Weekly Currency Wrap-up There were only limited US economic data releases during the week and the economic information failed to offer major market direction. Housing starts strengthened in May with a 5.0% increase to an annual rate of 1.96mn, but permits fell and there was a rise in jobless claims over the week. Durable goods orders fell 0.3% in May after a 4.7% drop the previous month with orders pushed down by weakness in the volatile aircraft sector.
With little in the way of definitive news over the week, interest rate expectations remained important during the week and there was speculation over a more aggressive policy stance from the US Federal Reserve. There were some expectations that US interest rates would rise to 6.0% this year and rumours that the Fed would sanction a 0.5% increase next week.
The ECB continued to take a tough stance on monetary policy with ECB Chairman Trichet stating that policy was still accommodative while timely interest rate increases would help contain inflation expectations. Comments from other ECB officials were similarly tough on inflation and interest rates during the week, increasing speculation over another rate increase in August.
Although long-term yield spreads did not move in the dollar’s favour over the week, the US currency strengthened to around 1.25 against the Euro with a further reduction in long speculative Euro positions. Source: VantagePoint Intermarket Analysis Software.
The Japanese yen remained under pressure during the week with losses to beyond the 116.0 level against the dollar. The yen was unsettled by rumours of a North Korean missile test and monetary conditions were also important. The Bank of Japan comments suggested that interest rates would be increased in July, but longer-term yield spreads moved against the yen as US yields increased. The uncertainty surrounding Bank of Japan Governor Fukui following an investigation into his financial dealings also unsettled the yen which also weakened to beyond 146.0 against the Euro.
Sterling came under pressure during the week, primarily on interest rate considerations. There was only limited UK economic data over the week, but the Bank of England MPC minutes record another 7-1 vote for unchanged interest rates in June. The bank maintained a balanced view over inflation risks, dampening speculation over a near-term increase in interest rates. Expectations of an increase were undermined further by the death of MPC member Walton, who had voted for an increase in interest rates at the previous two meetings. Sterling weakened to lows near 1.8150 against the dollar and 0.6890 against the Euro due to expectations of higher US and Euro-zone rates.
The Canadian dollar remained volatile over the week in a 1.1030-1.1240 range with strong domestic data being offset by volatility in commodity prices, a firmer US dollar and mixed comments from Bank of Canada Governor Dodge. The Australian dollar weakened against the US currency with lows near 0.73 as US yield expectations strengthened. Source: VantagePoint Intermarket Analysis Software.
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