• The dollar remained in recent narrow trading ranges confined by important technical resistance against most key currencies on Thursday. A penetration of the stock market’s crucial resistance or failure to do so may trigger the fx market to move out of its recent trading range. After rising overnight on better-than-expected European Q1 2008 GDP growth and hawkish ECB comments, the EUR/USD reduced its gains despite weak US industrial production. The yen was higher despite small gains in the US equity market. Just above support and near a 3-month low, the pound is suffering from an unpleasnt prospect of rising UK inflation and slowing growth. The USD/CAD is testing support pressured by high commodity prices.
  • Having failed to penetrate resistance on several attempts, the AUD/USD is testing its support from the shortterm uptrend. The pair is supported by high Australian economic growth, commodity prices and interest rates rates; however, some signs showed these factors are weakening. If the 0.93-handle support is broken, the pair is likely to drop.


Financial and Economic News and Comments

US & Canada

  • US industrial production unexpectedly fell a 0.7% m/m in April, following a downwardly revised 0.2% m/m rise in March, the Federal Reserve said. Production is up 0.2% y/y but down at a 4.9% annual rate in the past three months. Capacity utilization fell more than expected to 79.7% in April, from a downwardly revised 80.4% in March. With the exception of the month after Hurricanes Katrina/Rita, the decline in capacity use was the steepest since the 2001 recession.


  • US initial jobless claims rose 6,000 to 371,000 in the week ended May 10, the Labor Department said, in line with forecast. The 4-week average of new claims fell 1,000 to 365,750. Having declined about 10,000 over the past several weeks from its highest level in more than two years, the 4-week average remains relatively high possibly trending higher. Continuing jobless claims jumped 28,000 to a 4-year high of 3,060,000 in the week ended May 3, indicating weakness in the US labor market.


  • Manufacturing activity in New York State deteriorated slightly more than expected in May. The general business conditions index fell to -3.23 in May from 0.6 in April, the Federal Reserve Bank of New York said.
  • The Philadelphia Fed index rose more than expected to -15.6 in May from -24.9 in April, showing some improvement yet contraction, the Federal Reserve Bank of Philadelphia said. The component indexes for shipments, new orders, and employment rose in May. New orders jumped dramatically to -3.7 in May, the biggest gains since June 2006, from -18.8 in April.
  • Federal Reserve Chairman Ben S. Bernanke said he is encouraged by banks’ recent ability to raise capital from diverse sources. They have at least partially replaced the losses with new capital raising, but not entirely. They are being rather conservative in making new loans, which has implications for the broader economy, Bernanke said.
  • Canadian manufacturing sales fell 1.6 % m/m in March after a downwardly revised 1.3 % m/m increase in February. The new orders component rose 2.9 % m/m in March after falling 2.6 % m/m in February.


  • Germany’s GDP grew a larger-than-expected 1.5% q/q in Q1 2008, the fastest quarterly rate for almost 12 years, boosted by a mild winter that increased construction activity and consumption spending, the German statistical office said.
  • The eurozone GDP rose a stronger-than-expected 0.7% q/q and 2.2% y/y in Q1 2008, up from 0.4% q/q in Q4 2007.


  • Eurozone inflation in April rose at an unrevised 0.3 % m/m and 3.3 % y/y, Eurostat reported. The core CPI showed the inflation rate moderated to 1.6 % y/y, the lowest level since December 2006.
  • European Central Bank President Jean-Claude Trichet said better-than-expected Q1 2008 eurozone GDP growth vindicated the ECB’s assessment of a resilient economy; however, warning that Q2 2008 growth would be less flattering.
  • ECB Governing Council member Nicholas Garganas rejected the notion that the ECB lies in a dilemma between rising inflation and slowing growth. There is no dilemma, and there can’t be a dilemma, because our only task is to secure price stability. Period, he said.


  • Reserve Bank of Australia Governor Glenn Stevens, defending inflation targeting, said it is the best system to avoid damaging inflation. Inflation targeting is not perfect and, on occasion, still leaves policy makers with some quite difficult decisions to make, Stevens said. It is, however, the best system that has been devised as yet. By setting an inflation target the RBA can make a reasonable accommodation for changes in the pace of economic growth and employment over periods of a year or two, he said. In the language of tradeoffs, this systems accepts there is a short-term growth/inflation trade-off, but also accepts there is no longterm one, he said.

FX Strategy Update