Interest rate expectations in the US and Euro-zone did not change significantly over the week

Interest rate expectations in the US and Euro-zone did not change significantly over the week with only limited data releases for the markets to work on. US jobless claims rose to 332,000 in the latest week and headline retail sales fell 0.1% due to a drop in auto sales while there was a 0.3% increase in underlying sales. Futures markets are still placing the chances of an August Fed interest rate increase at over 50%.

The Euro was unable to build on the gains seen after the US employment report at the end of last week and weakened to lows around 1.2650 on Friday as long positions were pared back.

There was little in the way of Euro-zone data over the week. The ECB continued to pledge vigilance over inflation in its monthly report with markets still looking for an August interest rate increase. European finance officials expressed some concerns over the risk of further Euro gains, although it was not a major issue.

The US trade deficit increased to US$63.8bn in May from US$63.3bn the previous month. There was a sharp rise in oil imports as prices remained high, but there was a reduction in the underlying deficit to the lowest level since last August. The dollar took some comfort from the underlying improvement and a rise in exports.

Geo-political concerns increased significantly over the week with an escalation of tension between Israel and groups operating out of Lebanon with rocket attacks on civilian infrastructure. There was a breakdown of talks between North and South Korea while tensions over the Iran situation also revived. There was an increase in risk aversion which triggered a move to safe-haven investments during the week. There was at least a limited move into the US currency as high-yield positions were reduced while there was also demand for US Treasury bonds as equity prices fell. The Swiss franc was the main beneficiary of rising risk aversion with gains to 1.56 against the Euro.
Source: VantagePoint Intermarket Analysis Software

The Bank of Japan increased interest rates for the first time in six years with the central bank raising the overnight lending rate to 0.25% from zero while the discount rate was increased to 0.4% from 0.1%. The bank suggested that it would not increase interest rates again next month and would also take a cautious stance on future policy. The yen failed to derive any benefit from the rate increase with the yen undermined in part by the continuation of high oil prices. The Japanese currency weakened to lows near 116.0 and was unable to secure a significant recovery.

The Bank of Canada left interest rates unchanged at 4.25% this week and also suggested that rates would not be increased in the short term. The Canadian dollar weakened to lows near 1.14 against the US dollar before recovering back to 1.1280 as the currency secured support from high oil prices. The Australian dollar pushed to 0.7565 against the US dollar on a combination of high commodity prices and strong employment data, but gains were dented by a sharp rise in the trade deficit.

The UK data failed to offer any significant support to Sterling with the May trade deficit widening to GBP6.8bn from GBP5.6bn while there was a further rise in unemployment for June and earnings growth remained subdued. Sterling, however, regained ground against the Euro with gains to 0.6875 and was also resilient against the dollar. There were further reports of merger-related inflows during the week which underpinned the currency.
Source: VantagePoint Intermarket Analysis Software

Have a great day and a wonderful weekend.