• USD soared against a basket of currencies on prospects of bond-buying slowdown
• Euro remains at a 6-week low on prospects of negative deposit rates
• Commodities remains under pressure with a slowdown in global growth
USD –The USD soared against the major currencies with speculation the Fed will slow down its asset buying program in response to an improving economy later this year. Federal Bank of San Francisco President John Williams stated that the bank may reduce its $85 billion per month bond-buying as early as this summer and end it later this year. The Fed meets next month on June 18-19. Despite recent weak data including a climb in unemployment claims, slow housing starts and a fall in consumer prices led by a decline in gas prices, investors placed bets on the USD. While the University of Michigan confidence index rose to 83.7 in May from 76.4 in April, better than the expected 77.9, the Conference Board’s gauge of the outlook climbed 0.6% in April for the next 3-6 months, after falling 0.2% in March. In addition, US stocks also rebounded and the dollar index rose to the highest level since July 2010.
EUR – The euro weakened, hitting 6-week lows against the US dollar, on expectations that the European Central Bank could introduce negative deposit rates. With the risk of deflation affected by falling prices and a large drop in imports, the eurozone remains in a recession which began early this year. ECB’s executive board member, Benoit Coeure stated that their monetary policy will stay accommodative for a long time and that they are committed to providing the eurozone with abundant liquidity for as long as necessary. In addition, ECB policy maker, Yves Mersch stated that the option of a deposit rate cut option is on the table but whether they will use it is not certain. If the ECB takes action to adopt negative deposit rates, they will be the 1st major central bank to do this, which would cause the euro to react.
Continue Reading Below
GBP – The sterling fell against the US dollar, extending a 2nd weekly decline to a 6-week low, mainly due to strong US output. Despite the improving economy in the UK, there are concerns that the incoming Bank of England head Mark Carney, who takes post in July, could ease policy. With the pound dropping 2.2% this year, the 2nd worst performer after the yen amongst the major currencies, it is expected to remain vulnerable.
JPY – The Japanese yen weakened to its lowest level since October 2008, touching 103.12 in the session against the US dollar with investor optimism in Prime Minister Shinzo Abe’s economic policies. PM Abe’s plan includes an increase in private investment and infrastructure exports to overcome deflation and boost economic expansion. His goal is to get annual private investment to 70 trillion yen, which was the level before the 2008 financial crisis and to triple infrastructure exports to reach 30 trillion yen by 2020. As a result of his commitment for monetary easing along with fiscal stimulus, stocks in Japan had soared as the yen weakened. PM Abe plans on announcing an in-depth growth plan ahead of the Group of Eight summit in Northern Ireland on June 17-18.
Commodity Currencies – The Canadian dollar weakened against the US dollar reaching a 2-month low following a weaker than expected drop in Canada’s inflation rate in April. Annual inflation fell to a 0.4% from 1.0% in March, its lowest level since October 2009 and well below the BoC’s target of 1-3%. The drop was mainly caused by cheaper gasoline and car prices which lead to a weaker CAD and a boost in bond prices. Both the New Zealand dollar and the Australian dollar continued its’ plunge against the USD, hitting 0.8059 and 0.9708 respectively in the session. The aussie remains bearish with the recent RBA’s decision to cut interest rates and weak new motor vehicle sales indicating Australia will post a record budget deficit. The antipodeans will remain under pressure with dropping commodity prices due to a slowdown in global growth.
For more market reports go to Union Bank of California