Monday June 1, 2010

Trading in the euro remains a blood sport as June commences. It has already lost two cents before most U.S. traders have yet turned on their screens. The major driver of the day is a survey from the Chinese Federation of Logistics and Purchasing, which hints that measures aimed at stemming speculation in the real estate market are branching out to cool ancillary areas of the economy. With some pessimists already asking whether the Eurozone slowdown is causing China's economy to slow further and faster, the market seems to be conjuring up a nasty game of chicken and egg. What's cracking, however, is the euro, which slipped to a four-year low in European trading.

Euro - At the start of monthly trading economists take the temperature of global economies through a series of diffusion indices, known as purchasing managers surveys. An index shows whether the manufacturing heart of the economy is growing faster or slower than normal, with a reading of 50 showing a healthy balance of neither growth nor slowdown. The EU June PMI dipped marginally to 55.8 and is taken to indicate that the recovery is coming off the boil. Throw in the drama of fiscally austere budget policies in the region and investors continue to conclude that the region is heading for a second-leg of recession.

The euro fell to $1.2111 in earlier trading and slipped also against the Japanese yen to ¥110.70. A rise in the rate of unemployment to 10.1% across the region didn't help sentiment while a dip in consumer confidence reported a day earlier also kept the single currency on the back foot.

U.S. dollar - Weakness in commodity prices on the back of observations that China's growth may sag at the belly continues to provide a bid beneath the dollar. A report on Monday from the ECB that European banks may face further losses also helped crystallized a weaker opinion of the euro. In early risk-off trading the dollar surged against the Swiss franc while it also fought back against the Japanese yen. The big driver as noted above is the Chinese PMI data, which showed a larger than expected decline from 55.7 in April to a reading of 53.9 for May. While the PBOC has not officially shifted short-term interest rates, it has raised the value of required deposits banks have to hold in reserve. This has restrained lending and we are very likely witnessing the success of such moves as corporations find it harder to access lines of credit. Property sales have also fallen in Beijing, Shanghai and Shangzen in an apparent victory for government measures to quell speculation in the property market. The danger is that investors over analyze such data and conclude that China is dipping into a double-dip recession that will drag down a world hooked on stimulus spending.

British pound - The British pound was earlier dragged lower by the euro and continued to trade as a riskier currency. However, the British PMI manufacturing data was unchanged at a healthy reading of 58.0. What appeared to be driving a reversal in the fortunes of sterling is ongoing speculation that we hinted at late last week that the Prudential's takeover of the Asian arm of AIG is likely to be called off. The insurer sold sterling at the time of the announcement several months ago to lock into a foreign currency purchase price. If the deal is dead, it will likely close the hedge and repurchase pounds. Sterling jumped out of the blue during the morning to as high as $1.4617 as stops were triggered.

Aussie dollar - The Aussie dollar traded poorly once again. The Reserve Bank maintained its cash rate at 4.5% overnight calling the short-rate an appropriate near-term setting. While an element of future tightening is baked into the cake, investors are despondent over the Aussie's prospects more so by the fears that China's economy will cool faster and further. The Aussie reached 82.82 U.S. cents earlier and trades currently at 83.26 cents. Retail sales data was also released for the month of May. Store sales rose sharply at a monthly pace of 0.6% while an April report was also revised sharply higher from a gain of 0.3% to 0.8%. Both readings show the healthy state of the domestic recovery. Nevertheless data also showed the construction sector possibly languishing under efforts to soothe economic growth. Data showed building approvals during April fell at almost three-times the pace predicted by economists, falling 14.8% between readings.

Canadian dollar - The Bank of Canada will announce its own thoughts on the state of the economy this morning with most analysts throwing their hats into the ring in anticipation of an interest rate increase. Data on Monday confirmed a robust pace of GDP growth for the first quarter that once again topped the central bank's 5.8% projection coming in at 6.1%. With just about all engines on fire as far as the Canadian economy goes it won't be hard to justify the first post-stress increase in official monetary policy. After the GDP report on Monday the Canadian dollar yesterday traded above 96.00 U.S. cents for the first time since May 19 and currently trades at 95.31 cents and is higher on the day versus the greenback.

Japanese yen -The yen fought back against the dollar over the Memorial Day weekend by rising to ¥90.54 this morning. The negative market tone continues to drive investors into the hands of the safety of the Japanese unit.

Andrew Wilkinson Senior Market Analyst