America’s currency fared quite well throughout most of last week and this morning as surprisingly buoyant economic data helped underpin the dollar. However, last Friday’s release of lackluster key consumer data could serve as an ominous harbinger of impending negative sentiment for the world’s largest economy and its currency. A better-than-expected Durable Goods Orders (-0.5% in Apr. vs. -1.5% exp.) and an ameliorating Chicago PMI (49.1 in May vs. 48.3 prior)—together with a bout of profit-taking on the back of a heavily technically-driven market—provided a much needed boost for the USD as it recouped most of its losses from the weeks prior.
USD – America’s currency fared quite well throughout most of last week and this morning as surprisingly buoyant economic data helped underpin the dollar. However, last Friday’s release of lackluster key consumer data could serve as an ominous harbinger of impending negative sentiment for the world’s largest economy and its currency. A better-than-expected Durable Goods Orders (-0.5% in Apr. vs. -1.5% exp.) and an ameliorating Chicago PMI (49.1 in May vs. 48.3 prior)—together with a bout of profit-taking on the back of a heavily technically-driven market—provided a much needed boost for the USD as it recouped most of its losses from the weeks prior.
Nevertheless, the drop in Personal Spending and Personal Income (0.2% and 0.2% in Apr. vs. 0.4% and 0.3%, respectively, prior) along with a 28-year low in the U. of Michigan Consumer Confidence Survey (59.8 in May) provided a painful “reality check” that the US economy is likely to be far from a veritable recovery. Markets remain cautiously optimistic this week as this morning’s sanguine ISM Manufacturing Index evidenced trending toward expansionary territory (49.6 in May vs. 48.6 prior), while monthly Construction Spending also improved substantively (-0.4% in Apr. vs. -1.1%
prior). All eyes will be focused on the two key remaining economic indicators for the balance of this week—the ISM Services Index and the allimportant US NFP report. The greenback’s direction, not to mention the near-term direction of US monetary policy, will largely be dictated by the results of these key measures. Expect a volatile week in FX!
EUR – Signs that that the global economic slowdown is hitting the Eurozone is denting the euro’s prospects. “Stagflation” was largely seen as a US dilemma, but is now rippling through the Region as rising oil prices fuel worldwide inflation. The single currency hit lows at 1.5463 last week after German retails sales fell -1.7% in April while Euro Zone inflation rose to an above- target 3.6%. The data comes amid a raft of mixed economic reports portraying moderating economic conditions. Eurozone consumer sentiment fell to -15 last week with Germany and France—the E-15’s two largest economies—both reporting significant declines at 4.9 and -41, respectively. But economic sentiment remains steady, rising an aboveforecast 97.1. The mixed data highlight the difficult policy decision facing the ECB and pares back rate hike expectations, which in turn could narrow the interest rate differential that had previously powered the euro to all-time highs vs. USD. Under this scenario of continuing moderation in Eurozone growth, the euro will remain on the defensive vs. USD in the near-term.
JPY – The yen began last week falling to a one-month low against euro as a rally in Asian stocks prompted investors to add to higher yielding carry-trade positions. This was followed Tuesday by a three-day high for yen against USD (105.50) on Asian stock declines (-0.9%), which led to a paring of those same carry-trade investments. Japanese bonds fell, sending 10-year yields to their highest in nine months as a government report showed inflation increasing near its fastest pace in a decade. This increases the likelihood that the BoJ will raise its bench-mark interest rate before year end.
GBP – The British pound opened last week in negative territory dropping to $1.9775, but ultimately closing at $1.9841. As crude reached $135.00 a barrel BoE Governor King warned that further shocks in energy markets could spur a recession in the UK, noting “there is no justification for GBP above $2 with demand in both the consumer and corporate sectors remaining sluggish.” LIBOR (London Interbank offered rate) is experiencing a crisis in confidence as UBS AG, which has taken 38.1B in sub-prime related writedowns, claimed it was receiving rates below that of the daily published rate. This type of discrepancy has caused financial institutions to begin to question the wide-spread use and stability of LIBOR as a standard.
CAD – The loonie weakened against the greenback today amid profit-taking on crude oil prices, which is well off the all-time high of $135.09 hit on May 22. The prospect of lower interest rates in Canada also contributed to CAD’s decline. Last week’s Q1 GDP report showed a contracting economy and increased speculation that the BoC would cut its key lending rate by 25-bps on June 10. The main economic release this week will be the May employment report on Friday, which will be the last major piece of data
before the Central Bank announces its interest rate decision.
MXN – The peso slipped today ahead of a poll from Mexico’s central bank that will show if inflation expectations have risen in the last month amid persistent price pressures. Late last week, the peso firmed to a fresh five-year high against the USD after revised growth data in the US bolstered views that Mexico may escape a heavy impact from its chief trading partner’s economic slowdown.
CNY – The Chinese yuan continued its strengthening trend, hitting new highs at 6.9323. The yuan rose 0.66% in May, outperforming April’s 0.35% gain.