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

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Bankers Eye RMB Offshore Market As China Funding Costs Rise
A staff member counts Renminbi (RMB) banknotes at a branch of Bank of China in Changzhi, Shanxi province September 16, 2008. China's surprise easing of monetary policy may put a floor under the sagging stock market and support the shaky property sector, while pushing long-term bond yields down sharply.

•  US releases a string of strong data output

•  GBP weakens to 2-month lows

•  JPY tumbles with equity sell-offs as markets look to higher-yields

USD – The most significant US data releases this week are on the housing market, consumer confidence, and the second release of GDP. Home prices rose in the 12 months through March by the most in seven years as the recovery in residential real estate gained momentum.  The S&P/Case-Shiller index of property values increased 10.9% from March 2012, the biggest 12-month gain since April 2006, after advancing 9.4% in February. In May, confidence among U.S. consumers climbed to the highest level in more than 5 years as views on the economy and labor market improved.  The Conference Board’s index rose to 76.2, the strongest since February 2008, exceeding the highest estimate in a survey of economists.  The gain in sentiment coincides with rising property values and stocks that are providing a boost for household balance sheets at the same time as the job market heals. On Thursday, the 2nd release of GDP will be reported with a revision to the data not expected. However, it will still be interesting to see if market expectations are met and if the strong figures from the first quarter are indeed kept unchanged. The US dollar is deriving support from rising US yields on the back of heightened expectations that the Fed will soon taper QE, with 10-year yields moving back above the 2.0%-level for the first time since mid-March. Incoming economic data releases will be important to determine the timing of tapering although today’s releases of US house price data for March and consumer confidence for May is unlikely to materially alter tapering expectations.

EUR – The euro is largely range bound ahead of a holiday shortened week.  US markets resumed trading after the Memorial Day holiday with the single currency in the lower end of recent ranges below $1.29.  Although market focus remains on the possibility of further interest rate cuts to boost the economy, the ECB is also exploring other ways to kick start growth.  ECB policymaker Ewald Nowotny commented today that the central bank is also exploring ways to boost banks’ liquidity including reviving the asset backed securities market and lowering markdowns on assets used as collateral in an effort to get more money circulating through the economy.  The unconventional approaches maybe timely for Europe as it remains mired in recession.  The euro zone Purchasing Manager’s Index (PMI) registered only a slight increase in May at 47.7 last week, remaining well below the 50 threshold denoting expansion for the 16 straight month.  On a more hopeful note, Consumer Confidence in the region improved slightly to -21.9 also in May from -22.3.  Given this, the euro is likely to remain under pressure until signs of a turnaround emerge.

GBP – The pound weakened to near 2-month lows, currently trading at 1.5062.  The UK returns from a long weekend and news flow has been limited.  The weakness in the pound is due to positive news coming out of the US as residential property values increased 10.9% and US consumer confidence index rose to 6.2, the strongest level since February 2008.  Tomorrow brings the UK nationwide house prices and Friday will contain mortgage approvals and Gfk consumer confidence figures.

JPY – The Japanese yen tumbled as global equity markets leaned toward higher-yielding trades. BoJ policy makers are trying to provide support to the equity markets while limiting volatility in the JGB. Markets are watching the Japanese equity market causing the JGB to rise above 1.0% on 10-year yields, which ultimately weighed on Japanese stocks. Analysts expect the yen to remain weak due to BoJ’s aggressive monetary easing and equity selloffs.  The yen currently trades at 102, weakening from last week’s climb close to 100.

Commodity currencies –  The Australian dollar traded just 0.6% from levels last seen in 2011 on speculation the Federal Reserve may begin tapering quantitative easing after US data showing improvement in residential real estate and consumer confidence.  The one month volatility of the Aussie versus the US dollar is near its highest point in a year.  Demand has been down for the Australian and New Zealand currencies due to a slowdown in Chinese growth which will reduce the antipodean countries’ exports.  China, Australia and New Zealand’s largest trading partner, is releasing a PMI reading on June 1.  If this release contains negative data, it could further push the RBA for another rate drop in their next meeting.  The Canadian dollar is also falling for a 3rd day against the US dollar.  Tomorrow’s BoC announcement will be the last led by departing Governor Carney and no major shifts are expected from the meeting.

RMB – The yuan closed on a weaker note today in China after the fixing rate was set lower.  The onshore market (CNY) closed at 6.1215, down from Monday’s close of 6.1211, while the offshore market (CNH) hit 6.2189.  Despite the pause in the appreciation trend, expectations remain for China’s currency to continue gaining ground with the PBOC already lifting the yuan to a series of record levels this year and pushing the currency to new highs 7 times this month.  Premier Li reiterated yesterday that China will continue to move forward on market reform as PBOC is takes steps to expand the yuan to a fully flexibe currency with expectations for the central bank to further widen the 1% (rise and fall of the) trading band currently allowed.  Moody’s also reiterated that China’s 2013 GDP will come in close to 8% and that GDP will remain in a 7 to 8% range through 2017.  The market will, however, keep its eye on this week’s PMI figure due out on Friday to assess the effect on not only China, but how commodity currencies like the Aussie might fare.

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