May 30 2007
Daily Forex Analysis
Daily Forex Analysis
USD
Yesterday the most significant news to come out of the US was the consumer confidence index which rose to 108 this month from a revised 106.3 in April, a five month low. The market was expecting a figure of 104.5 so this unexpected jump signaled that consumers are continuing to spend despite the prevailing record high gasoline prices and the housing market downturn which was expected to leave consumers with an insecure feeling about their finances. However rising stock prices and a resilient labor market is driving consumer spending which makes up a lion share of the US economic growth. This raises the likelihood that the Federal Reserve’s forecast for “moderate” growth in the coming quarters will be realized. It is also important to note that consumers’ expectations for the inflation rate for 12 months from now were 5.5 percent in May, the highest in a year so the Fed is considered more likely to raise interest rates when inflation is higher, making dollar-denominated investments more attractive. On the back of this positive news the greenback realized marginal gains all across the board and it drove the EUR below the 1.35 level against the USD. However not all was rosy for the dollar as the positive news was partially offset by concerns about central bank moves in Europe and the Far East to diversify currency holdings and once traders see that the central bankers are on the other side of a trade they usually go with that momentum.
The consumer confidence index kicks off a week of reckoning for the dollar, with the market set to make crucial decisions about the near- term outlook for US interest rates in the wake of a stream of crucial economic data, most notably Friday’s Non-Farm Payrolls report for May. So we could see some sharp dollar movement on the back today’s release of the ADP employment index which is our first leading indicator for payrolls. If this figure releases better than expected coupled with hawkish FOMC meeting minutes then we could see the dollar go on a bullish rampage.
EUR
Yesterday the European current account was reported at an unexpected surplus of 5.4B bouncing out of previous negative territory. The market forecasted an increase in the Euro-zone current account deficit of -4.3B, so this unexpected surprise boosted the EUR and although it gave back most of its intraday gains it was still the best performing currency against the greenback. In other news the German CPI released inline with expectations at 0.2% indicating that although consumer prices dropped from last months figure of 0.4% they are still relatively stable. The strong EUR does not seem to be negatively impacting the European economy as indicated by the current account surplus and many traders believe that the ECB’s main refinancing rate will be 4.25% by September. This sentiment, which was the other main driver of the EUR boost, was further reinforced by comments made by the ECB member Weber stating that the current cycle of interest rate increases has not yet reached its end. Weber also indicated that policymakers will stop utilizing “code words” to signal interest rate changes when the current monetary tightening cycle ends. He also defended the ECB’s utilization of the M3 money supply indicator in formulating monetary policy, noting broad money has increased 10.9% y/y in March.
Today the only news coming out of the Euro-zone is the German and French retail PMI. These figures are not expected to cause any volatility, so the EUR should range trade today against the majors but there is a possibility of sharp movement against the greenback if the ADP employment index springs a surprise.
JPY
The yen edged higher yesterday, after China said it would raise a stamp duty on stocks in an attempt to cool its equity markets, prompting concerns about risky trades financed by borrowing in the Japanese currency. The EUR dropped against the yen, after touching an all-time high, and U.S. stocks fell on expectations that the move by China may prompt further losses in global equity markets and heighten risk aversion, this is a clear attempt by the Chinese to restrain the equity boom. The Chinese authorities raised the stamp duty on share trades to 0.3 percent from 0.1 percent starting today. In the 16-year history of the modern Chinese stock market, an increase in stamp duty has always caused a market slump over the following few weeks. If this move by the Chinese results in heightened risk aversion we could finally see the unwinding of carry trades.
The yen retained most of the gains it gathered earlier from strong Japanese economic data, which reinforced expectations that the Bank of Japan will raise borrowing costs again in the coming months. News that Japan’s unemployment fell to 3.8 percent in April, its lowest level since March 1998, and spending by households in April jumped 1.1 percent in real terms, proved to be the major drivers in the currency markets as many of the world’s major trading centers returned from the long holiday weekend. All the economic indicators released have shown improvement and traders have taken them as a lead to buy the JPY.
