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Weekly Update

The euro is largely rangebound as markets contemplate the outlook for Eurozone interest rates

Tue, Jun 24 2008, 06:49 GMT
by Union Bank of California Team

Union Bank of California

USD – The dollar continued its declines last week falling to a low of 72.98 against a basket of the 16 most-actively-traded currencies. A slew of US economic data hit the markets last week with mostly sanguine news: Empire Manufacturing survey posted a disappointing -8.7 (-2.0 exp.) followed by PPI (1.4% m/m, 3% y/y), PPI Ex Food and Energy posted a modest 0.2% increase. Housing starts continued their line of contraction with only 980K (1.032M previous). Industrial Production saw a slight boost to 0.1% (-0.7% prior) aided by a weak dollar. Consumer Confidence came in at 45—again below the psychological level of 50. A small reduction in jobless claims presented one of the few silver linings in an otherwise stalwart economic outlook for the world’s largest economy. With little more than nominal inflationary pressure the Federal Reserve is faced with a double- edged sword: hiking interest rates would add support to the lagging dollar and potentially lower commodity prices, but the action may slow an already contracting economy, undermining the Fed’s last nine months of monetary easing. Expect the dollar to remain range bound as these conditions persist.

EUR – The euro is largely rangebound as markets contemplate the outlook for Eurozone interest rates. Given the ECB’s hawkish stance on inflation, the question over rate hikes is not so much a matter of will the Central Bank act but of when and how much? Markets got further clues last week from ECB Councilmember Smaghi who commented that a 0.25% increase should be adequate to bring inflation back below the 2% target rate leading many to scale back expectations for future hikes. Many are calling for the ECB to raise rates by 0.25% as soon as next month and hold steady thereafter as the ECB contemplates additional increases. Signs of moderating EU-15 economic conditions continued as German economic sentiments came in at a larger -52.4, while producer prices rose to an annualized 6%. With stagflation a global phenomenon fueled by higher energy prices, euro strength has been directly correlated with energy prices, gaining when the price of oil—priced in dollars—rises.

JPY – The yen began last week much as it finished the preceding—weaker against the major currencies as investors continued to pour funds into higher- yielding and emerging market investments. Japan’s Leading Index of Economic indicators showed a decline of almost 2% across some sectors illustrating the contraction in the world’s second largest economy. The BoJ last week scaled back its evaluation of exports and corporate profits as the global slowdown weakens demand and surging costs eat into profits.

GBP – Sterling opened last week lower snapping two-days of gains reaching a low of $1.9563. The drop heralded speculation that GBP may see further declines as the BoE resists the temptation to raise rates amid accelerating inflation. BoE officials, including Governor King, have stated in recent months that the UK will likely avoid a recession. That prognosis is looking less probable as Britain battles many of the same economic woes that have pushed the US into its first “recession” in almost two decades. King substantiated that view last week by saying policy makers will “tolerate a decline in living standards to tackle inflation”.

CAD – The loonie fell slightly against a broadly stronger greenback today as the price of oil slid from an early session high and took the commodity-linked currency with it. The CAD often mirrors oil price movements as the country is a major oil exporter and the biggest supplier to the US. There are no major Canadian economic data releases until Friday, when the industrial product and raw materials indexes for May are due.

MXN – The peso closed at its highest level in five years on Friday at 10.275 against the dollar after the Mexican Central Bank raised its key interest rate to 7.75% after its monthly monetary policy meeting. The increase is an effort to help tackle inflation caused by escalating food prices. MXN has gained over 6% against the USD as the interest rate gap between the two countries continues to widen making Mexican assets attractive to investors.

CNY – The Chinese yuan hit another post-revaluation high against the dollar late last week and is poised to add to its gains amid harsher monetary measures to fight rising inflation. The Central Bank may again raise interest rates as the government increases borrowing to fund earthquake-related reconstruction and on the back of a spike in fuel prices due to the recent action to lift gasoline subsidies.

Last Week’s Currency Highs and Lows and Forecast

Published on  Tue, Jun 24 2008, 06:55 GMT

Archive

• This morning the USD rose to the highest level against the euro in almost seven months
  Published On Wed, Sep 3 2008, 06:48 GMT
• America's currency was back on the defensive again throughout most of last week
  Published On Tue, Aug 26 2008, 07:33 GMT
• America's currency extended its rally from the prior week
  Published On Tue, Aug 19 2008, 06:53 GMT
• Japan's currency continued a steady decline vs. USD on slowing domestic output
  Published On Tue, Aug 12 2008, 09:05 GMT
• Concerns of slowing growth in the Eurozone is putting pressure on the euro
  Published On Thu, Aug 7 2008, 07:51 GMT

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