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US$ Remains in Tight Ranges

The US$ gained modestly over the weekend following comments from China’s deputy head of the international payment department, Guan Tao, stating that the greenback will maintain its status as the world’s reserve currency. These comments follow those from the governor of China’s Central Bank who stated that China’s “foreign-exchange reserve policy is always quite stable, “ and that “there will be no sudden changes.” After Friday’s market reaction to initial comments from the Chinese, suggesting that the nation favors a supranational currency, this backpedaling offered a welcome respite to the market. Overall, it seems like the Chinese initial comments were indicative of some political posturing, however, after some time it seems the reality of the possible devaluation of their large US treasury holdings with a weaker US$ led the Chinese to seemingly reverse these comments. Expect trade to remain rather quiet this week, given the abbreviated market week ahead of the July 4^th holiday. However, the US does release a slew of data, which will almost certainly steer trade. Tomorrow sees the release of the S&P/ Case Schiller Home Price Survey, expected to show an 18.6% drop in home prices from last year, Chicago PMI and Consumer Confidence are also slated fro release. Wednesday yields the ADP jobs report, ISM Manufacturing, Construction Spending and Pending Home Sales. However, it will be Thursday’s release of the US jobs report that ultimately steers trade expected to show a loss of 355,000 jobs and an increase in the unemployment arte to 9.6%. Trade will likely be volatile this week as thin markets spur extended moves, however, expect the US$’s ultimate fate to be determined by the strength of US economic data.

 

The Euro backed off from Friday’s highs as Chinese officials signaled that they are not willing to quickly abandon the US$ as the world’s reserve currency. Traders will likely focus on the diverging economic and interest rate outlooks for both the US and Eurozone over the remaining summer months. Last week, the US Fed signaled that it has ended its policy of quantitative easing and will now look for the correct timing to remove excessive stimulus from the economy. This view is in stark contrast to the ECB that has kept interest rates elevated over the last year. While this policy of elevated rates contrasted with the Fed has ultimately helped bolster the euro on a yield basis, traders are now questioning the longer term effect that economic stimulus has on growth prospects. Expect the US economy to outpace that of the Eurozone later this year, leading the US$ to ultimately surge against its European counterpart.

 

The Yen dropped modestly overnight as concerns about mounting deflationary pressures coupled with a deepening plunge in Japanese government bond yields has encouraged fresh capital outflows from the country. In addition, a report released from Japan’s trade ministry overnight revealed that retails sales declined 2.8% in May from the year earlier. Declining consumer spending, low interest rates and a flight of capital from the country will likely keep the yen under pressure for some time.

 

Sterling continues to consolidate following Fridays surge, as traders remain focused on the prospects for UK economic recovery. Low UK interest rates and an incredibly proactive position from the Bank of England have seemingly formed a bottom in the UK economic downturn, leading traders to speculate that the worst is behind the nation. This has helped sterling recover over the past few months, but ultimately the currency’s direction will now be more determined by the US$ direction as opposed to events within the UK.

US$ Gains As Appetite For Risk Eases

The US$ rose across the board overnight following the release of a report from the World Bank revealing that global economic conditions are worse than originally forecast. The World Bank changed its forecast that the global economy will contract 2.9% in 2009 vs. an earlier forecast in March of a 1.7% contraction. These declines in global growth helped prompt some limited safe-haven US$ buying. However, it was the continued unrest in Iran, which helped also force investors into the greenback. Iran’s disputed election from last week continues to fan the flames of dissent within the country as massive demonstrations last week resulted in a violent crackdown over the past weekend. With this increase in violence, and no immediate end in sight to the continued unrest, expect tensions to continue to escalate. This unrest has led investors to purchase the US$ as a safe haven aggressively early this morning. The US$’s fortune this week will be determined ultimately by investor risk tolerance and the desire to purchase the greenback as signs of a US economic recovery materialize. The flow of US data begins tomorrow with the release of Existing Home Sales, expected to show a modest recovery in home sales. Wednesday sees the release of Durable Goods and New Home Sales while Thursday yields weekly claims data and the final release of first quarter GDP. In addition to the flow of US data slated for release this week, the Fed announces its decision related to interest rates on Wednesday at 2:15. While it is widely expected that the Fed will hold rates steady at this meeting, traders will be looking to see if the Fed signals any timetable for the removing of the excessive stimulus in the system and the timing of any hike in interest rates.

 

The Euro fell overnight as traders again shifted their capital to the greenback amidst an increase in global risk. Adding to the euro’s woes were the details in the World Bank’s assessment of the Eurozone’s economic outlook. They changed their forecast to a decline of 4.5% in 2009, from a previously forecast contraction of 2.7%. While this forecast is unlikely to alter the ECB’s assessment resulting in any shift in policy, it could contribute to increased pressure on the Central Bank. Should this increased pressure surface, the market will closely monitor the ECB for any further political division, which could weigh on the euro.

 

The Yen gained modestly overnight as its appeal as a “safe-have” investment again surfaced overnight, leading traders to purchase the Japanese currency. With increased geopolitical tensions in Japan and a downbeat economic assessment from the World Bank, the yen benefited. However, expect these yen gains to be somewhat limited as economic conditions in Japan will remain dismal for some time. As the World Bank report demonstrated, Japanese GDP will shrink 6.8% this year vs. an earlier forecast of a 5.3% decline. This poor outlook will eventually lead to yen declines as traders soon focus on the differences in economic fundamentals.

 

The Pound fell overnight, as a report released showed UK housing prices fell in June fro the first time in five months leading some to question the strength and sustainability of any UK economic recovery. Also, hurting sterling was its yield appeal as investors looked to shift capital to less risky assets as the World Bank offered a downbeat assessment of global economic growth. Expect sterling to consolidate recent ranges as the US$ looks to find some base in recent trading.

US$ Rallies as Greenback Reasserts It's Reserve Status

The US$ rallied overnight after a seeming reversal in position from the Russian Finance minister suggesting that the BRIC (Brazil, India, Russia and China) will not desert the US$ as the primary currency in their reserve mix. Finance Minister Kudrin stated that he sees no alternative to the US currency and that his nation has full confidence in the US$. With Russia holding some $386 billion in US Treasuries, it seems that the message from Treasury is beginning to get through. This message is simple “don’t talk the US$ down when it might weigh on your own personal interests.” (I.e. devalue the value of your large bond holdings). There is a slew of US economic data slated for release this week that could help determine overall US$ direction. Empire Manufacturing was released earlier this morning showing a modest decline of –9.41 vs. -4.60 forecast. TICS data was also released this morning showing a paltry $11.2 billion in US positive flows during April. Tomorrow sees the release of PPI expected to gain a modest 0.6%, while Housing Starts, Building Permits are expected to better last month, as Industrial Production and Capacity Utilization are expected to yield minor declines. CPI and Current Account are to be released on Wednesday, while Weekly Claims and the Philly Fed are to be released Thursday.

 

The Euro fell overnight after comments from Russian Finance Minister Kudrin suggesting that the US$ will not lose its appeal as the world’s reserve currency lessening the attractiveness of the euro. Further helping push the euro lower was an article in the UK Telegraph citing German Chamber of Commerce and Industry President Hans Heinrich stating that conditions now are tighter than they were during the height of the global credit crunch. For such a high authority in German industry to be speaking so negatively is definitely a negative for the common currency.

 

The Yen continues to trade and consolidate under the 100.00 level as traders continue to use the currency pair as a barometer for market risk. With global equity markets slipping modestly overnight, the yen gained slightly against the US$ as traders repurchased short positions. Expect this pattern to continue for some time until a clear direction of US economic recovery unfolds. Only at that time will the yen weaken significantly.

 

The Pound continues to consolidate against the US$ at recent elevated levels as optimism about UK economic recovery continues to rally the pound. Expect this trend of sterling strength to continue for some time as investors believe the “everything and the kitchen sink” policy enacted by UK policy makers is having the desired effect of pushing consumer confidence higher while stabilizing home prices. 

US$ Gains as Bond Tension Eases

The US$ is stronger today, snapping a steep slide against most major currencies as worse-than-expected economic data out in Europe and reassurance that U.S. debt will draw demand led the greenback higher.  Investor confidence in the dollar does however remain on shaky ground as the U.S. debt picture continues to cause worry.  An auction of 30-year treasury bonds yesterday had the highest yield since 2007 suggesting that demand, while sufficient to cover all the bonds up for auction, has waned.  The rise in far-dated bond yields is particularly troubling and concurrently weighs on the dollar, as the Fed and Treasury’s separate actions to affectively lower longer-term interest rates have not had the desired affects.  With 10-year and 30-year yields rising at a quickened pace, mortgage and loan rates have also been on the rise, stunting a recent wave of refinances.  This weighs on the dollar as many expect the government will be forced to up their asset-purchasing program, despite assurances that they will not, to have the desired affect of dropping yields and thus flooding the market with dollars.  However, the Finance Minister of Japan did state overnight that the world’s second largest economy’s demand for U.S. treasuries remains “unshakable” and that he sees the dollar’s role as a reserve currency remaining intact.  Worries over inflation, or the lack their of, have also kept the dollar within its lower ranges.  The U.S. government has spent a staggering $12+ trillion over the past 18 months in an attempt to avoid an economic meltdown and yet the continued slump in consumer demand and the persistent drop in the price of goods suggests that the unprecedented actions have not stoked inflation.  However, while the U.S. economy continues to face serious potential pitfalls as it crawls out of recession, it does remain the best of the bunch with the world’s other major economies’ recoveries predicated on success here in the U.S.  This morning saw the Import Price Index released, showing a 1.3% gain, versus an expected reading of 1.4%, month over month, but the year over year index registered a steeper-than-expected drop of 17.6%.  Investors will also take note of U. of Michigan Confidence, due at 10, expected to gain to 69.5.  In the short term, thus expect the dollar to pare some of its weekly drop against most major currencies albeit within its recent ranges.

 

The EUR is lower this morning, hampered by worse than expected economic data.  European Industrial Production dropped in April by the most on record as the global economic downturn has sapped demand for exported goods.  Further weighing on the common currency this morning, German wholesale prices fell nine percent in May from a year earlier, the largest decline in nearly 23 years as Europe’s largest economy wallows in recession.  A report also showed that European governments have lent out $5.3 trillion in aid to support banks during the credit crunch, more than the annual gross domestic product of the region’s largest economy, Germany.  As economic data remains weak in the Euro Zone, expect the euro to pare some of its recent gains.

 

The JPY is lower, albeit within its recent ranges as the Japanese Finance Minster outspokenly supported the US$.  Kaoru Yosano said his nation’s confidence in U.S. debt is “unshakable” and that the currency’s global status is safe.  “We have complete trust in the fact that the U.S. views its strong-dollar policy as fundamental, so our trust in U.S. Treasuries is absolutely unshakable.”  The yen also remains under pressure, as investors opt for higher-yielding assets including the AUD, NZD, commodities and equities.  In the short term, expect the yen to move towards the lower end of its ranges on dollar strength. 

 

The GBP is lower this morning as the underperformance of the British housing market continues to weigh on the currency.  The housing slump has mired as many as one in ten homeowners in negative equity, where their mortgages exceed the value of their properties.  This implies 1.1 million households now face negative equity despite a slowing in the pace of decline over the past two months.  Home prices have plummeted some 20% since 2007 as the country slogs through the worst recession in a generation.  The report from the BOE also suggested that the declining wealth within the U.K. might have a bigger effect on consumer demand than in the last recession, adding to the political tensions within the country.  In the short term, thus expect the pound to remain under pressure as investors fear that the British economy will continue to underperform.

US$ Remains on Shaky Ground as Debt Picture Clouds Prospects for an Economic Recovery

The US$ has pared some overnight losses in early trading this morning as promising economic data reinforces investors’ view that the U.S. economy remains on track for an economic recovery.  The dollar was on the back foot over the past two days against most major currencies as investors worry that the world’s largest emerging markets may consider divesting from a portion of their U.S. treasury bond holdings.  While the actions do not necessarily have a direct impact on currency markets, these persistent worries about the debt outlook for the U.S. may weigh on the government’s efforts to jumpstart the economy.  For example, due to investor fears that a divestment, and the resulting drop in demand for U.S. treasuries, will lead to a spike in yields, the average rate on a 30-year fixed rate mortgage has jumped from 5% to 5.75% in just two weeks, stunting the recent wave of refinancing.  An upturn in the U.S. housing market remains paramount to the economy’s resurgence, and has been one of the main tenants of President Obama’s recovery plan.  An auction of 30-year treasuries later this afternoon will thus be closely watched as yields have already hit an eight-month high; the highest since before Lehman Bros. collapsed last fall.  However, some investors are interpreting the BRIC (Brazil, Russia, India and China) nations’ move to buy IMF bonds not necessarily as a divestment from U.S. treasuries, but rather a political power play to gain more international clout.  Furthermore, the move higher in yields has had a two-sided affect on the dollar.  On one hand, it draws support for the greenback, as U.S. long-term returns look attractive.  However, the economic impact that the rising yields may be dollar-negative in the longer term.  This morning saw Retail Sales expand for the first time in three months by 0.5%, led higher as deals on automobiles attracted buyers.  Weekly Jobless Claims were also released this morning slightly better than expected at 601K, versus an anticipated 615K, but continuing claims registered higher than expected.  Investors will also take note of Business Inventories at 10 am this morning, expected to contract by one percent, the same as last month.  However, currency markets will continue to take their lead from investor expectations of an economic recovery here in the U.S.

 

The EUR remains within its recent ranges as investor confidence in a U.S. led economic recovery wavers.  The world’s leading emerging economies have announced they will consider buying IMF bonds to supplement their large U.S. treasury holdings.  The euro has thus benefited on broad dollar weakness, as investors fear the U.S. government debt picture will hamper an economic recovery.  The correlation between higher oil prices and a higher euro as an investment hedge also remains largely intact.  That said, oil prices have spiked to nearly $72 barrels a barrel, the highest of the year as a bettering employment picture in most of the world should lead to an increase in global consumption.  However, economic data out of the Euro Zone has yet to show signs of bottoming.  Irish consumer prices fell by a record 1.7% in May, as the cost of energy, food and household goods all declined amid the worst recession in the country’s history.  In the short term, expect the euro to remain in its recent wide ranges as investors gauge the affects of the debt outlook for the U.S. going forward. 

 

The JPY is slightly lower this morning, weighed down by a rise in commodity prices and the resulting demand for higher-yielding assets.  The yen fell particularly far against the commodity currencies after the Reserve Bank of New Zealand left interest rates on hold at an already historic low, citing a slowing in the pace of economic decline, as the country averts recession.  In the short term, expect the yen to remain within its lower ranges as investors seek higher returns in other currencies, commodities and equities.

 

The GBP is higher this morning as the economic outlook for the U.K. continues to improve.  After better-than-expected housing data led sterling higher earlier in the week, the pound has also found support as capital flows out of US$ positions, as investors fear the U.S. economic recovery may be hampered by the country’s debt outlook, support the pound.  Interestingly, many analysts expected the pound’s lack of status as a world reserve currency to actually be a detriment for the currency.  However, with the U.S. debt picture quickly deteriorating, the pound’s lack of risk of devaluation from foreign divestment has actually provided support.  Comments from BOE member Sentence, “the very big policy stimulus that has been provided by fiscal and monetary authorities around the world should now be beginning to be felt…we should be able to look forward to a recovery beginning either later this year or early 2010.”  Thus with generally improved investor confidence in the U.K. economy, and no fear of loosing its status as a default currency, expect the pound to remain higher within its recent ranges in the near term. 

US$ Remains on the Back Foot as Russian's Allude to a Divestment from U.S. Treasuries

The US$ fell across the board overnight as growing investor confidence and comments suggesting that the dollar could loose its status as the global reserve currency, both weighed on the greenback.  Overnight, the dollar took an initial hit as Russian President Medvedev stated that Russia would strongly consider divesting from U.S. treasuries and switching their holdings to IMF debt.  The Russians have been calling for at the minimum a diversification away from strictly US$ holdings quite emphatically over the past several months.  While the comments are likely just political posturing as the Russian economy continues to suffer from the drop in global consumption, the nation’s growing influence with its close ties with other BRIC (Brazil, Russia, India and China) countries lends it amplified authority.  The dollar however has recovered from its overnight lows against most currencies as investors shrug off the commentary and currency markets continue to be led by expectations for economic recovery here in the U.S.  A report this morning however showed that the U.S. Trade Deficit widened in April for a second consecutive month as exports dropped to the lowest levels in almost three years.  The gap between imports and exports grew 2.2% as foreign demand for U.S. exports dropped over two percent.  A growing gap means that trade will not help the economy this year as much as in 2008, when it contributed the most to growth in three decades.  Investors will also take note of the Fed’s Beige book, due out at 2:00 PM, expected to show a slight improvement in the economic activity of the Fed’s major districts.  In the short term, the dollar will likely remain towards the lower end of its ranges as uncertainty over an economic recovery, not only in the U.S., but also in the world’s other major economies. 

 

The EUR is a bit higher this morning against the dollar as investors fear that global central banks may move away from large US$ holdings.  Overnight, the Russian Central Bank alluded that it may divest from its U.S. Treasury holdings and purchase IMF bonds as a replacement.  While the comments are likely just political posturing, any suggestion that the dollar could loose its status as the world’s default reserve currency tends to weigh heavily.  Investors also shrugged off disappointing production data out of France, showing that output contracted some 1.4% versus an expected drop of 0.2%.  However the overall direction of the currency market continues to follow expectations of a potential economic recovery first and foremost in the U.S., but also in the world’s other major economies.

 

The JPY is lower this morning, albeit within its recent ranges.  The yen was hurt by worse than expected economic data showing that orders for Japanese machinery fell to a 22-year low and producer prices tumbled by the most since 1987 as dwindling profits forced companies to cut costs.  Bookings, an indicator of capital investment in the next three to six months, fell 5.4% in April, the lowest levels since 1987 as well.  And finally, Japanese wholesale prices slid 5.4% from a year earlier as deflation looms in the world’s second largest economy.  In the short term, expect the yen to move back towards the lower end of its ranges as comparative economic strength of the world’s largest economies determines the overall direction of the currency market.

 

The GBP is higher this morning on better than expected economic data.  U.K. manufacturing rose for a second consecutive month as a rebound in vehicle production helped end the yearlong factory slump.  Output climbed 0.2% from the month earlier, suggesting that the economy may be stabilizing from its worst contraction since WWII.  However, it’s important to note that while the data has gone from negative to positive on a month over month basis, year over year, industrial production remains down by over 22%.  In the short term, expect the pound to consolidate in its higher ranges with limited upside potential as major pitfalls still exist for the British economy.

US$ Slips as Investor Confidence Fades

The US$ pared some of its early gains in overnight trading as investors took profits from the dollar’s steep gains over the past two trading sessions.  With little major economic data to further reinforce expectations for a U.S. economic recovery, investors scaled back some of their optimism following Friday’s better-than-expected Non-Farm Payrolls report.  The dollar’s losses however were capped by encouraging commentary out of China, in which the Vice Foreign Minister stated that the world’s largest foreign holder of U.S. government debt has no intention of abandoning US$ assets, stating that no one is discussing, “dumping the dollar.”  The dollar also lost support as investor expectations for a Fed rate hike before year’s end dwindled.  While economic data suggests that the pace of deterioration has slowed at the least, the economy remains in distress and expecting that the Fed will hike rates sooner rather than later is quite presumptuous.  Investors will be waiting for the results from several key treasuries auctions later this week to have a clearer outlook for interest rate expectations.  For today, investors will take note of Wholesale Inventories, expected to register –1.2%, TIPP Economic Optimism, anticipated at –48, both due out at 10AM.  However, with little major economic data slated for release today, the direction of the currency market will likely be determined by investor expectations of U.S. economic recovery and what that will likely mean in regards to monetary policy.

 

The EUR pared some of its weekly losses overnight despite worse-than-expected economic data out of Germany.  German industrial production fell 1.9% month over month, reversing a positive trend from March.  However, with little economic data out of the world’s largest economy, investors shrugged off the German data and bought the common currency.  The gains also come just one day after S&P downgraded the credit rating of Ireland for the second time in three months.  For today do expect the EUR to trim some of its weekly losses as expectations of a Fed rate hike fade, leaving the Euro Zone with a slight yield advantage for the foreseeable future.  However, with European economic data not suggesting that pace of contraction has yet found a bottom, the medium to longer-term trends for a weaker euro remain intact.

 

The JPY is slightly higher this morning as investors take profits on the US$’s recent gains.  The yen has moved lower as of late as currencies gravitate back towards fare value after much of the unwinding of the “safe haven” trade has already occurred.  This has however led the yen slightly higher this morning as investors sell the dollar against European and commodity currencies with little economic data due.  Comments from the BOJ stating that the Bank’s ultra-low interest rates may in fact hinder the flow of credit in the Japanese market, have however capped the yen’s recent advance.  In the short term, expect the yen to move higher against the dollar, albeit within its recent ranges.

 

The GBP is higher this morning on positive economic data regarding the U.K. housing market and a lull in political turmoil.  The Royal Institution of Chartered Surveyors said that the U.K. housing market is “stabilizing”, reinforcing optimism that the worst of the recession has passed.  Sterling also advanced on belief that Prime Minister Gordon Brown has again fended off calls for his resignation.  However, the pound’s gains may be short-lived as the debt situation in the U.K. has investors on edge about the successfulness of a British economic recovery.  For the short term, expect the pound to move higher within its recent ranges, but with the longer term trend for a weaker sterling remaining in tact.  

US$ Maintains Rally as Fundamentals Support Dollar Strength

The US$ continued to appreciate overnight after large gains seen during Friday’s U.S. trading session.  The dollar’s gains came as an initial result of better-than-expected non farm payrolls data out last Friday, showing that the U.S. labor market has at the least bottomed and may have moved into recovery mode.  On a more fundamental level, there has been a shift in market mentality from unwinding long dollar “safe haven” positions to supporting the greenback based on the prospects for a swift economic recovery here in the U.S.  The dollar has also found support this morning on broad-EUR weakness as S&P downgraded Irish sovereign debt for the second time in three months.  This action highlights the persistent fears that Euro Zone’s debt situation will weigh on the common currency in the longer term.  There is no major economic data set for release this morning, and thus currency markets will likely take their cue from both the direction of equities as well as traders’ expectations for the U.S. economic recovery.  The middle of the week sees Wholesale Inventories, TIPP Economic Optimism, ABC Consumer Confidence all out on Tuesday, and MBA Mortgage Applications, Trade Balance, the Monthly Budget and the Fed’s Beige Book.  Thursday sees Advance Retail Sales, Weekly Jobless Claims, and Business Inventories.  The week closes with Import Price Index, and U. of Michigan Confidence all due out on Friday. 

 

The EUR is lower this morning as credit worries hit the common currency.  Standard & Poor’s downgraded Ireland’s credit rating overnight for the second time in three months as Irish debt balloons.  As Euro Zone nations’ debt levels reach “unacceptable” levels per the Stability Pact, credit ratings agencies have become increasingly worried that the fiscal picture in the Euro Zone will not improve in the near term.  The euro had been led higher over the past month as investor confidence returned to the market prompting traders to sell out of their long-dollar positions and diversify their currency holdings.  However, after U.S. jobs data surprised to the upside on Friday, there has been a fundamental shift in market mentality to now favoring the dollar predicated on the prospects for an economic recovery in the world largest economy sooner rather than later.  With no major economic data slated for release today, currency markets will loosely track equity markets, with overall trends being determined by growth prospects for the Euro Zone nations as compared with their G7 counterparts.

 

The JPY consolidated overnight in its new lower levels as currencies gravitate back towards fair value.  The yen had been led higher over the past month as investors diversified their currency holdings away from long-dollar positions.  However, with U.S. jobs data surprising to the upside last Friday, market sentiment has now begun to reward the greenback as the currency of the country best set for recovery.  The yen has also remained under pressure as there is growing belief that the U.S. Fed may hike interest rates from their historic lows before the end of the year, thus expanding the yield advantage over the yen.  In the short term, expect the yen to remain under pressure, albeit within its recent ranges. 

 

The GBP remains towards the lower end of its recent ranges this morning.  Sterling pared some of its Friday gains after Prime Minister Gordon Brown averted a vote of no confidence by firing several of top ministers, but keeping Treasury Minister Alistair Darling.  Brown’s Labour party was thoroughly defeated this weekend in local level elections, down some 15% from 2004 elections, and third behind the Liberal Democrats and Conservatives.  In the short term, broad dollar strength and political uncertainty in the U.K. will likely keep the pound towards the lower end of its ranges. 

US$ Has Volatile Morning After NFPR Suprises to the Upside While Unemployment Dissapoints

The US$ consolidated within its recent ranges overnight ahead of key jobs data due out later this morning.  Non Farm Payrolls, expected to register 525K, and Unemployment, expected to register 9.2%, the highest in 29 years, are both due out at 8:30 AM.  Following a weekly jobless claims number yesterday, and more importantly a continuing claims number, that suggests the labor market may be bottoming, investors remain confident that an economic recovery is just around the corner here in the U.S.  However, even though expected, the knee-jerk reaction to an unemployment rate over nine percent may be negative for markets, but will likely have little longer-term affect on the dollar.  Through the majority of May, this growing optimism has weighed heavily on the dollar as investors shift capital away from “safe haven” long-dollar positions and diversify into other currencies, equities and commodities.  However, much of this shift in capital has likely already occurred and through the course of June, a move back toward fair value is likely in currencies, with markets taking their cue form prospects for economic growth.  Further providing support for the dollar’s longer term trend of appreciation is commentary from ECB President Trichet, stating that he supports a strong dollar policy, as it is imperative to much the rest of the world’s own economic recovery for U.S. purchasing power to remain relatively robust.  In the short term, thus expect the dollar to remain in volatile ranges this morning as investors focus on the key employment data, with the longer-term trend of slow appreciation remaining in tact.

 

The EUR consolidated in its lower ranges overnight as investor await key employment data out of the United States.  Yesterday, the ECB left interest rates on hold at 1%, despite some speculation that they would continue to ease, but did state that while rates are currently appropriate they are not necessarily at their lowest.  While a cut to 0.75% from 1% would not likely have much material affect, with global commerce remaining as tight as it is, the good-faith effort would have been a symbolic positive.  However, more closely watched, was ECB President Trichet’s commentary on the Bank’s plans to buy covered bonds.  While he refused to call the program quantitative easing, it appears the Bank will buy government debt “spread throughout the region”.  However, with little detail announced, and now expansion of the upward limit of 60 billion EUR, the Bank’s purchasing program has had little affect on currency markets.  Comments from Trichet though supporting a strong dollar as imperative to the Euro Zone’s economy should however be US$ supportive in the medium to long term.  For today however, expect early trade to remain volatile as investors take not of U.S. Non Farm Payrolls and Unemployment.

 

The JPY continues its slow trend of depreciation this morning as investors continue to diversify their currency portfolios.  The yen has fallen for three straight weeks now against the higher-yielding AUD and NZD as risk appetite has gained.  The yen has also been led lower as awful Japanese economic performance continues to weigh on the currency.  In the short term, expect the yen to pare much of its monthly gains from May as investors look for higher-yielding investments.

 

The GBP is lower this morning, hurt by political uncertainty at the highest levels.  Prime Minister Gordon Brown has been countering calls for his resignation for months now, but after a recent scandal in which Labour Party politicians have essentially been accused of fraud, the calls have intensified.  In a bid to regain control of even his own party, Defence Secretary John Hutton was asked to resign, following Pensions Minister James Purnell late on Thursday.  Finance Minister Alistair Darling, however, will remain at his post despite public disapproval for his handling of the financial crisis.  While political uncertainty is never a positive for a currency, the pound will like remain within its recent ranges in the short term as much of the market focuses on employment data due out in the U.S. this morning. 

US$ Diverges as Central Bank Decision, Political Tenstions and Growth Prospects Drive Trade

The US$ gained overnight, led higher by different events against the world’s major currencies.  Encouraging economic data out of the U.S. provided support for the dollar this morning as investors focus away from pure risk assumption and towards economic growth prospects for the world’s largest economies.  However, all eyes were on the ECB today as the European Central Bank left interest rates at 1%.  The market’s focus however was on the ECB’s first foray into quantitative easing, in which the Bank met market expectations, albeit with little detail, that they would buy up to 60 billion euros worth of covered bonds “spread throughout the euro area.”  Against the GBP, the dollar has also gained, but due to a potential political breakdown in the U.K., with rumors swirling that Prime Minister, Gordon Brown, and Exchequer, Alistair Darling, may be forced to resign in the coming weeks.  Against the yen, and most other major currencies, the dollar has gained as generally positive sentiment in regards to the U.S. economy’s potential recovery makes the greenback relatively more attractive than its counterparts.  In other developments, a trade talk between China and Malaysia, who presently do business in US$ ($39.1 billion in 2008), announced that they would likely not continue to do business in US$ and are considering a switch to using the Chinese Yuan.  These talks are significant because they could be China’s first step to making their highly restricted currency into one that is convertible and thus better suited for international trade.  This morning, weekly jobless claims registered 621K, in line with expectations, and continuing claims dropped nearly 70K, the first such drop in nearly two years.  In the short term, with the ECB committing to less substantive plans than many had hoped and expected, expect the dollar to remain under modest pressure.  However, with the Fed’s largest counterpart continuing its track record of relative inaction, the dollar’s medium to long-term outlook remains positive.

 

The EUR is trading in wide volatile ranges this morning after the ECB left interest rates on hold at an all-time low of one percent.  While ECB President Trichet made it clear that interest rates were not necessarily at their lowest levels, they are currently at “appropriate” levels.  However, the investor focus was not on the interest rate decision, but rather the ECB’s first attempt at quantitative easing.  While Trichet was emphatic that buying government bonds is not in fact quantitative easing, the widely used definition of the term is a monetary policy used to increase the money supply by purchasing securities, government or other, from the market to increase liquidity and encourage lending.  Trichet did commit to purchasing government bonds, “spread across the euro region.”  Also in rather contradictory statements, Trichet suggested that he saw signs of the recession easing, but at the same time lowered the Bank’s outlook for Euro Zone GDP to –5.5%.  In the near term, expect the euro to thus trade in wide volatile ranges, however its bias will likely be to the downside today as support for the common currency wanes.

 

The JPY moved modestly lower against the dollar as investor focus shifts away from pure risk assumption.  As growth prospects begin to direct trade once again, the yen will be particularly week as the Japanese economy is expected to contract by a double-digit percentage.  The yen had also been helped higher over the past several trading sessions on broad dollar weakness.  However, with the greenback paring much of its weekly gains this morning, expect the yen to move lower.  In the short term, expect the yen to push back towards the lower end of its ranges as Japanese economic growth, or the lack there of, will weigh on the currency.

 

The GBP is significantly lower this morning on rumors that the political leaders of U.K. may be forced to resign.  Prime Minister Gordon Brown has come under increasing pressure this past year as his country suffers through the worst recession in the post WWII era.  However, the Labour Party government has called the rumors “nonsense” after three weeks of news reports showing that members of the party were expensing personal spending as public expenses.  A poll showed that if an election were held today, the Labour party would likely finish third behind the conservatives and Liberal Democrats.  With such political uncertainty, the pound took an initial hit, but has recovered much of its losses.  For today however, expect the pound to remain on shaky footing as investors consider the prospects of a dissolved British government.