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Weekly Update

The holiday−shortened week last week kept things fairly quiet in the FX market

Wed, Jul 9 2008, 11:33 GMT
by Union Bank of California Team

Union Bank of California

USD – The holiday-shortened week last week kept things fairly quiet in the FX market, as the greenback traded within a tight range against its major world counterparts in the absence of any meaningful direction. The key event risks for last week—the US NFP report (-62K in Jun. vs. -60K exp.) and the post-rate news conference by the ECB—ultimately proved to be a “non-event” vis-à-vis market volatility. With further rate hikes from both the Fed and the ECB now in doubt for the balance of this year, markets appear undecided as to which currency to cheer. The paucity of economic data for this week, save the US Trade Balance and the University of Michigan Consumer Confidence Survey, will likely turn the market’s focus to the G8 meeting in Hokkaido, Japan, which began yesterday and will conclude on 7/9. Global inflation talk is expected to be prominent on the agenda, and a significant cause of it is perceived to be the USD-weakness phenomenon. Official opposition to further dollar depreciation by the G8 would very much trigger a major turn in the greenback, causing it to rally to multi-month highs relative to the EUR and JPY. Furthermore, oil’s stalwart advance to a record high last week, will also provide the market with plenty to digest as it frantically attempts to garner insight into the health of the world’s largest economy and the direction of its currency.

EUR – The euro rose to highs of $1.5909 last week after the ECB lifted rates by 0.25% to bring benchmark interest rates to 4.25%. The much anticipated decision provided only a brief lift to the euro after ECB head Trichet’s comments following the decision that “starting from here I have no bias” led markets to pare back further rate hike expectations. Despite the decision, the Eurozone continues to struggle with mixed growth amid persistent inflation. Producer prices rose 1.2% in May to bring the annual rate to 7.1%. Eurozone unemployment was reported at 7.2%, while the manufacturing and service PMI’s fell below the sub-50 level indicating contraction at 47.1 and 49.2, respectively. Without a clear signal on the path of future interest rates, the euro is well below last week’s highs at just above $1.56, while markets seek clues on the health of the Eurozone and the single currency’s direction.

JPY – The yen saw some modest recovery last week from recent lows reaching a high of 105.93 only to erase those gains over the holiday-weekend trading. Japan's tax revenue fell short of the government's estimate for a second year, making it harder for Prime Minister Fukuda to pursue his goal of balancing the budget in three years. In response, Japan plans to sell 21 trillion yen ($199B) of financing bills in July according to the Ministry of Finance. The first round drew bids worth 3.09 times the amount of bonds on offer, compared with 2.09 times at the auction last month. Bonds also gained as the Nikkei 225 fell for an 11th day last Thursday, the longest losing streak in more than 50 years, after a report last week showed that U.S. companies cut more jobs in June than economists forecast. Expect a range-bound yen as markets continue to digest declining data from Japan.

GBP – Sterling began a precipitous decline last week that has yet to abate. Chancellor of the Exchequer Darling rejected the idea of making banks pay billions of pounds into a saver-protection system (similar to the FDIC system in the US); at least for the time being, postulating that it would place too great a burden on lenders still struggling with the effects of the credit crisis. The UK has been heavily challenged by the sub-prime crisis, evidenced by the near-collapse and subsequent nationalization of Northern Rock PLC, the UK’s third-largest bank, in February. According to the Nationwide Building Society, UK house prices fell in June from a year earlier by the most since the end of the last recession in 1992. Sterling will likely remain under pressure as declining housing values and liquidity issues point toward recession and possible rate reductions.

CAD – The loonie fell against a stronger greenback today as oil prices slid to $140 a barrel after rising last week to a record high near $146 a barrel and stronger-than-expected domestic building permits data failed to generate momentum. The market has its sights set on Friday's June jobs report—the last data the BoC will consider ahead of its scheduled interest rate decision on July 15.

MXN – Mexico's peso advanced as gains in global stocks boosted investors risk appetite for higher-yielding emerging market assets. The currency has appreciated 5.65% ytd, buoyed by the widening gap between US and Mexican benchmark interest rates. The 5.75% rate differential between the two countries is the widest since September 2005.

CNY – The Chinese yuan is lower vs. the dollar at 6.8658 amid broad dollar strength. With interest rate policy choices seen as limited ahead of the Beijing Olympics this summer, markets are anticipating further yuan gains to contain inflation.

Last Week’s Currency Highs and Lows and Forecast

Published on  Wed, Jul 9 2008, 11:43 GMT

Archive

• 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
• The euro is stabilizing around the $1.57 level
  Published On Wed, Jul 30 2008, 06:30 GMT
• The Chinese yuan is lower vs. the dollar at 6.83 amid talk of slowing appreciation
  Published On Tue, Jul 22 2008, 06:51 GMT

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