- The dollar fell against most other key currencies Tuesday on a record oil surge and indications foreign central banks may raise interest rates further, while Federal Reserve Vice Chairman Donald Kohn believes monetary policy appears to be appropriately calibrated for now to promote both rising employment and moderating inflation over the medium term. The Fed’s different inflation-fighting approach increases US interest rate disadvantage and continues to pressures the greenback. The EUR/USD rose on higher-than-expected German producer-price inflation and the suggestion by head of ZEW Wolfgang Franz that the European Central Bank may have to ignore the economy’s weakness and even increase rates as inflation accelerates. The AUD/USD rose to a new 24-year high as the latest Reserve Bank of Australia minutes indicated the RBA considered raising rates. The yen advanced as US stocks fell. The USD/CAD is testing support at an 8-week low as oil prices touched a record $129.60 bolstering demand for Canada’s commodity exports.
- The USD/JPY fell for a third day out of four as US equity prices declined. After failing to penetrate the 105-area resistance, the pair is now testing support from the short-term uptrend. The pair is strongly correlated with the US equity market. The pair is likely to fall further as the stock market will possibly continue to consolidate gains. There is support in the 102-area.
Financial and Economic News and Comments
US & Canada
- The US producer price index increased a less-than-expected 0.2% m/m in April, the Labor Department reported. The core PPI, which excludes food and energy, climbed 0.4% m/m in April, double the forecast. The PPI rose 6.5% y/y and the core PPI rose 3.0% y/y. The overall PPI figures indicate US inflation pressures have not yet fully receded.
- The Chicago Fed national activity index stood at −1.17 in April, showing economic activity weakened further, compared to −0.98 in March. All four broad categories of indicators made negative contributions to the April index, the Federal Reserve Bank of Chicago said.
- Federal Reserve Vice Chairman Donald Kohn said today at the National Conference on Public Employee Retirement Systems Annual Conference, New Orleans, Louisiana that US economic conditions remain quite difficult and cautioned that a return to stronger economic growth, likely to come next year, could be relatively moderate.
- Crude oil jumped above $129 a barrel in New York for the first time after Boone Pickens, founder and chairman of Dallas-based BP Capital LLC Boone Pickens, said oil may reach $150 a barrel this year.
- Canadian wholesale trade grew 0.6% m/m in March, slightly better than forecast, following a revised 2.1% m/m decline in February, Statistics Canada reported.
Foreign acquisitions of Canadian securities, continuing to grow, reached C$5.3 billion in March, the highest level since March 2007, fueled by substantial issuance of new Canadian shares to foreign portfolio investors,
Statistics Canada said.
- The German ZEW index of investor and analyst expectations unexpectedly declined to −41.4 in May, just slightly above the 15-year low of −41.6 reached in January, from −40.7 in April. A negative reading means pessimists outnumber optimists. The current situation measure unexpectedly rose to 38.6 in May from 33.2 in April.
- The German PPI rose a more-than-expected 5.2% y/y in April, the fastest pace since August 2006 driven by energy costs, the Federal Statistics Office in Wiesbaden said. The PPI rose 1.1 m/m.
- Bank of Japan new Governor Masaaki Shirakawa and his colleagues vote unanimously to leave the overnight lending rate at 0.5%.
- The minutes from the Reserve Bank of Australia’s May meeting were more hawkish than expected. While the RBA noted that domestic demand had moderated significantly, the minutes also showed that though the RBA had stayed its hand, it had discussed an interest-rate increase for a considerable time.
FX Strategy Update