The US$ fell overnight ahead of comments this afternoon from Fed Chief Bernanke on inflation. Bernanke is slated to speak at 1:00 p.m. today in Massachusetts and the market has adopted the view that he will not signal any shift in US interest rate policy. With no significant US economic data slated for release today, the market continues to look at the narrowing of global interest rate differentials with the US, coupled with increased global uncertainty about the overall strength of the current US government. A recent rally in bond markets has helped push US long-term interest rates back down, making US$ holdings less attractive. Add to the narrowing of yields, the increased attention on the Bush administration, the market is becoming more uncomfortable about holding the greenback. A slew of subpoenas directed at the White House from Congress ranging from issues to attorney firings to FBI oversight, coupled with a misdirected war effort have the US executive branch in complete disarray. With the White House “under siege” it appears to have all but abandoned any attempt to salvage the US$ or adopt any semblance of a throwback “strong US$ policy.”
The euro is trading near its high, as the market looks to the narrowing of interest rate differentials between the US and the Eurozone. With the Fed seemingly on hold, and the market expecting Fed Chief Bernanke to reiterate this stance later today, and the ECB poised to hike rates at least twice more this year, the market is finding euro deposits much more attractive. Further helping the euro higher overnight were comments from ECB Board member Juncker, who stated that he believes the Eurozone growth situation “is excellent.” With continued hawkish commentary from a wide range of ECB officials and the US in a seeming interest rate “holding pattern” surrounding both economic growth and interest rate policy, the market will likely soon push the euro to new fresh all-time highs.
The yen rebounded overnight, gaining against the US$ as speculation mounts in the market that the Bank of Japan could signal that it is poised to hike rates next month at is meeting later this week. Any increases in Japanese interest rates could cause an unwinding of the “carry trade” as higher rates will make borrowing in yen less appealing. Interest rate futures are now affording an 80.0% chance that the BOJ will move on rates in August. With expectation for higher rates as a backdrop, the yen could enjoy some short-term strength as investors cover short positions. This unwinding seemed to occur overnight as both the New Zealand and Australian Dollars dropped from recent highs against the yen. These currencies have been the favored counter in yield carry trades. Expect the yen to consolidate in recent ranges with an upward impetus for the remainder of the week as interest rate expectations continue to support the yen ahead of the Bank of Japan meeting.
The pound gained overnight holding near a 26 year high after a report revealed that UK retail sales grew at the quickest pace in three months, while the trade deficit narrowed. The pound continues to trade near its highest levels since 1981 as speculation mounts that continued economic growth and strong consumer spending, buoyed by a robust housing market will force the Bank of England to push rates higher several more times this year. This trend is likely to continue as investors purchase the pound as expectations mount that high rates will dominate the UK economy, further attracting investment capital predicated upon the “carry trade.”
The Canadian dollar gained briefly this morning following the Bank of Canada’s decision to hike interest rates 25 b.p. to 4.5%. While this hike had been priced into the market as stronger than expected growth data and inflation figures prompted the BOC to act, the commentary accompanying this policy action seems far from hawkish. However, the market will likely continue to purchase the Canadian Dollar as higher interest rates now afford a significant yield advantage.