•  UK avoids a triple dip recession with sterling at 11-week highs

•  Commodities are taking a hit with signs of economic weakness

•  RMB is trading weaker with the release of new tight yuan regulations

USD – The dollar traded relatively flat last week with the DXY ending the week slightly lower than it started, closing at 82.125. However, the dollar is retracing some of those losses in today’s trading with the DXY touching 82.408.  The week saw a new high in the S&P along with a move in US 10-year yields to 1.75%.  This upcoming week is quiet with no important US data releases and only a couple Fed speeches, the most notable being Ben Bernanke’s speech at the Chicago Fed’s Conference on Friday.  The following week, however, will bring us retail sales, CPI, the housing market, as well as a few other items.  The retail sales figures should be of particular note as disappointing March figures may suggest that US consumers have adjusted their spending due to tax increases.  The Fed appears resolved to continue to support the economy through bond purchases for the foreseeable future with expectations of tapering the program soon disappearing.

EUR – The EUR is trading 100 points below levels it had risen to leading into the ECB 0.25% rate cut. On the fundamental side, services PMI were generally stronger than expected across Europe, though still contracting, with the Eurozone services composite rising to 47.0. Retail sales were worse than expected, with the yoy decline at 2.4%.  The Sentix investor confidence index improved to –15.6, but disappointed expectations. The market has now priced in a deteriorating EUR outlook, however, in terms of relative central bank policy the Fed, BoJ, and BoE policy is still more currency negative than present ECB policy, so in the near-term we may see some EUR outperformance with a tapering off toward year end. The main economic release in the Eurozone within the next two weeks is GDP growth in Q1 to be released on the 15th. Forecasts indicate that the Eurozone may have contracted 0.2% q/q in Q1-13. The contraction should reflect zero growth in Germany, and a continued contraction in France and Italy. Preliminary GDP for Spain in Q1 has already been released, and it showed a slowdown of 0.5% q/q. Ahead of the GDP releases, Eurozone retail sales and industrial production for March should give more information about the economic situation in Q1. Looking at Q2, releases of soft indicators should add more insight. German ZEW economic sentiment declined in April and an increase in May reflecting more positive market sentiment is expected.

GBP – The pound strengthened to a 11-week high against the dollar this morning before falling off a bit as reports from UK business confidence beat forecasts.  While the data hasn’t been stellar, with expectations having been beaten down, any reading that is coming in better than expected has resulted in a stronger pound.  Sterling has appreciated 2.6% in the past month, the strongest among the 10 developed-market currencies, as the UK avoided a triple dip recession in Q1.  The BoE has a meeting on the 9th where they are expected to leave both rates and their asset purchase program as they currently stand.

JPY – The yen fell for a third straight session vs the US dollar after retreating over 1% last Friday, following last week’s surprisingly strong US jobs data report. Japan’s market was thin today due to the Children’s day holiday, but analysts expect the BoJ will continue to flood the economy with liquidity in the coming months putting pressure on the yen. In addition, economists believe that although the dollar/yen is resistant to reach 100, it is just a matter of time to do so. 

Commodity currencies – Commodities have taken a turn for the worse as fresh signs of economic weakness trump demand. Global PMIs are trending lower, dragging the outlook for oil and distillates despite the perception of an increased threat to Middle East supply after Israeli air strikes on Syria.  The CAD is slightly lower against the USD following the release of Canadian PMI data that showed the pace of business purchasing slowed more severely than expected in April.  Canadian PMI data fell to 52.2 from 61.6 in March.  Market participants expect the CAD to be subdued until Friday’s employment data.  The AUD weakened against its US counterpart after a slip in HSBC China Services PMI data, which slowed to its lowest in nearly two years.  However, Q1 retail sales data rose at its fastest pace in six years.  Australian retail sales for Q1 rose to 2.2%, compared to its previous reading at 0.1%, adding roughly 0.4% points to GDP growth in Q1.  The RBA will meet tomorrow to discuss a potential rate cut.  However, market participants expect the RBA to hold off on a change in rates until the RBA sees the GDP reports for Q1.  Overall for commodities, shipments of crude oil, iron ore and soybeans are all expected to rise in April from the month prior, due to a seasonal recovery in demand from China. However, expect commodities to trade in lower ranges before the release of China’s preliminary April trade data on Wednesday. 

RMB – The onshore yuan (CNY) fell 0.22% reaching a low of 6.1694, while the offshore yuan (CNH) came in at 6.1630 after the State Administration of Foreign Exchange (SAFE) released new rules late yesterday tightening limits on long yuan positions that banks can hold.  The yuan soon recovered after the markets digested the news and realized that the caps won’t take effect until the end of June and banks will have time to adjust their positions. Also impacting the Chinese currency markets was an announcement from China's cabinet that called for the drafting of detailed plans to help achieve full convertibility of the yuan.  The move would allow not only the current trade provisions of convertibility tied to the import/export of goods and services, but would also allow for convertibility under the capital account, which covers portfolio investment and borrowing.  The central bank has outlined the task of making the yuan convertible by 2015, baring no major global financial crisis.  A PoBC official also stated that they will be looking into lifting restrictions on individuals trading in yuan and potentially expanding the currency cap of $50K per year.  A small pilot program was launched in Yiwu a city in Zhejiang province and expectations are that the program may launch country wide by year end.

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