Weekly Currency Wrap-up Volatility levels remained high during the week with the US currency able to secure a strong recovery from lows beyond 1.29 against the Euro seen early in the week. There was only limited front-line US growth data over the week, but US economic conditions and prospects were still a very important market feature.
In comments on Monday, Fed Chairman Bernanke stated that he was concerned over inflation risks with core inflation at the upper end of an acceptable range. He repeated that the Fed would be vigilant over inflation, although he also indicated that the US economy was slowing to a more moderate growth rate. Bernanke’s inflation warnings were matched by similar warnings from Fed Governors Poole, Bies, Guynn and Hohn with Poole stating that it was better to err on the side of tightening slightly too far. The series of remarks increased market speculation that there was a concerted effort to convince markets over the Fed’s inflation-fighting credibility.
The markets responded by pushing the chances of a June interest rate increase back above the 80% level from below 50% after last week’s weak payroll report. The drop in jobless claims to 302,000 in the latest week fuelled expectations that the payroll report may have been distorted lower and also helped support expectations over another interest rate increase in June.
On Thursday, the ECB increased Euro interest rates to 2.75%, the third increase in seven months. In the press conference following the meeting, the ECB stated that policy was still accommodative and that the inflation risks were skewed to the upside. There were, however, no aggressive warnings over another near-term rate rise with ECB Chairman Trichet not repeating recent comments over the need for vigilance over inflation.
European officials expressed some concerns over the impact of any Euro gains above the 1.30 level against the dollar and this helped encourage profit taking on long Euro positions. The combination of Fed comments and some disappointment over the ECB stance reinforced the move and pushed the Euro below 1.27 against the dollar. The US trade deficit was slightly lower than expected at US$63.4bn for April and the US currency strengthened to near 1.26 against the Euro on Friday. Source: VantagePoint Intermarket Analysis Software
The Japanese data was firmer than expected with a strong 10.8% increase in machinery orders for April. There was, however, evidence of further friction between the Bank of Japan and Finance Ministry over the timing of an interest rate increase. The Nikkei index fell sharply over the week with losses of close to 6.5% and this reinforced speculation that the central bank would be more cautious over increasing interest rates. The yen weakened to lows beyond 114.50 against the dollar and 145.5 against the Euro before finding some support.
The Bank of England left interest rates unchanged at 4.50% for the 10th successive month. The UK industrial data was disappointing with a 0.6% production decline for April while the Halifax Bank reported that the May increase in UK house prices was held to 0.1% which dampened Sterling confidence. The UK currency weakened to five-week lows below 1.84 against the dollar.
The Australian and Canadian dollars remained volatile over the week due in part to further sharp moves in commodity prices. Gold prices fell to near US$600 per ounce while there was a drop in oil prices to near US$70 p/b. The Australian central bank left interest rates unchanged at 5.75% while the current account deficit was little changed.
The employment data in both countries was much stronger than expected with Australian unemployment falling to 4.9% from 5.1% while the Canadian rate dropped to 6.1% from 6.4%. Both countries recorded big employment increases as Canadian employment increased by over 90,000. This helped the Australian and Canadian dollars recover from lows below 0.74 and 1.1240 respectively against the US dollar . Source: VantagePoint Intermarket Analysis Software
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