Foreign Exchange Weekly

America’s currency was buoyed last week with a surprising string of sanguine economic data that have market participants cautiously optimistic about the prospects of a turnaround for the world’s largest economy. Last Friday’s final University of Michigan Consumer Confidence Index revealed a sharp rebound from a 28-year low in June (61.2 in Jul. vs. 56.6), while durable goods orders also showed an unexpected amelioration (+0.8% in Jun. vs. -0.3% exp.).

USD – America’s currency was buoyed last week with a surprising string of sanguine economic data that have market participants cautiously optimistic about the prospects of a turnaround for the world’s largest economy. Last Friday’s final University of Michigan Consumer Confidence Index revealed a sharp rebound from a 28-year low in June (61.2 in Jul. vs. 56.6), while durable goods orders also showed an unexpected amelioration (+0.8% in Jun. vs. -0.3% exp.). However the biggest surprise was the solid uptick in new home sales (530K in Jun. vs. 503K exp.); moreover, there was a +50K revision to the past 3 months of data and a measurable decline in outstanding inventory. Consequent to the positive data releases, the dollar experienced a broad-based rally against all of its G10 counterparts last week, with the notable exception of the JPY, against which the tide of “carry trade” flows was insurmountable. With another data-heavy week looming on the horizon, markets will have plenty to digest. The key headline events, and hence “event risk” for the USD, will be the NFP and ISM Manufacturing releases n Friday. Expect another volatile week in currency markets.

 

EUR – The euro is stabilizing around the $1.57 level, falling from earlier peaks as concerns over Fannie Mae and Freddie Mac subside. Last week was the euro’s turn to succumb to worries of an economic slowdown that has dragged on the dollar. Eurozone PMI, an index of business sentiment, fell to 10 year lows at 47.86 while industrial orders fell -3.5% in May. Germany’s Ifo business climate index also fell to 97.5 raising worries that the slowdown gripping Europe’s largest economy maybe a barometer for the wider Eurozone. With the E-15 facing the slowdown that has plagued the US economy, the euro’s direction will likely be determined by which economy is comparatively more resilient.

 

JPY – The yen lost 1.5% vs. USD last week as sellers of the currency sought higher yielding investments funded by yen. Declining growth and production in Japan and indeed the rest of the region has weighed heavily of late as Asian central banks contemplate interest rate increases to curb inflationary pressures from steeper commodity prices. The yen began last week around the 106.30 mark and had retreated to 107.90 by week’s end. Japanese corporate entities, led by Toyota, cut their 2009 revenue estimates as increased fuel costs dampen demand in the US. Expect the yen to remain under pressure as current conditions and speculation persist.

 

GBP – The British pound saw mixed fortunes as well last week ultimately loosing 0.83% (2.0030 – 1.9863) versus the USD. Slowing economic growth and the prospect of cuts in the Bank of England’s benchmark interest rate will weaken the pound to $1.90 and to 80 pence per euro by year-end, according to the median forecast of analysts and strategists surveyed by Bloomberg. The Central Bank left its key rate at 5% on July 10. The National Institute for Economic and Social Research said the economy faces its worst performance since the 1990s recession. Britain’s so-called neutral interest rates is below 5% for the first time in a decade, suggesting that the BoE will be able to leave its benchmark rate lower for longer. Neutral interest rates, which economists describe as neither restraining nor stimulating the economy, were previously assumed to be between 5% and 5.5%—they are now at between 4.5% and 5%.

 

CAD – The loonie fell to its lowest in three weeks against the greenback today amid investor pessimism toward the commodity-driven currency and sparse domestic data. Higher crude oil prices, solid economic data and a weaker USD had boosted the CAD above parity with the USD less than two weeks ago. With no domestic data until mid-week, the CAD will look to the equity markets, oil price movements and general USD sentiment for direction.

 

MXN – The peso weakened sharply on Friday after the Central Bank reported it would suspend its daily dollar auctions, and stocks rose after unexpectedly strong US consumer confidence and housing data. Mexico’s central bank noted it would suspend on August 1 a daily sale of $32M from its foreign reserves after the government bought $8B from the bank to cover foreign exchange requirements for the coming months. Traders had expected the peso to break past the psychological level of 10 pesos per dollar (around five-year highs) in coming days on bets that the Central Bank will boost interest rates again in the coming months in its fight against inflation.

 

CNY – The Chinese yuan recorded its biggest one-day drop since its revaluation in July 2005 today. The yuan fell to 6.8410 following Friday’s close at 6.8189 as markets pared back yuan appreciation expectations after China’s Politburo said the country faced increasing difficulties sustaining growth.

Union Bank's experienced foreign exchange advisory staff provides current market information, trends, forecasting, and rates to support hedging strategies and mitigate international payment risks.Neither this, nor any other communication received from Union Bank, N.A., whether written or oral, is, or should be construed as, a recommendation or solicitation with respect to the purchase or sale of any security or instrument or execution of any particular... More

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