Mostly lower in NY trading Friday, the dollar, however, retained its weekly gains as investors concluded that further Fed interest-rate cuts are less likely as inflationary expectations are rising and US economic data were not worse than expected. The euro reached a 2-week low on an unexpected decline in German retail sales but pared losses on weak US consumer confidence and modest personal consumption and income. The yen was flat as US stocks traded little changed at important technical resistance. Sterling, surprisingly strong this week, is testing the 1.98-handle resistance. The Australian dollar, little changed today, has not moved much since breaking resistance last week.
The USD/CAD rose after the Canadian economy unexpectedly contracted in Q1 2008 fueling speculation the Bank of Canada will cut interest rates further. The pair has been trading sideways in 2008 pressured by higher energy prices and supported by Canadian economic weakness and BOC rate cuts. The pair is between supports at the 0.98-0.97 areas and resistance at par. If the BOC does not cut rates at the next meeting on June 10, the USD/CAD may drop below support.
Financial and Economic News and Comments
US & Canada
US personal spending increased 0.2% m/m in April after rising 0.4% m/m in March and personal income increased 0.2% m/m in April following March’s upwardly revised 0.4% m/m increase, the Commerce Department said. The figures indicate the income and spending are at a modest level. Adjusted for inflation, April consumer spending was flat. Disposable personal income, income after taxes, rose 0.2% m/m.
The price index for personal consumption expenditures in April rose 0.2% m/m and 3.2% y/y, and the core PCE deflator rose 0.1% m/m and 2.1% y/y, the Commerce Department said.
The Reuters/University of Michigan consumer sentiment index fell slightly less than expected to 59.8 for May’s final reading from April’s 62.6. May’s reading was the lowest since 58.7 in June 1980 but slightly higher than the preliminary reading of 59.5 published earlier this month. The consumer expectations measure fell to 51.1 in May from 53.3 in April and the current conditions gauge fell to 73.3 from 77.0.
Canada’s GDP contracted 0.1% q/q in Q1 2008, the first decline in activity in almost five years, due to widespread cutbacks in manufacturing, notably in motor vehicles sector, Statistics Canada reported. Lower consumer spending also took a toll on economic activity as personal spending slowed to 0.8% q/q in Q1, down from 1.8% q/q in Q4 2007.
Europe
Germany’s retail sales unexpectedly declined for a second consecutive month in April as faster inflation eroded consumers’ spending power. April sales fell 1.7% m/m after dropping 2.2% in March, the Federal Statistics Office said. Sales fell 1% y/y.
UK consumer confidence fell to -29 in May, the lowest level since 1990, from -24 in April, GfK said.
European Central Bank council member Axel Weber ruled out any change in the ECB’s current inflation target, saying revising the ECB’s definition of price stability would jeopardize the ECB’s credibility at a time when fighting inflation is “of the essence.” “I see no compelling reason why a temporary, albeit protracted, rise in energy and food prices should give rise to a discretionary change in the eurosystem's stability norm,” Weber said at a conference in Frankfurt. “It would risk unanchoring inflation expectations at a point in time where their solid anchoring is of the essence,” he said.
Asia-Pacific
Japan’s core consumer-price index, which excludes fresh food, rose 0.9% y/y in April following March’s 1.2% y/y rise, the fastest rate in a decade, the statistics bureau said. Nationwide core CPI, which excludes food and energy, fell 0.1% y/y in April. Tokyo’s core CPI, a harbinger of the nationwide index, rose 0.9% y/y in May, after increasing 0.7% in April, signaling nationwide prices may have risen at a faster pace in May.
Japan’s household spending fell 2.7% y/y, the biggest decline since September 2006, the statistics bureau said.
Australian consumer and business credit (loans) rose a less-than-expected 0.4% m/m and 14.1% y/y in April, the Reserve Bank of Australia said.
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