•  JPY  hits new highs after plunging to its lowest level in over 4 years

•  USD remains strong with the fall of import prices

•  AUD remains under pressure with the release of the RBA’s budget plan

USD – The USD is stronger against its major counterparts as recent US data reported import prices fell and retail sales unexpectedly rose in April. The price of US imports fell due to a drop in oil costs, slipping 0.5% last month, the biggest decline since December. The lower prices in oil costs provide support that there is a positive outlook for household finances. In addition, the National Federation of Independent Business said that its gauge of confidence for small US businesses rose last month to its highest in 6 months. Market participants await data releases later this week including industrial production, housing starts and consumer prices and consumer sentiment on Wednesday, Thursday and Friday, respectively.

EUR – The euro held steady against the USD amidst the possibility of the ECB cutting interest rates to below zero.  The single currency fell to 1.2946, well below session highs of 1.3028 and close to a 5-week low of 1.2935. Spain has sold 4.05B euros of 6 and 12-month T-Bills, above the 3 to 4B target, at the lowest yields in over 3 years. The Spanish syndicated debt auction’s positive response had some support for the currency but the broader euro zone is still coping with a recession. Germany’s ZEW poll showed that sentiment rose to 36.4 points from 36.3 in April, falling short of expectations for a reading of 38.3. Other data output showed euro zone factories’ output rose stronger than expected in March, but remained mixed as France and Italy, the euro zone’s 2nd and 3rd largest economies, had decreased industrial output. The euro sentiment continues to remain bearish and economists believe strong growth in the euro zone will not happen until 2015.

GBP – The sterling weakened against the US dollar despite positive UK data output and the BoE’s decision to refrain from cutting interest rates last week. This week’s biggest release will be on Wednesday, with the BoE’s release of its quarterly inflation report for May. The underlying tone of the report will be likely to show support the MPC’s view that growth and inflation are heading in the right direction.

JPY – The yen weakened against the US dollar after plunging to its lowest level in over 4 years. The yen sell off spree last week turned Japanese investors to more foreign assets, however slowed down due to a spike in Japanese government bond yields posting an average yield of 1.78%, higher than the previous auction yield of 1.49%. Other positive news from Japan’s inflation release showed Corporate Goods Price Index climbed out of negative territory for the first time since April 2012, with a reading of 0.0%, over the estimated of a 0.2% decline. The yen is likely to extend further in the near term with little technical resistance until around 105.00 to 105.50. 

Commodity Currencies – The Australian dollar fell to an 11-month low against the US dollar following the release of the Australian budget. The RBA’s plan included cuts to family benefits worth over 10B AUD over 10 years, higher custom duties and changes to business tax concessions. The government, which faces elections due on September 14th, strayed from deep spending cuts but was forced to revise an earlier forecast of a surplus to record a deficit of 19.B AUD vs. the 2.2B AUD posted from last October. Despite, the RBA blaming the budget revision on a high Australian dollar and weak commodity prices, Australia maintained its S&P and AAA Moody rating.  The New Zealand dollar fell against the USD as market participants await the RBNZ release of its annual budget this Thursday and believe that the kiwi could strengthen if they announce that it is on track to achieve a budget surplus by 2015. The Canadian dollar weakened against the US dollar as markets steered away from riskier assets following weaker than expected German sentiment data. Canadian government bonds were higher across the board with 2-year bonds gaining 0.6 Canadian cents to a 1.014% yield and the 10-year bond gaining 3 Canadian cents to a 1.907%.