Daily Summary on USD, EUR, JPY, GBP, AUD, CAD and RMB

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•  JPY strengthened for the first time in 3 weeks

•  U.K. raises home asking prices for the 5th straight month 

•  Aussie and kiwi regains strength ahead of key central bank release on Tuesday

USD – This week’s calendar is light in comparison to last week and will be dominated by Fed activity and a few significant data releases. On Fed activity, the speech by New York Fed’s Dudley on Tuesday and Fed Chairman Bernanke’s testimony on Wednesday may provide new information about the Fed’s view on the labor market and a possible exit from the QE program.  Speculation is growing that the Fed may taper its asset purchases in the near future. Any such action would cause investors to expect a strengthening of the dollar, reinforcing a bullish outlook. The new and existing home sales figures for April are released on the 22nd and 23rd, respectively. They are forecasted to show a small increase in sales despite last week’s disappointing housing starts and permits data. A solid recovery in the US housing market is viewed by many as a bellwether for the strength of the recovery of the  economy in general. On Wednesday, the FOMC minutes from the May meeting will be released. Markets will be looking for any hint that the Fed will curtail or alter its bond buying program. On Thursday, the flash Markit manufacturing PMI for May is expected to show a modest increase from 52.1 in April up to 52.4. Durable goods and the weekly initial jobless claims also feature. The latter will attract particular attention after last week’s upward spike.

EUR – Euro begins the week largely range bound awaiting a raft of economic data this week which will provide investors a checkup on the health of the European economy.  The single currency remained hemmed in tight ranges overnight near $1.28 after a combination of low inflation and weak economic data last week sent the euro to 6-week lows vs. the dollar.  Inflation rose a modest 1.2% in April, well below the ECB’s 2% target, leaving open the possibility of further rate cuts to boost the ailing economy.  GDP data last week saw the major economies of Europe reporting contraction except for Germany which eked out 0.1% growth in Q1.  Europe’s second largest economy, France had hoped to avert recession but reported its second consecutive quarter of negative growth at -0.2%.  Economic data releases this week include Purchasing Manager’s Index (PMI) reports and Consumer Confidence on Thursday.  Euro is likely to take its next cues from the data as well as the outlook for interest rates in the region provided by the data.

GBP – The pound strengthened from a six-week low against the dollar this morning after an industry report showed U.K. home sellers raised asking prices for a fifth straight month to a record high, adding to optimism Britain’s economy is improving.  Bank of England Governor King said in an interview yesterday a “modest recovery” is underway, though “more needs to be done” to encourage growth.  Tomorrow brings CPI, expected at 2.6% versus 2.8% the prior month.  The BoE seeks to keep inflation below 2%, so there is still a ways to go on this front.

JPY – The JPY strengthened the most in three weeks against the USD as Japan’s Economy Minister Amari said further losses in the currency would have negative effects after it fell to the lowest level since 2008 last week. The yen has weakened sharply in the run up to and during the implementation of Abenomics with the trade weighted yen declining by an annualized rate of around 36% since the end of October of last year. Economy Minister Amari’s comments  displaying  concern  over the negative impact of the yen becoming more  markedly undervalued ahead may help to ease the pace of yen  weakness in the near-term, but is unlikely to derail the yen weakening trend.

Commodity currencies – The Australian dollar and the New Zealand dollar recovered against the USD after 2 weeks of steep drops to multi-month lows ahead of key central bank events this week. The aussie climbed up 0.7% from Fridays’ close of 0.9719 alongside the NZD which was up 1% from 0.8063. The Antipodeans have been pressured due to their US counterpart’s growing talks that the Fed will slow down its stimulus program later this year. In addition, weighing on the currencies are renewed worries about a slowdown in China and falling prices on commodities, especially iron ore which is Australia’s biggest export earner. On Tuesday, the RBA will release minutes from its May policy meeting when it cut rates to record low of 2.75%. The Canadian dollar remained steady with a holiday after reaching 2-month lows last Friday against the USD. Weak Canadian data release showed CPI only gained 0.1% against the estimated 0.2% and inflation dropped 0.4% in April from 1.0% in March, its lowest level since October 2009. The BoC has talked about raising interest rates, which is bullish for the CAD, but may not be able to follow through given the lower than expected inflation levels.

RMB – The renminbi rose 0.05% to 6.1389 per dollar in Shanghai and is continuing its appreciation trend to within 0.2% of a 19-year high with speculation further appreciation will be brought on by capital inflows.  In the next few years, China is likely to see a large influx of speculative funds pushing asset prices and consumer prices higher.  For the renminbi the primary focus this week will be the flash HSBC manufacturing PMI for May.  China appears to have lost some momentum in their recovery over the past few months, though growth is not severely down but remains somewhat stagnant with GDP growth hovering around the 8% mark.  The market anticipates the flash HSBC manufacturing PMI to be unchanged at 50.4 in May which is consistent with the final reading of the PMI in April.

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