD.
A press report that the Fed will resist pressure to increase its bond purchases and some nervousness ahead of the weekend G-8 meeting were cited as early USD positive factors. Comments from Japan's Finance Minister asserting his confidence in US treasuries also fed the more positive tone. The worst than expected -1.9% m/m decline in April Eurozone industrial production added to the pressure on the EUR.
In general, finance ministers meetings tend to result in little direct comment on currency markets aside from reassertions that stable exchange rates are preferred.
However, some concern that the US treasury will restate its commitment to a strong policy is considered to be a possibility this weekend. Any comment on currencies beyond these parameters would be a big surprise.
USD/CAD again failed to hold below the CAD1.100 level yesterday. Today's bounce was most likely encouraged by last night's warnings from the BoC's Carney about the rapid rise in the value of the CAD, though this is not new news.
Profit-taking in sterling vs both the USD and the EUR was not spurred by any new event. Of interest is that the BoE's inflation survey has shown a rise in inflation expectations to 2.4% in the 12 months from May compared with the 2.1% increase the survey forecast in February. This indicates that the self-fulfilling deflationary loop of delaying purchases in the hope of price cuts has become less of a risk. Some analysts are reporting that this brings the possibility of a rise in the bank rate nearer. However, there is no real change to the view that rates are set to remain at their current level until 2010 suggesting support for sterling from this story is marginal.
This afternoon, University of Michigan confidence is due as is the US import price index. The ECB's Trichet is also schedule to speak.
