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The Chinese yuan is lower vs. the dollar at 6.83 amid talk of slowing appreciation

Tue, Jul 22 2008, 06:51 GMT
by Union Bank of California Team

Union Bank of California

USD -- The greenback opened last week lower across-the-board against its major trading counterparts on speculation Federal Reserve Chairman Bernanke and US Treasury Secretary Paulson would report to Congress that credit market losses will weigh on US economic growth. This proved to be accurate when both men testified before the Senate Finance committee last week. The currency declined to a 25-year low versus the Australian dollar on concerns the debt of Fannie Mae and Freddie Mac will deteriorate even after the US government pledged support for the two-largest buyers of home loans. One suggestion for shoring up the two mortgage behemoths is through taxpayer money. Paulson took a step toward committing taxpayer funds when he asked Congress to give Treasury the power to invest in Fannie Mae and Freddie Mac if necessary. Under legislation lawmakers are considering, the FHA would gain the ability to refinance up to $300B worth of loans at an estimated cost to the government of $3B. The dollar then saw some relief later in the week as banks and financial institutions posted better- than-expected losses for the last quarter. Expect the dollar to remain under pressure as markets assess further threats to the economy from the housing meltdown and increasing inflationary pressures.

EUR -- The euro moderated its gains after scaling fresh all-time peaks at $1.6038 last week on concerns over the US financial sector. The euro subsequently backed away from its highs after better-than-expected earnings reports from US financial institutions helped to stabilize markets. Despite the currency’s gains, the Eurozone continues to face a mixed economic picture. EU-15 industrial production declined 1.9% in May while inflation climbed 0.4%in June to bring the annual rate to 4%. German ZEW expectations, an index of investor sentiment, deteriorated to a record low this month, falling to -63.9. The reading is the lowest figure since the survey’s inception in 1991. Acknowledging the challenges facing the Eurozone economy, ECB President Trichet said that growth is likely to slowdown in the Q2 and Q3. As a result, the euro is likely to be highly susceptible to market vagaries surrounding US financial markets, especially as a safe haven from the dollar.

JPY -- The yen saw mixed fortunes last week ranging between 104.10 and 106.97 as corporate and financial earnings, carry-trade and risk aversion in the markets whipsawed the currency. Thirty-percent declines in Japanese stocks this year are continuing to make equities more attractive than the country's government debt. Yields on benchmark 10-year government notes will move between 1.4% and 1.8% until the end of September as waning demand for Japanese exports and low-wage growth slow the world's second-largest economy. The Bank of Japan is unlikely to raise interest rates this year as accelerating inflation is due mostly to oil prices. Expect yen to remain range-bound and reactionary to investment flows and economic data from Japan and the US.

GBP -- Sterling retained relative strength last week as it traded between $1.9945 and just-north of $2.00. UK unemployment claims remained unchanged in June from May’s 2.6% reading. The pound fell against the dollar mid-week on speculation the UK government will increase borrowing as Chancellor of the Exchequer Darling introduced new spending guidelines. The UK currency declined against euro as well after the Financial Times reported the new spending framework would allow for the breaking of limits on public-sector debt. This was countered, however, by and unnamed Treasury spokesman who characterized the story as “pure speculation.”

CAD -- The loonie rose slightly against the greenback on Monday amid firm commodity prices and ahead of retail sales and inflation data due this week. BoC reported in its Monetary Policy Report Update last week that soaring oil prices would lift inflation as high as 4.3% in early 2009. With Canada’s inflation and growth worries the Central Bank has indicated it will leave interest rates steady for the foreseeable future. Also boosting CAD was news of foreign acquisitions of Canadian businesses.

MXN -- The peso finally broke through the stubborn 10.20 support to trade at a new, 5-year high against the dollar today amid the 25-bps hike of the benchmark rate to 8% by the Central Bank and a hawkish-sounding statement last week. Now at 5.3%, domestic inflation is forecasted to continue its rise for the remainder of the year and into 2009. MXN is poised for further gains as the rate gap between the US and Mexico continues to widen.

CNY -- The Chinese yuan is lower vs. the dollar at 6.83 amid talk of slowing appreciation. The currency fell for the third day in a row as attention focused on whether the government would slow the pace of yuan strengthen in response to a slowing economy and to curb money inflows.

Last Week’s Currency Highs and Lows and Forecast

Published on  Tue, Jul 22 2008, 06:57 GMT