• The dollar fell against most major currencies on Monday after Federal Reserve Bank of Chicago President Charles Evans said the US economy faced “substantial” downside risks to both growth and inflation. However, the greenback gained against the yen as US equity prices rallied reducing risk aversion. Sterling recovered from early losses after soaring UK producer-price inflation data reduced expectations for aggressive UK interest-rate cuts. The Australian dollar rose despite Australian home-loan approvals falling to the lowest level in almost three years. The Canadian dollar advanced as Canadian stocks made a new high.
  • The EUR/USD rose after European Central Bank President Jean-Claude Trichet said the ECB’s present monetary policy stance will keep European inflation in check. Meanwhile, Chicago Fed President Evans said “the current net stance of monetary policy is accommodative - and this is appropriate in order to address the way we see the sluggish economy unfolding in 2008.” The statements show the ECB stresses higher importance on inflation fighting. The pair has not penetrated the 1.54-area support, possibly moving higher before another test of the 1.54 support.


Financial and Economic News and Comments

US & Canada

  • The US Treasury budget surplus in April 2008 narrowed to $159.28 billion, following a $177.67 billion surplus in April 2007, according to the US April Treasury budget statement.
  • Federal Reserve Bank of Chicago President Charles Evans said: “Monetary policy is accommodative and appropriately situated to address the substantial risks that remain both for sluggish economic activity as well as unwelcome inflationary pressures.” The US consumers were “under a lot of stress” and the Fed’s current interest rate “roughly balances out” both risks, he said.


  • UK producer-price inflation climbed 7.5% y/y in April, more than expected and the fastest annual pace since 1986, the Office for National Statistics said. The PPI rose 1.4% m/m, also the fastest monthly pace. The figures support the case for the Bank of England to moderate the pace of interest-rate cuts after maintaining its benchmark rate at 5% May 8 following three rate cuts since December.
  • BOE Governor Mervyn King will present the BOE’s quarterly economic forecasts in the inflation report on May 14.


  • Japan’s April merchant sentiment dropped for the first time in three months as inflation rose. The Economy Watchers index for current conditions fell to 35.5 in April from 36.9 in March, the Cabinet Office said. The future conditions measure fell to 38.2 from 39.5.


  • Bank of Japan Governor Masaaki Shirakawa said the BOJ is focusing on “the downside risks” to the Japanese economy from the global economic slowdown and financial-market turmoil. It is “not appropriate to predetermine the future policy direction” because “uncertainty about the economic outlook is high,” he said. We think the BOJ will probably maintain its key overnight lending rate at 0.5% through the current fiscal year.
  • China’s consumer prices rose 8.5% y/y in April, approaching the fastest pace since 1996, driven by food costs, the statistics bureau said.


  • China raised the bank reserve ratio for the fourth time this year as inflation accelerated. Banks must set aside a record 16.5% of deposits with the People’s Bank of China, up from 16%, the PBC announced.
  • Australian home-loan approvals fell a larger-than-expected 6.1% m/m to 59,371 in March, the lowest level in almost three years, after shedding 6.8% m/m in February, the Bureau of Statistics said.

FX Strategy Update