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The greenback finished last week favorably against major counterparts for the second consecutive week. The US dollar index which measures the value of the greenback against six major counterparts has strengthened near 4 percent this month as a hybrid of economic set-backs weigh on risk appetite. We're seeing a chicken and egg situation in the US - commodities remain under pressure which is fueling US dollar strength, in-turn resonating through to the broader market which promoting further strength in the US currency, which promotes further losses across risk assets.
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A primary directive for the greenback remains the price of crude oil which has taken a near 13 percent hit in May alone. Cleary south-bound metals, commodity and energy markets provide the most favorable environment for US dollar strength given their inverse relationship. Floods in the US mid-west now threaten to be the next major stumbling block in the United States plight to regain economic momentum. Sentiment barometers such as the S&P 500 show market participants are lacking the conviction to build upside momentum - this lack of inspiration is helping the greenback for all the wrong reasons.
Across the Atlantic, recent weeks have seen the Euro trade less like German Deutschmark and more like the debt plagued shared currency it's famously known for. The one eyed focus on interest rate hikes has now made way for underlying fundamentals to reassert themselves once again with further broad losses seen in the last seven trading days.
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Meanwhile, the plight to restore confidence in the Euro-region has take another turn for the worst with IMF chief and French Presidency candidate Dominique Strauss-Kahn placed in US Police custody on sexual assault charges. This came on the eve of a meeting with EU officials in which Strauss-Kahn was supposed to attend to discuss ways of restoring confidence in the flagging region which may also include more talk of a further cash injection for Greece. The divide between the Euro-zones 'star' economies and peripherals was further highlighted on Friday on the release of both German and French GDP which surpassed economists' expectations. At the time of writing the Euro is buying US$1.4080
A major beneficiary to market jitters continues to be the Japanese Yen. After breaking the ¥ 85.35 levels in early April the Yen has been on a slow and steady path back to the danger zone of the ¥ 80 levels. Nevertheless, the persistent strength of the Yen only serves to highlight the short-term relief intervention may bring to a currency - with the G-7 induced weakening on the Yen failing to have a sustained effect.
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The unexpected decline in April's jobs numbers assisted the Aussie to relax further towards US dollar parity last week with general global risk aversion providing further reasons for investors to unwind risk assets. Key data this week locally will see the release of the RBA minutes from the meeting held earlier this month. Although there will be the usual scouring through the minutes to find any market moving tidbits however many participants consider the real 'meat' was in the RBA's recent Statement of Monetary Policy which saw the bank increase its inflation forecast. Given we've seen a number of market moving events since the rate decision including last week's surprise employment drop - this week's minutes may already be seen as stale in the eyes of interest rate projectionists. A primary directive for the Aussie dollar this week will also turn the health of the US economy.
The health of US housing sector dominates the economic data in the week ahead with feedback on mortgage foreclosures, housing starts, building permits and home sales due for release. No doubt market participants will be listening closely to the words of Fed Chairman Ben Bernanke on Monday in an address on the US economy and further central bank feedback will be a key market moving theme on Wednesday with the release of the FOMC minutes. We can also expect the topic of US debt to remain in the headlines with the US debt ceiling expected to be breached early this week.
At the time of writing the Aussie dollar is buying 105.5 US Cents.
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