NEWS / Foreign Exchange

USD ??“The greenback experienced some mild volatility last week

USD ??“The greenback experienced some mild volatility last week on the back of some ostensibly conflicting economic data that provided no ground for the dollar??™s firm footing. However, liquidity, and hence price action, began to slow to a virtual halt late last week, ahead of yesterday??™s US Memorial Day holiday, as well as the White Monday holiday that left half of the 18 western European markets (including Germany) closed. Markets focused last week on the release of key US housing data and Durable Goods Orders (0.6% in Apr. vs. 4.3% in Mar.). While New Homes Sales beat expectations by showing the largest 1-month jump in 14 years, the Existing Home Sales dropped below the psychologically significant 6MM barrier, recording its worst showing in 4-years. With currency markets back in full swing this morning, and a promising Consumer Confidence release so far (108.0 in May vs. 105.0 exp.), the dollar appears to be well poised to stage a potential rally. With plenty on tap in terms of key economic data for the balance of this week, namely Q1 GDP and NFP data, markets will have plenty to digest as it attempts to assess the health of the world??™s largest economy and the direction of its currency.

EUR ??“ Europe??™s single currency ended last week mildly lower, even as robust economic data out of Germany failed to attract new buyers. The German ZEW Survey (24.0 in May vs. 16.5 prior) boosted sentiment for Europe??™s largest economy, and while the final reading in German Q1 ??™07 GDP remained unchanged at 3.6%, it effectively cemented expectations for a 25-bps rate hike to 4.0% by the ECB on June 6th. Markets will look to the May German CPI release later today, in order to gauge inflation for the Eurozone as a whole, which will be released on Thursday. Furthermore, Wednesday??™s release of E-12 M3 Money Supply (April) will also prove to be a significant indicator to assess inflationary pressures throughout Europe??™s amalgamated economies, ultimately providing insight for the ECB??™s next move, vis-? -vis its monetary policy.

JPY ??“ The Japanese yen remained relatively soft last week, making only marginal gains against AUD and NZD, but losing ground against the majors. Data releases were of a contrasting nature made up of poor economic numbers and modest performance out of the equity markets. Data was as expected for the most part (i.e., CPI at 0% and core inflation posting its third negative reading in a row at -0.1%). However, outperforming equities and bond yields added a bit of a buffer to lackluster growth numbers. Weaker GDP and consistently negative CPI are making it increasingly difficult for the BoJ to justify continued rate hikes, which continues to put pressure on the yen. Retail trade and industrial production this week, as well as increasing political tension, could give indication as to near term yen direction including potential carry-trade unwinding.

GBP ??“ The British pound was on the rise again last week after strong preliminary money supply data. Furthermore hawkish verbiage from the last BoE meeting revealed a 9-0 vote in favor of recent interest hikes and the potential for a 0.5% move by year-end. The pound has remained range-bound in a 40bp band ever since. The flip side of the coin was also delineated by the central bank, which expects the core inflation to fall within 2% by year end. The housing market and energy costs will continue to be the focus for near-term sterling direction.

CAD ??“ The currency rose to a 29??-year high against the USD on Tuesday after the Bank of Canada held interest rates steady at 4.25%, as expected, but signaled more rate hikes to quell inflationary pressures.  The bank said that both total inflation and core inflation, which strips out volatile items, came in higher than expected in April.  The clear tightening bias was a marked departure from the BOC's neutral preference since May 2006, in the longest period of rate stability since the early 1970s.  It also reported 1Q growth was likely to be 3.5%, a full percentage point higher than its estimate in a Monetary Policy Report last month.       

MXN ??“ After the Bank of Mexico kept interest rates steady on Friday, the market rejoiced by sending the peso Thigher on belief that investors??™ interest will still flow into the country, as inflation shows signs of easing.  Last week the currency traded weaker on fears that the central bank would have to hike rates again because of strong retail sales data, and upbeat ??™07 and ??™08 GDP forecasts.

CNY ??“ The fixing of the dollar against the yuan rebounded yesterday after last week??™s sharp declines due to the US-China strategic talks.  Meanwhile, the NDRC government agency reported exports appeared ???unstoppable???, the country faces little competitive substitute and the trade surplus this year is expected to range $250B-$300B, irrespective of a recent export tax and a stronger CNY.