Narrowly higher Friday, the dollar consolidated gains from this week's lower energy prices and reduced risks from a financial meltdown. The greenback was also supported by Federal Reserve Bank of Minneapolis President Gary Stern's hawkish comments. The EUR/USD was little changed above the 1.58-support as German producer-price inflation accelerated at the fastest pace in 26 years in June. The GBP/USD fell below the $2.00 mark after UK's budget deficit rose to the widest since records started in 1946. The Australian dollar, modestly lower, consolidated earlier gains. The yen and Swiss franc tested support as reduced risk aversion weighed on the currencies.
The USD/CAD ended the week little changed as Canada's leading economic indicators index was flat. The pair has found support at par. We expect the USD/CAD to rise to the 1.02-1.03 area. If support at 1.00 is broken, the pair is likely to test the 0.98-handle.
Financial and Economic News and Comments
US & Canada
Canada's composite leading economic indicators index was unchanged in June, after advancing for three straight months, as consumer spending remained strong but housing and manufacturing showed signs of weakness. The 0% m/m change in the LEI in June followed gains of 0.2% m/m in May and 0.1% m/m in April, Statistics Canada reported.
Canada's wholesale sales in May rose a more-than-expected 1.6% m/m to C$44.2 billion ($44 billion), a third straight monthly increase, led by fertilizers and other chemicals, following an upwardly revised 1.5% m/m advance in April, data from Statistics Canada showed. Wholesale sales gained 2.9% y/y. Wholesale inventories increased 0.6% m/m to C$54.8 billion, up 1.0% y/y. The figures suggest the Canadian domestic economy seems to hold up even though exporters struggle.
Federal Reserve Bank of Minneapolis President Gary Stern said the Fed should not wait until markets return to normal before hiking interest rates. “We can't wait until we clearly observe the financial markets at normal, the economy growing robustly, and so on and so forth, before we reverse course,” Stern said. The Fed “well-positioned” for downside risks to the economy, but “I worry a little bit more about the prospects for inflation,” he said.
Europe
The euro area trade balance showed a ?4.6 billion deficit in May, compared with a ?2.5 billion surplus in April and a ?1.4 billion surplus in May 2007, Eurostat reported. In May, seasonally adjusted exports fell 3.4% m/m and imports declined 1.3% m/m.
German producer prices accelerated a more-than-forecast 6.7% y/y in June, the most since March 1982, after rising 6.0% y/y in May, the Federal Statistics Office said. Excluding energy, producer prices rose 3.0% y/y. The accelerating producer-price inflation adds to pressure on the European Central Bank to keep interest rates high despite slow economic growth.
The UK budget deficit was ?24.4 billion ($49 billion) in Q2 2008, the Office for National Statistics said. The deficit expanded to ?9.2 billion in June, the widest since records began in 1946.
European Central Bank President Jean-Claude Trichet said the ECB expects the eurozone economy to improve after a “trough” in the previous six months. “We will have a trough in the profile of growth” in Q2 and Q3 before “a progressive return to ongoing moderate growth,” Trichet said.
Asia-Pacific
Japan's nationwide department store sales fell 7.6% y/y to ?588.0 billion in June, the Japan Department Stores Association said. Tokyo-area department store sales declined 7.4% y/y to ?152.5 billion in June.
Bank of Japan Governor Masaaki Shirakawa said the BOJ weighs risks to growth and inflation equally. “We don't have any pre-set direction for policy and must carefully examine both upside and downside risks. If asked about a numerical-weight allocation, I would say that it is fifty-fifty” growth to inflation, Shirakawa said.
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