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Weekly Update

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The greenback largely held its ground last week against its major world counterparts

Wed, May 14 2008, 08:44 GMT
by Union Bank of California Team

Union Bank of California

USD – The greenback largely held its ground last week against its major world counterparts, as it continues to be propped-up by an undercurrent of nascent bullish sentiment. With interest rate futures on the Chicago Board of Trade now showing an 82% chance that the Fed will keep interest rates unchanged at 2% on 6/25, markets embrace this as an omen that the worst (concerning US economic woes) is now behind. Moreover, a series of sanguine data last week helped to further underpin the dollar. The US Trade Balance showed a welcome decrease (-$58.2B in Mar. vs. -$62.3B prior); Initial Jobless Claims showed improvement (365K during wk. of 4/26 vs. 380K prior); Pending Home Sales unexpectedly ameliorated (-1.0% in Mar. vs. -1.9% prior); finally, the closely watched ISM Non-Manufacturing breached the “make-it-or-break-it” level of 50.0 last month, printing at 52.0 (vs. 49.6 prior). With the greenback now ostensibly gaining momentum, markets will look to the marquee event of this week—tomorrow’s Advance Retail Sales release—to either confirm or deny the existence of an USD appreciating trend. Additionally, the calendar for the world’s largest economy this week is packed with a myriad of other potentially market-moving indicators, over which markets will have plenty to ruminate.

EUR – The euro is struggling to find direction amid broad dollar strength. The single currency fell to lows below $1.53 last week before rebounding to $1.55 after the ECB left rates unchanged at 4%. Despite ECB President Trichet’s hawkish comments on inflation, which boosted the euro following the meeting, the Eurozone is showing signs of uneven performance leading many to believe that growth is moderating. Eurozone retail sales fell -0.4 while German industrial orders fell -0.6. By contrast, Eurozone PMI, an index of business sentiments, rose to 52, signaling expansionary conditions, while producer prices rose to 5.7% annually. The mixed performance and the corresponding outlook for interest rates puts the euro on a seesaw in search of direction.

JPY – The past month has seen a marked shift in the markets’ interest rate expectations with the next step from the BoJ most likely resulting in an increase, rather than a decrease. This shift comes on the back of economic data suggesting that Japanese growth has not collapsed after all, and a surprisingly strong rise in inflation to 1.2% y/y. However, inflation is still well within the BoJ’s target range of 0-2%, and core inflation excluding energy and food, is still a modest 0.1% y/y. It is expected that growth, not inflation, will be the key to the timing of the next interest rate hike in Japan. This week interest in Japan will focus on Thursday’s publication of the Q1 GDP figures. With expectation that private consumption will grow by a meager 0.5% q/q, this is still the weakest part of the Japanese economy.

GBP – The British pound rose above $1.96 following the release of higher inflation figures. Output prices rose by 1.4% in April, bringing the annual rate to 7.5%—the highest readings for both numbers since 1986. Despite the inflation pressures, the British economy is also struggling with slowing growth. Last week’s Chartered Institute Purchasing Managers Index fell to 50.4 from 52.1, which sent the sterling tumbling. Although the Bank of England kept rates unchanged at 5%, a rate cut at its next meeting is widely anticipated keeping the pound under pressure.

CAD – Yields on the Canadian 10-year bond dropped to the lowest in more than a week on speculation that the Bank of Canada will cut borrowing costs amid the lowest inflation in more than a year. A low inflation rate is providing the BoC enough space to cut rates at least one more time this year. The CAD depreciated 0.1% to 1.0065 per USD, from 1.0052 last Friday. Market participants are forecasting that the CAD will decline to 1.08 by year-end.

MXN – The peso is showing some resilience, gaining more than 0.50%, despite expectation that the spread between interest rates in Mexico and the US will not widen further. After shedding some of its 4% YTD gains last week, the attraction of high interest rates in Mexico continues to draw investors. The MXN, which closed above 10.56 on Friday, is once again moving towards recent highs below the 10.50 levels.

CNY – The Chinese yuan rose to post revaluation highs of 6.9882 only to give back gains after an earthquake struck southwestern China late yesterday. The magnitude 7.8 quake sent the yuan back above 7 as market participants worried about the economic impact of the earthquake.

Last Week’s Currency Highs and Lows and Forecast

Published on  Wed, May 14 2008, 08:58 GMT