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US$ Slips to Worst of the Year as Capital Flows Shift Away From the Dollar

The US$ is significantly lower against all major currencies this morning as the quickening pace of risk assumption weighs broadly.  The greenback touched a six-month low against the EUR, a seven-month low against the GBP, and an eight-month low against the AUD, NZD, CAD and ZAR.  The dollar also declined against the ten other most widely traded currencies, and the dollar index slipped below the 80.0 mark for the first time since early December.  The dollar’s precipitous drop was started off by rumors that the U.S.’s credit rating may be in question nearly two weeks ago, but those fears have largely subsided as the government attracted healthy demand for the $100+ billion in treasuries auctioned off this week.  However, jitters persist as the yield curve quickly steepens on the far end, suggesting that foreign investors are demanding a greater risk premium for holding U.S. assets.  The South Korean National Pension Service also announced overnight that it would be reducing its exposure to U.S. treasuries, currently comprising nearly $300+ billion of the funds holdings, in its 5-year portfolio, only putting further pressure on the dollar.  The buck is also lower as commodity prices surge, oil moving about $65 per barrel for the first time in 8 months on hope an easing of the global recession will lead to increased demand, and gold gained to a four-month high as a hedge against possible future inflation in the U.S. as a product of the government’s various spending programs and the Fed’s ultra-low interest rates.  The most recent revision of Q1 GDP was released this morning at –5.7%, worse than the expected –5.5%, but better than last month’s –6.1% reading.  Personal Consumption also posted worse than expected at 1.5%, versus an anticipated 2% gain.  Investors will also take note of Chicago PMI, expected to register 42.0 at 9:45, and U. of Michigan Confidence, expected to gain to 68.0, due out at 10:00.  The dollar is likely to remain under pressure in the near-term as gaining investor confidence results in the diversification of currency portfolios and a substantial shift in capital flows away from U.S. treasuries and the US$. 

 

The EUR reached six-month highs against the dollar this morning as the pace of risk assumption accelerated.  Data out of Asia encouraged investors that at least the worst of the global recession has already passed, with a recovery to begin sooner rather than later.  Japanese industrial production registered far better than expected, suggesting that global demand may be picking up after months of business’ surviving off of inventory.  Indian GDP also registered better than expected at nearly 6%, as one of the world’s rising economic powers proves resilient in the face of the current state of the global economy.  Investors shrugged off early disappointing news out of the Euro Zone, showing that the region’s inflation rate fell to 0% for the first time in the Union’s 13-year history.  While ECB data only goes back thirteen years, RBS estimates that inflation is now at the lowest since 1953.  German consumer prices posted an unexpected drop, the first since at least 1996 this month, but still the risk of deflation is “very limited”, per ECB Vice President, Lucas Papademos.  German retail sales however, did rise by the most in four months.  However, while economic data does not widely support a stronger common currency, the EUR will likely remain supported throughout the day as risk assumption prompts investors to liquidate long-US$ positions for higher-yielding assets.

 

The JPY is higher this morning after encouraging production data.  Japanese industrial production jumped the most in 56 years in April, surging 5.2% from March.  The global economy is showing signs of recovery from its worst recession since the Great Depression, but while economic data show signs of encouragement, an imminent rebound cannot be wholly relied on.  Industrial production in month over month terms gained substantially, yet the actual level is about where Japanese production was in 1980.  So while a rebound in numbers is a positive, it remains a relatively small piece of the substantial ground lost over the past two years.  In the short term, the yen should pare some of its overnight gains as selling of the currency against all majors other than the US$ will ultimately bring the yen lower against the dollar as well.

 

The GBP moved to a seven-month best against the US$ overnight, as the pound headed for its biggest monthly gain on the dollar in almost a quarter of a century.  Encouraging economic data out of Britain suggests that the U.K. government’s efforts to jumpstart the economy have been successful.  Consumer Confidence matched the highest in twelve months and U.K. home prices unexpectedly jumped in May.  The average cost of a home rose 1.2%, versus an expected drop of 0.9% per the Nationwide Building Society.  The pound has rallied despite S&P signaling that the U.K. may lose its top credit rating as the government’s finances deteriorate, with the budge deficit expected to reach 12.4% of GDP this year.  However, unlike the US$, the pound has rallied on positive economic news in the U.K as investors continue to diversify their currency holdings away from strictly long-US$ positions.  The pound will likely remain supported throughout the course of the day as risk assumption continues to drive the direction of capital flows. 

US$ Pares Some of Its Losses Against GBP and EUR, while Gaining on the JPY

The US$ is mixed this morning, consolidating near it’s multi-month lows against the GBP and EUR, but gaining substantially against the JPY.  Despite a triple-digit sell-off on Wall St. yesterday afternoon, investors’ risk appetite continues to expand, thus spurring capital flows into higher yielding assets.  This has stunted the dollar’s yearly strength as of late as the “safe haven” trade, which had provided much of its support over the past six months, dissipates at a quickened pace.  However, this dollar weakness seems at odds with conventional wisdom, as positive economic news ought to be generally supportive for a currency.  Yesterday, both existing home sales and the house price index surprised to the upside, adding to the evidence that the pace of economic decline is at least slowing and raising hopes the a recovery may come as soon as in the second half of the year.  However, this is not to say that the world’s largest economy is out of the woods just yet.  It is widely expected that GM will fall into bankruptcy as soon as this Friday, and the number of banks on the Fed’s “problem bank” watch list surpassed 300 as credit conditions remain relatively difficult and defaults continue to rise for smaller local and regional institutions.  This morning saw Weekly Jobless Claims register 623K, which while still an awful number, it was better than the forecasted 628K and down from last weeks 636K.  However, continuing claims keep on rising and are unlikely to move the other direction for at least another quarter.  Durable Goods Orders registered 1.9%, versus an anticipated 0.5% in the biggest jump since November of 2007.  Investors will also take note of New Home Sales data expected to register a 1.1% gain, and Mortgage Delinquencies, both due out at 10:00 AM.  In the meantime, expect the dollar to remain within its lower ranges against most currencies as the unwinding of the “safe haven” trade continues to weigh on the currency.

 

The EUR remains within its recent ranges against the US$, as gaining risk appetite provides support.  The common currency has not however been able to break above key support levels against the dollar as concerns over the health of the Euro Zone economy remains in question.  The EUR has gained as of late largely due to its yield advantage over that of the dollar, and without regard for the prospects of an economic recovery.  However, the Euro Zone economy severely lags that of the U.S., even the U.K., and long and protracted recession is to be expected.  As evidence, both Germany and Italy auctioned off a combined 20 billion euros in government debt, driving yields on 10-year bonds to their highest in six months.  With questions remaining on whether or not the ECB will, or even be able to, purchase government or corporate bonds to lower the far end of the yield-curve, the EUR may be due for renewed weakness as the Euro Zone economy is likely to under perform well into 2010.  However, in the short term, expect the common currency to remain supported in its higher ranges as gaining risk assumption drives investors out of the US$ and JPY and into higher-yielding assets.

 

The JPY is significantly lower this morning after a night of terrible economic data out of Japan.  Japanese retail sales fell for an eighth month in a row, suggesting that the economy will continue to under perform into 2010.  More importantly, a report showed that there were significant outflows of capital from Japanese investors last week as they sought the higher-yields of both American and European bonds.  The move has been spurred on by generally improved investor sentiment and higher demand for riskier, and higher yielding, assets.  The AUD and NZD in particular have thus been well supported as hints of the “carry trade” emerge.  The Kiwi was the biggest winner, gaining over 3% against the yen as S&P in fact upgraded the island nation’s credit rating from stable to positive.  In the short term, expect the yen to pare much of recent gains against most major currencies as capital outflows weigh on the yen.

 

The GBP is lower this morning as investors may have overbought sterling in the past two weeks.  The pound moved higher as growing investor confidence, and apparent certainty over an imminent recovery in the British economy spurred investors to seek the higher yield of British equities.  However, as BOE policy makers continue to make clear, the economic recovery will be slow at best.  BOE member, David Blanchflower, said he doubted whether the U.K. economy would grow this year or next.  “There can be many false dawns and we shouldn’t just assume everything is over.”  A report also showed that U.K. retails sales fell again in May, a sign the recession may not be easing.  In the short term, thus expect the pound to pare some of its recent gains, albeit remaining within its elevated ranges as strong investor demand for British equities keeps sterling fairly supported. 

US$ Remains Under Pressure as Risk Assumption Quickens

The US$ is mixed this morning as the correlation between stocks and currencies weakens.  The dollar had seen a bit of support first thing yesterday morning over heightened political tensions in Asia with North Korea test firing several short-range missiles and a nuclear explosive.  However, while the actions may be indicative of possible rising tensions, the global community appears to be ruling out any grave repercussions.  The dollar’s safe haven appeal has thus been reduced as market risk appetite continues to gain.  The dollar has however stayed below key technical levels against both the EUR and GBP as investors take profit from both currencies’ swift appreciation.  The dollar’s status also remains in question as rumors of a possible credit ratting downgrade of the U.S. persist.  However, moves as a result of this credit concern are likely overdone at this point as credit conditions in the U.S. are likely no worse, than in European nations.  This morning sees the House Price Index, expected at 0.2%, and Existing Home Sales, expected to gain 2%, both due out at 10:00 AM.  While home resales in the U.S. probably increased as prices and mortgage rates dropped, the affects of the gains will be muted until the employment picture in the U.S. improves.  Tomorrow’s jobless claims are expected to show another 600K+ reading as employers continue to shed jobs in an effort to cut costs.  For today however, expect the greenback to remain in relatively tight ranges against most currencies as the dollar again tests key technical levels against most major currencies.

 

The EUR is relatively flat this morning after swinging in relatively wide ranges overnight.  The EUR has moved higher as of late as investors question the prospects of not only an economic recovery in the U.S., but the overall long-term outlook for the U.S. economy.  With rumors pervading the market that the U.S.’s credit rating may soon be in question, investors have diversified holdings into equities, commodities, and higher yielding currencies.  However, the common currency’s gains have been capped by not only key technical levels, but also dovish commentary from Erkki Liikanen, the ECB representative from Finland.  Liikanen suggested that he, and other ECB policy makers, believe the Bank has room to ease monetary policy further, hinting that both the Bank’s key interest rate will likely drop below 1%, and also that the rift between ECB policy makers remains a hot topic.  However, for today expect the EUR to again test the higher end of its recent ranges, and yearly highs, as investors weigh the Euro Zone’s economic growth prospects against that of its G7 counterparts.

 

The JPY consolidated in its recent ranges overnight as political tensions in the region remain high.  Investors have been mixed on the direction of the yen over the past twenty-four hours as Japan benefits from “risk aversion” capital flows, but also suffers from its proximity to North Korea.  With stock set to open relatively flat this morning, expect the yen to remain range-bound for much of the day, while its long-range outlook remains negative as investors will again focus on Japan’s horrendous economic condition. 

 

The GBP is higher this morning as investors push sterling to the highest levels seen so far in 2009.  The pound has recovered some17% from its lowest levels in decades seen early this year, as investors believe the currency was oversold.  The U.K. has suffered from expectations of doom for their economy, but many now believe the naysayers will be proved wrong and that the British government’s actions to stimulate the economy will prove effective sooner rather than later.  However, a forecast of a weaker pound in the medium to long term remains likely, as the government’s actions to buy up Gilts and at the same time issue record levels of debt will ultimately weigh on the currency.

US$ Falls as U.S. Credit Rating Questioned

The US$ fell against all major currencies overnight over concerns of a possible downgrade of the U.S.’s credit rating.  Yesterday, S&P negatively revised its outlook for the U.K.’s credit rating, suggesting that similar moves may be in the cards for economies in similar situations, including the U.S.  However, a downgrade from AAA for the U.S. could be catastrophic for the entire system, and definitely a heavy weight on the US$.  The greenback still makes up over 60% of global foreign reserves, but if a credit downgrade were to occur, there would likely be a massive outflow of dollars from foreign reserves as a new, “safer”, standard is sought.  However, these rumors are purely speculation at the moment, and an actual downgrade remains unlikely, as U.S. debt is the benchmark by which all other risk assessments are made for foreign nations.  Yes, the credit outlook may be bleak here in the U.S. with U.S. net debt as a percent of GDP ballooning into the double digits this year as the government’s deficit spending hits full stride, but the U.S. credit picture is likely no worse than in any of the other G7 country.  The fear was also intensified after infamous investor, Bill Gross, of PIMCO stated that the U.S.’s credit rating will be downgraded sooner or later.  The will of investors who refuse to believe the rumors will be tested early next week when the U.S. government auctions off $101 billion in treasuries.  However, with no major economic data due out today to debunk investor jitters over the fear that the U.S. budget problems will outpace its prospects for recovery, the dollar will likely test its lowest levels of 2008.  The dollar index is already down 5% for the month of May, and is on pace to have one of its worst monthly performances in nearly three decades.  While this may put a dent in the dollar’s appreciation in the near to medium term, in the longer term all evidence still supports a stronger greenback as the U.S. remains best set to recover from recession.

 

The EUR is higher this morning, bolstered by the souring credit outlooks for both the U.K. and possibly the U.S.  The EUR has seen a double boost as of late, as investors unwind “safe haven” long-dollar positions, looking for returns in riskier assets like commodity currencies and equities.  Secondly, following a downward revision in the credit outlook for the U.K., speculation has been on the rise that a similar downgrade is likely for the U.S.  Investors have thus taken the opportunity to sell the dollar, and diversify into other currencies, including the EUR.  However, the move may be temporary at best.  The U.S.’s credit rating is the benchmark by which all others are compared, and if a downgrade is possible, so too is a downgrade for European nations.  However, with little economic due today, and ahead of a long weekend in the U.S. and U.K., the EUR is likely to remain well supported in the near term.

 

The JPY is stronger this morning following encouraging commentary from Japanese central bankers.  The BOJ met this morning and left rates on hold at 0.1% as expected.  Investors did however take note of the Bank’s commentary following the rate decision, stating that the Bank has no plans to intervene in currency markets.  "There have been expressions like free-falling or cliff-diving. We are no longer in that sort of situation," he said after the central bank upgraded its view on the economy for the first time in almost three years.  In the near term, expect the yen to remain broadly supported as investors flee the dollar as U.S. credit may be downgraded sooner rather than later.

 

The GBP is higher this morning, touching new yearly highs overnight, recouping all of yesterday’s losses.  The pound dropped nearly 300 points yesterday morning after S&P revised its outlook for the island-nations credit rating to “negative” from “stable.”  The knee-jerk reaction was to sell sterling after the decision, but the pound since clawed back as the question of who’s next came to the surface.  The downward revision was largely based on the U.K.’s growing net debt as a percent of GDP, nearing 12% this year.  However, the same statistic for the U.S. was higher before the current economic crisis, and with the massive government spending programs that the U.S. has enacted, is likely to move higher at a much quicker pace than that of the U.K.  The pound, along with all other major liquid currencies, have thus benefited as investors diversify large dollar positions in case the scenario of a U.S. credit rating cut comes to fruition.  In the short term, thus expect the pound to test its recent highs ahead of a long weekend both in the U.K. and the U.S.

US$ Pulls Back from Lowst Levels of the Year

The US$ consolidated towards the lower end of its recent ranges overnight.  The greenback pared a bit of its losses against a basket of currencies, led higher mostly by a move up against the GBP.  Global stocks skidded overnight for the first time in four trading sessions coming a day after the Fed cut its forecast for the U.S. economy and former Fed Chairman, Alan Greenspan, reiterated that the banking sector remains in a fragile state.  Adding to the blip in the growing wave of consumer confidence, Standard & Poor’s cut of U.K. ratings outlook, reminding the market that burgeoning budget deficits will likely weigh on the world’s largest economies for at least the next year.  Risk assumption has thus slowed this morning, moving the dollar higher.  Economic data in the U.S. has also put a dent in investor confidence as Weekly Jobless Claims registered 631k, more than the expected 625k, suggesting that a bottom has yet to have been found in the labor market.  Investors will also take note of Leading Indicators, expected to show an increase to 0.8%, and Philly Fed., expected to register –18.0 versus –24.4 last month, both due out at 10:00 AM.  In the short term, expect the dollar to pare some of its losses from the past few days as the pace of risk assumption slows and investors are thus less willing to liquidate long dollar positions for higher risk assets.

 

The EUR is lower this morning as a downgrade of S&P’s debt outlook for the U.K. was downgraded to ‘negative’.  While the announcement has little direct impact on the Euro Zone, if the U.K. is vulnerable to such a downgrade, the market has begun to wonder who is next.  The Euro Zone has been struggling with sovereign debt levels as a percent of GDP, which the region’s Stability Pact states that it cannot surpass 3% for more than two years.  Many nations, including Portugal, Spain, Greece, Ireland, Italy, and now even Germany, are teetering on the edge of exceeding these limits.  The prospects of a consequential cut in credit ratings is thus weighing on the euro this morning.  The common currency is also under pressure this morning as the pace of risk assumption slowed with global stocks falling for the first time in four days.  In the short term, expect the euro to pare some of its recent gains as investors seek the safety of the dollar for today.

 

The JPY is relatively flat this morning as stocks fell for the first time in four days.  The yen has strengthened as of late on general dollar weakness, as investors assumed riskier positions.  However, this morning, the yen finds its strength as the pace of risk assumption at least temporarily slows as S&P cut the debt outlook for the U.K.  However, as the yen moves back towards its multi-month highs on the dollar, Japanese officials will likely become increasingly agitated and outspoken for a weaker yen.  With the ever present risk of market intervention, expect the yen to remain capped while remaining well supported in the near term.

 

The GBP has had a volatile start to the day after S&P cut the debt outlook for Britain.  The outlook was cut from “stable” to “negative”, while the credit rating itself was left at AAA, but S&P did mention that there was a one in three chance the rating too would be cut.  The knee-jerk reaction was to thus sell sterling, but if the U.K.’s rating is in question due to fiscal concerns, the market has begun to ask the question of who’s next.  Rival agencies Moody’s and Fitch both said that their more positive ratings of Britain are not under review.  The pound has also weakened this morning as risk assumption slows as investors fear similar downgrades could affect other G7 nations, including the U.S.  U.S. government debt is considered the “risk free” benchmark by which all others are measured.  However, a credit downgrade would be a staggering blow, but may not be far fetched.  The U.S. had a higher debt as a percent of GDP ratio entering the economic crisis, and it continues to grow at a faster pace than that of the U.K.  In the short term, thus expect the pound to remain towards the lower end of its recent ranges as the growth prospects for the U.K. remain bleak. 

US$ Weaker as Optimism Continues to Outweigh Dissapointing Data

The US$ consolidated in its lower ranges overnight in a relatively quiet trading session.  The greenback has been under pressure as of late as investor expectations of an imminent recovery outweigh the reality of disappointing hard data.  Yesterday, a report showed that housing starts slipped by the most on record, suggesting that the housing market has not yet reached a bottom and that home prices most likely have further to fall as foreclosures continue to rise.  While the dollar’s association with stocks has eroded as of late, a strong correlation with equity volatility does remain.  The VIX, Chicago Board Options Exchange Volatility Index, retreated to the lowest levels since September 12, the last trading day before Lehman Bros. filed for the largest bankruptcy in U.S. history.  With lower volatility, lower LIBOR (the cost for banks to borrow dollars), and generally improved market sentiment, investors have begun to seek returns in equities, commodities and high-yielding currencies.  Under current conditions, the dollar is likely to remain towards the lower end of its ranges throughout the next few weeks as investors unwind “safe haven” dollar positions.  However, improved sentiment and the expectations for economic growth will ultimately support the dollar in the medium to long-term, as the U.S. remains best set for an economic recovery this year.  With little economic data out today, the currency market will continue to take its cue from equities and overall market risk sentiment.

 

The EUR remains towards the higher end of its recent ranges as generally improved investor sentiment bolsters the common currency.  While market risk sentiment is widely improved as of late, it is predicated on expectations of future economic growth, and ignores current negative economic data.  This morning, a report showed that Spain’s economy contracted at a faster pace than anticipated, with GDP dropping 1.9% quarter over quarter, and 3% from the year earlier, the most since 1970.  Spain’s unemployment rate has also skyrocketed to near 20% over the past six months.  Spain’s construction boom had made it a motor of job creation in Europe in the middle of the decade, but now has 4 million people out of work, accounting for nearly 70% of the annual increase in Euro Zone unemployment over the past year.  Spanish household spending also fell 4.1% year over year, almost double the decline in the previous quarter.  While the euro will like remain towards the higher end of its recent ranges in the near term as investor expectations outpace reality, the common currency will weaken in the medium to long terms as fundamental economic weakness will eventually weigh on the currency.

 

The JPY is slightly higher this morning against the dollar, while falling against higher-yielding currencies.  The yen has benefited against the dollar on the back of dollar selling for higher-yielding currencies as investors seek higher risk, but also higher yielding, investments including equities, commodities and high-yield currencies.  However, economic data will likely provide a cap for the yen’s appreciation as a report showed Japanese GDP shrunk by a staggering 15.2% in Q1 ’09.  While Japanese officials made it clear that they were “not optimistic about the economy” they did suggest that the “worst may be over.”  However, a swift recovery in Japanese economic growth is not expected as global consumption continues to contract as unemployment rises, and growing Japanese debt and inflation will likely continue to weigh on the yen in the near term.

 

The GBP is slightly higher this morning as stocks move higher and oil trade above $60 a barrel on speculation that the worst of the global recession is past.  A promising report showed that U.K. manufacturers were the least pessimistic on the outlook for production in eight months in May.  Sterling has thus benefited from the return of risk appetite, considering a lot of bad news has already been price into the pound, possibly making it currently undervalued.  The pound has thus gained to its best levels since December 18^th, but comes ahead of a record sale of treasuries tomorrow, part of a plan to auction of a record 220 billion pounds of gilts this fiscal year, 50% more than last year.  So, while concrete economic data may be outweighed by expectations of recovery in the near term, ultimately a weaker pound will likely be inevitable as systemic economic weakness ultimately weighs on sterling.

US$ Drops As Risk Assumption Resumes Pace

The US$ fell broadly overnight, led lower by gaining risk assumption with rising stock indexes encouraging optimism.  As of late, the market has seized on the positives and brushed aside still disappointing economic data, thus moving out of “safer” assets and into higher-risk, but also higher-yielding, investments including equities, commodities and higher-yielding currencies.  The dollar has thus lost its appeal as investors shift capital out of “safe-haven” positions and mostly into stocks.  Encouraging the shift, the Ifo Institute released its global economic confidence report, showing a surprising gain to 64.4 from 50.1 last quarter, its first gain since Q3 2007 and the highest in nearly a year.  However, in a breakdown of the reading, the report showed that an assessment of current conditions actually deteriorated to 38.4 from 45.7, but a gauge of expectations rose to 89.5 from 54.4.  However, disappointing housing data out in the U.S. this morning will likely put a damper on the risk rally.  Builders broke ground on the fewest homes on record in April, a sign that sales and home prices may have farther to fall before the housing market bottoms.  The measure dropped to 458K versus an expected gain to 520K, signaling a 13% annual drop.  Building permits, an indicator of future construction, also fell 3.3% to a record low pace of 494K.  However, with unemployment continuing to rise, the resulting increase in house foreclosures will continue to weigh on home prices as their remains a glut of inventory.  Furthermore, despite improvements in the credit market, conditions remain tight at the retail level, thus making securing financing for new construction difficult.  In the near term, thus expect the dollar to remain towards the lower end of its recent ranges, as stocks may be set for a mixed opening this morning.

 

The EUR is higher this morning as investor confidence unexpectedly jumped last month.  The common currency’s inverse correlation with stock indexes remains largely intact, thus the euro moves higher in tandem with stocks.  The German-based Ifo Institute reported that global investor confidence rose by the most since 2007, and to the best levels in nearly a year last month, as expectations of progress in the coming six months outweighs a worsened near-term outlook.  German investor confidence also jumped to a 3-year best.  However, worse than expected housing data out of the U.S. this morning signals that while the pace of economic deterioration may be slowing, it has likely not found a bottom yet.  The common currency’s gains will thus likely remain within its recent ranges in the near term, with muted longer-term prospects of a swift European economic recovery providing a top. 

 

The JPY is relatively flat this morning as risk assumption versus aversion dominates trade.  The yen gained earlier this week as investors feared an economic recovery may be farther off than previously expected.  However, yesterday’s triple-digit gains on Wall St. assuaged some of these lingering fears, and the yen has thus swung between gains and losses.  Moreover, yen gains will likely not be sustained in the longer term, as Japanese authorities remain outspoken against a stronger currency.  In the short term however, expect the yen to remain relatively well supported, as worse-than-expected housing data in the U.S. will likely lead to a shaky start on Wall St..

 

The GBP touched a five-month high against the US$ as British corporate earnings spurred speculation that the worst of the British recession is past.  Sterling rose in early trading on speculation that the government has begun talks on selling stakes in partly-nationalized banks to privet investors.  However, growing investor confidence seems to predicated on expectations supported by positive economic news, and ignores the more disappointing data.  For instance, U.K. inflation slowed at a faster pace than expected, to the weakest level in 15 months.  The retail price index dropped an annual 1.2%, the most since records began in 1948.  In the near term, the pound will benefit from rising investor confidence, but in the medium to longer terms, a deluge of British government debt and a protracted economic recovery will weigh on the pound.

US$ Mixed as Market Rally Stalls

The US$ is lower this morning against most currencies, while paring losses against the JPY.  The dollar suffered early losses against all currencies in the Asian trading session as fear that an imminent global recovery may be farther off than previously thought.  The dollar’s strict correlation with the stock market, as a beneficiary of risk sentiment, is no longer as clear-cut as it used to be.  Rather, the dollar’s direction is based on both risk appetite as well as the perceived prospects for economic growth in the medium to longer terms.  This week, investors will take note of key housing data, but the overall direction of the foreign currency market will likely follow that of equity markets, albeit with a loose correlation.  This afternoon, investors will take note of the NAHB Housing Market Index, expected to show a modest rise over last months reading.  Tuesday sees the release of Housing Starts and Building Permits, while Wednesday sees Mortgage Applications and minutes from the Fed’s April 29^th meeting.  The week closes out with Weekly Jobless Claims, Leading Indicators and Philly Fed all out on Thursday.  Investors will thus take note of economic data and central bank commentary when gauging the prospects of an imminent U.S. economic recovery, and the dollar will thus be led by those perceptions.

 

The EUR is relatively flat this morning as European shares swing between gains and losses and economic data continues to weigh on optimism.  The common currency also remains under weight as there is apparent growing dissention amongst ECB policy makers with German member, Axel Weber, in clear opposition to members representing the P.I.G.S. (Portugal, Ireland, Greece, and Spain).  Weber is adamantly opposed to lowering rates further, or expanding the Bank’s bond-purchasing program, whereas the other members seem to believe the Bank’s actions are too little, too late.  The EUR will likely remain under pressure in the near term, albeit within recent ranges, as investors transition between optimism and fear of an economic relapse on a seemingly hourly basis.

 

The JPY weakened this morning, after gaining to a two-month high in the Asian trading session.  The yen has seen a significant rise over the past week as optimism of an forthcoming economic recovery faded, thus spurring investor to seek the perceived safety of the Japanese currency.  However, the yen’s appreciation is much to Japanese policy makers’ dismay as the export-driven economy remains on tenuous footing at best.  This morning, two Japanese central bankers reminded the market that they are monitoring foreign exchange markets closely and would effectively devalue the currency should it strengthen too far.  While an effective devaluation is unlikely even feasible, the mere prospect will likely cap the yen’s downside in the near term.

 

The GBP is higher this morning, gaining as risk assumption again takes foot.  However, the pound’s gains will not likely push the currency out of its recent ranges.  Gaining risk assumption has benefited the pound as investors seek the higher-yields of equities priced in British pounds.  However, economic data, central bank policy, and policy-maker commentary are all pound-bearish.  While the pace of deterioration within the British housing market has slowed, it has not yet likely found a bottom.  British interest rates sit at 0.5%, and central bankers remind investors to not be overly optimistic too early.  As former U.K. Finance Minister, Norman Lamont, stated over the weekend, “there are some optimistic signs but I wouldn’t call them ‘green shoots’…the rate of decline in the economy is decelerating, [but] for a recovery, the first thing that has to happen is, you stop falling.  Then you have to bump along the bottom.  It’s very unlikely you’ll zoom up into a trampoline recovery.” 

US$ Gains as Dissapointing Labor Data Weighs on Risk Assumption

The US$ is higher this morning on disappointing economic data out of the U.S. yesterday morning, and falling equities.  Optimism about a swift global economic recovery has been muted over the past two trading days as the move away from “safe haven” assets, such as the US$, and to higher-yielding investments, equities and commodity currencies for instance, may have been premature.  Economic weakness does persist, and global yearly GDP for 2009 is still expected to show more than a one percent contraction.  Disappointing retail sales data out of the U.S. yesterday supports this as diminished global consumption has weighed heavily on international trade, and thus global economic growth.  A recovery in U.S. consumption is unlikely to occur until the labor market picture improves.  This morning, Weekly Jobless Claims registered 637K, higher than the expected 610K, and Continuing Claims rose to a new all-time high.  However, Producer Prices showed a modest increase to 0.3%, higher than the expected 0.2%, decreasing the likelihood of deflation, at least in the near term.  With economic data disappointing, and stocks set to open slightly lower this morning after yesterday’s triple digit drop, expect the dollar to remain supported against most currencies other than the yen as risk aversion drives trade this morning.

 

The EUR is lower this morning, albeit within its recent ranges, as risk assumption temporarily slows.  While the recent risk rally, in which investors have opted for higher yielding, yet higher risk, assets, such as equities and high-yielding currencies, will likely not come to an end in the near future, the rise in risk appetite has likely expanded too far and too fast.  In the immediate term, this has capped the common currencies appreciation against the dollar, as investor continue to view the euro as a higher-yielding, but riskier, investment with the ECB’s benchmark rate sitting at one percent.  The EUR is also on shaky ground this morning as clear dissention within the ECB’s ranks adds to the struggle between the major and more minor economies within the Union.  Slovenian member, Marko Kranjec, said yesterday that the ECB will likely spend more than 60 billion euros that it has earmarked for covered-bond purchases and hasn’t ruled out buying corporate bonds and commercial paper.  Only hours later, German Axel Weber, who had already said there is no need to buy other assets, stated that 60 billion euros was the absolute maximum.  With clear fissures within the ECB, investors fear that the Bank will not be effective in guiding Europe through its worst recession since WWII.  In the near term, expect the euro to pare some of its recent gains as investors scale back risk assumption.

 

The JPY is higher this morning in a renewed wave of risk aversion.  The yen had weakened as of late as investors unwound “safe haven” positions in the yen and US$, for riskier assets such as equities and higher-yielding currencies.  However, with economic data disappointing the market over the past two trading sessions, investors have scaled back the rate of risk assumption and taken a more cautious stance.  After such an economically damaging 18-month period, investors seem to look for safety whenever economic news is not better than forecasted.  The yen may thus gain in the near term, but systemic economic weakness will ultimately weigh on the Japanese currency within the next several months.  In the near term, expect the yen to remain supported as the ebb and flow of the market’s risk appetite continues to drive trade.

 

The GBP is lower this morning, moving back to the lower end of its recent ranges as the risk rally sputters.  The pound had gained as of late on the back of better-than-expected economic data and the market’s rising appetite for riskier assets.  However, the recent risk rally has stalled as a swift and imminent economic recovery is not likely.  The British economy in particular remains under pressure, and the BOE’s asset purchasing program will keep the market diluted with sterling.  For today, expect the pound to remain under pressure, and move back towards the lower end of its recent ranges as currencies take their cue from equities.

US$ Slides as Growing Investor Confidence Reduces Appeal of the Dollar's Safety

The US$ is lower this morning, slipping against all 16 of the most actively traded currencies as improving market sentiment spurs on risk assumption.  Global economic data continues to surprise to the upside, which suggests we may be in the later part of the global recession, which generally has investors looking for returns on their investments.  The dollar’s appeal as a safe haven investment has thus been muted as investors exit long-dollar positions and treasuries for equities and higher-yielding currencies.  Currency markets shrugged off comments from Fed Chairman, Ben Bernanke, in which he stated he believes that U.S. Fed policy and overall economic resilience in the world’s largest economy will bolster the dollar sooner rather than later.  However, it appears that a weak dollar in the near term may still be in the cards.  As investors have exited the safety of treasury bonds for higher-yielding assets, the yields on treasuries have risen.  The yield on the 10-year has not only risen, but at a far faster rate than anticipated, and there are market rumors that the Fed is not comfortable with this rise at this point in the economic cycle.  The Fed bought $8.5 billion of the 10-year, part of its normal operations, but significantly larger than the market expected.  If the Fed is in fact uncomfortable with yields rising as quickly as they are, and expand their purchasing of far-dated bills, the dollar will likely remain under pressure in the near term.  Also weighing on the dollar this morning, is a release yesterday from the White House in which the updated expectations for its budget deficit was unveiled at -$1.8 trillion, or 13% of GDP for this year.  However, currency markets continue to take their cue from equity markets as declining volatility encourages investors to assume riskier positions.  Today, investors will take note of budget and trade data, with the Trade deficit expected to read larger than last month at -$29 billion, and the Monthly Budget Statement, expected to drop $20 billion.  TIPP Economic Optimism and ABC Consumer Confidence are also both due today, expected to show a modest improvement from last month.  However, in the near term, expect the dollar to remain on the back foot as the unwinding of “safe haven” positions continues to weigh on the greenback.

 

The EUR is higher this morning as growing investor optimism boosts demand for riskier assets.  The EUR has been under pressure over the past six months as investors shunned riskier assets in favor of the world’s most liquid currency, the US$.  However, with data beginning to signal that the pace of economic decline is at least slowing, investors have been increasingly willing to assume riskier positions.  ECB President Trichet echoed this optimism yesterday, stating that the economy as an “inflection point”, and will likely turn the corner soon.  On the growing optimism, oil prices jumped to a six-month best, just shy of $60/barrel.  Investors however shrugged off a report from the IMF calling for Europe to up its level of financial coordination and fix the inhering faults in its banking sector in order to emerge from recession later this year or next.  While EUR strength is to be expected in the immediate term due to the unwinding of “safe haven” positions, and technical selling of the US$ for a variety of reasons, the medium to longer term trend for a weaker common currency remains in tact as the Euro Zone business cycle severely lags that of the more proactive G7 nations.

 

The JPY is higher this morning, despite gaining risk appetite.  However, against higher yielding assets, the yen has continued its retreat.  Growing investor confidence has investors looking for returns and unwinding the “safe haven” trade of holding either the dollar of the JPY.  While the dollar will likely remain within ranges against the yen in the near term as investors sell the US$ against European and higher-yielding currencies, expect the medium to longer-term trends of a weaker JPY to remain in tact as global risk appetite expands.

 

The GBP is significantly higher this morning as economic data surprised to the upside.  British Industrial Production contracted at a slower-than-expected pace of .6%, versus an anticipated drop of .9%, and Manufacturing Production read -.1%, versus an expected -.8%.  While both figures when read year of year show significant declines in the double digits, they were better than expected and the best readings in 13 months, and that has spurred investors to buy sterling.  A separate report also suggested that home prices are declining at the slowest pace since January of 2008.  And British retail sales in fact climbed in April from one year earlier.  While the numbers are not indicative of growth, they at least show that things are not getting worse, which will be pound-supportive in the near term.  However, underlying economic weakness, and a lagging business cycle, will likely lead sterling lower against the dollar in the medium to longer terms as the U.S. remains best set to recover from recession this year.