USD – America’s currency ended higher against most of its major world counterparts—save the GBP and JPY—continuing this trend this morning, amidst ostensibly improving economic fundamentals in the US. Inflationary pressure continues to remain benign [PPI (May): 0.2% vs. 0.6% exp.; CPI (May): 0.1% vs. 0.3% exp.]. Although manufacturing data still demonstrated sluggishness in the industrial sector [Industrial Production (May): -1.1% vs. -0.5% prior; Empire Manufacturing (Jun): -9.41 vs. -4.55 prior], a stalwart advance in the Housing Starts Index (532K in May vs. 458K prior) provided a much needed boost to US economic sentiment. The closely watched Leading Indicators Index showed a marginal amelioration that further lends credence to the notion of an incipient, yet sustainable, recovery for the world’s largest economy. With plenty on tap for the economic calendar this week, markets will have plenty over which to ruminate, a fact in itself that will likely contribute to heightened volatility. Key indicators among the “event risks” are existing home sales data, durable goods, GDP, and Wednesday’s FOMC interest rate announcement. Although the Fed Funds target is widely anticipated to remain at the current 0% to 0.25% range, market participants will pay close attention to the accompanying bias statement to assess if the FOMC will continue to support “the functioning of the financial markets via quantitative easing and other measures”, which would keep the size of the Federal Reserve’s balance sheet at an extremely high level, keeping pressure on the greenback.
EUR – The euro opened this week firmly within recent ranges as markets assess the outlook for growth and the overhang of massive fiscal stimulus. The single currency continues to trade within last week’s ranges between $1.38-1.40. Today’s German Ifo business climate report provided little impetus for the currency to depart from ranges. The mixed Ifo business climate report continues with the larger theme of a mixed Eurozone economic picture with the business climate and expectations components above forecast, while the current conditions component below. Also weighing on the euro, Germany is expected to raise its new borrowing target in 2010 to over EUR 100B. Given this scenario, the euro is likely to remain range-bound until a clearer economic picture emerges.
JPY – The yen gained ground against all major currencies with risk aversion returning to markets as tension in Iran escalated and the World Bank’s announcement that the global recession will be deeper than expected. The Japanese manufacturing confidence came in firmer than expected also helped bolster the yen. The sentiment among large Japanese manufacturers increased to -13.2 points compared with a record low of -66 just three months ago. Japan’s Nikkei closed up 0.4% as a result of the improvement in the manufacturing survey.
GBP – The sterling opened higher this morning against its US counterpart at 1.6510. It also moved higher against the Euro last week and has been underpinned by higher UK equities and comments from Bank of England (BOE) Governor Mervyn King that policy-makers are seeing evidence of a “flattening out” of the economic contraction. In the past week unemployment data provided more evidence to the thesis that job cuts are easing. Unemployment rose much less than expected by 39k in May (consensus 60k), down from 49.6k in April. It was the third month in a row in which unemployment rose by less than expected and suggests that job cuts have been more front-end loaded in this recession, possibly as a consequence of the extreme pressure on all companies when the financial crisis was at its worst. Based upon positive data out of the UK market participants are speculating that the BOE will begin to raise interest rates again in Q2 next year, which supports a positive view of the GBP even after its recent rally.
CAD – The loonie gave up nearly 3% (1.1334 – 1.1514) to its US counterpart last week as crude oil slid 7.1% to $61.78 from last Tuesday’s high of $72.75. Early in last week’s session, concerns that a 16% gain for the Canadian dollar since March 9 may undermine the country’s already battered exporters, raising the likelihood that BoC Governor Carney will follow the US Fed, BoE, and Swiss National Bank in pursuing so-called quantitative easing. Canadian stocks declined last week for the first time in a month as energy producers dropped, erasing an earlier gain in the main equity index. Oil producers Suncor Energy Inc. and EnCana Corp. fell more than 2%. Canada’s M1B gross money supply rose C$2.7B ($2.4B) in May to C$443.5B ($390.7B).
MXN – The most recent median economic forecasts for Mexico are as follows: Industrial Production (-15%); Supply & Demand (-10.2%), Bi- Weekly CPI (-0.16%), Retail Sales (-5.1%). Last Tuesday Mexico’s central bank confirmed that it sold $50M to buy pesos at an average weighted price of 13.3520 pesos per dollar. Mexico reported the greatest drop in industrial production since the peso crisis 14 years ago as the manufacturing sector plunged amid the global recession. Output fell 13.2% in April from a year earlier, including an 18% decline in manufacturing activity. The decline in output was the largest since 1995, when soaring interest rates caused defaults on loans and put banks on the verge of collapse. The plunge in production, led by the steepest drop in manufacturing activity since Mexico began measuring output in 1981, signals that the Mexican economy hasn’t begun to recover from the global economic slump.
CNY – The yuan gained slightly vs. the dollar to 6.8362. In a sign that pressure for the yuan to appreciate may grow, a recent central bank report pointed toward a resumption of incoming capital flows in May that had slowed since late last year.