USD– The greenback staged a powerful rally last week against its major world counterparts—culminating with multi-week highs vis-à-vis the EUR and GBP—on the back of a vastly better-than-expected NFP release last Friday (-345K in May vs. -520K exp.). Unfortunately, however, the US headline unemployment rate rose more-than-expected to 9.4%—the highest level since August 1983—from the previous 8.9% reading. Nevertheless, the dollar was further underpinned by improving levels in both the Manufacturing and Non-Manufacturing ISM reports (42.8 in May and 44.0 in May, respectively), as well as by the rise in Personal Income and Spending (0.5% in Apr. and -0.1% in Apr., respectively). Overall, the stream of US data releases throughout the past couple months could be construed as relatively sanguine, which would seem to suggest that America’s “Great Recession” may have bottomed-out sometime between Q4’08 and Q1’09. Moreover, a notable development in currency markets last week was that fundamental forces are now ostensibly driving the greenback’s movement, as opposed to risk trends that have dominated much of trading throughout this year and late last year—gaining during periods of “risk aversion” and equity market losses, while losing during periods of ameliorating investor sentiment. Though the US economic calendar promises far fewer top-tier releases as compared to last week, markets will stilly have plenty to digest this week as consumer and trade data will undoubtedly exert their influence on market movement.
EUR – The euro fell from its peaks following a better-than-expected jobs report in the US last week. The single currency climbed to 6-month highs last week of $1.4337, but subsequently gave up its gains after the improved employment report stirred optimism that the US will be the first to emerge from the global economic downturn. Euro came under additional pressure following a sovereign downgrade of Ireland: S& P downgraded Ireland to AA, the second downgrade in 3-months, highlighting the ongoing economic difficulties in the Eurozone. The ECB left interest rates unchanged last week at 1% providing little support to the euro, while the unemployment rate throughout the E-16 remains at 9.2%—nearly on par with that of the US.
JPY – The yen started to weaken last week as investors became bolder and took on additional risk, increasing demand for higher-yielding assets funded in the Japanese currency. Japanese companies sold off inventories and started to restock, leading to a rebound in industrial output. Analysts expect the world's second-largest economy to grow 0.5% from Q2’09 onwards. Nevertheless, falling wages and a rising jobless rate will weigh on growth in the coming months. Recent talk that corporate bankruptcies in Japan dropped 6.7% last year from a year earlier helped the Japanese yen rebound this morning. According to April’s quarterly Tankan survey on corporate sentiment and business plans, the dollar may average 97.18 y en in the 12 months to March 2010.
GBP – The sterling dropped to its lowest level against its US counterpart in almost two weeks as political tensions continue to weigh on the currency. The pound opened at $1.5952, sharply lower than the overnight high of $1.6242. The pound fell as Prime Minister Gordon Brown confronted a fresh attempt to oust him following a drubbing for the ruling Labor Party during the European Union parliamentary elections. The pound also slipped versus the yen after former BoE policy maker David Blanchflower said the Central Bank may expand its program of buying assets with newly created money as the economy shrinks. Last week the BoE kept interest rates at 0.50%, which has also weighed on the GBP.
CAD – The loonie gave back gains after reaching a near 8-month high last week on the back of a stronger US dollar. The Canadian currency’s recent rise was quite a surge considering it was hovering near 4-year lows against the USD in early March. The rise has been credited to a combination of higher prices for oil, relatively upbeat economic data, and falling demand for the US dollar. However, last Friday’s poor domestic jobs data where Canada’s economy lost a net 41,800 jobs in May, after an increase of 35,900 in April, helped to curb the CAD’s gains. Also weighing on the Canadian unit this morning was falling oil prices, ($67/bbl today vs. $71 last week). Although Canada's Q1’09 GDP data came in better-thanexpected, the BoC left interest rates stable as expected. Monetary officials from the BoC said it plans to leave interest rates low until next year, and had unusually strong comments on the threat posed by the sharp appreciation of the Canadian dollar.
MXN – The peso dropped to a five- week low – currently trading at 13.4360 – as global stocks slid, trimming demand for higher- yielding assets, and as oil, the nation’s biggest export, fell. The Mexican peso (MXN) remains strongly influenced by the economic recovery prospects in the US, interest rate differentials and the direction of energy prices. Investors remain indifferent to the mid-term congressional elections scheduled for July 5th. CNY – The yuan is lower (6.8371 vs. USD) amid broad dollar strength. Economic conditions have bottomed out according to a recent report by Chinese officials but would return to rapid growth in 2-3 years. The yuan is projected to rise 1.63% over the next 12-ms. per latest market indications.