Daily Market Commentary

Fundamental Outlook at 1400 GMT (EST + 0400)

€

The euro weakened sharply vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.5300 figure and was capped around the $1.5480 level.  The common currency reached its lowest level since 8 May as traders continued to bid the dollar higher on the notion that U.S. interest rates have further room to move higher than European interest rates.  To this end, European Central Bank member Gonzalez-Paramo reiterated the central bank is only currently looking at raising interest rates next month in what would most likely be a +25bps adjustment to 4.25%. Likewise, ECB member Quaden added it is “legitimate, to contemplate a limited adjustment of our monetary policy stance in order to assure a solid anchoring of inflationary expectations.” ECB policymakers have gone to great lengths this week to stress that any additional adjustment to its main refinancing rate is likely to be a one-time move.  Dealers will pay close attention to this weekend’s G8 meeting in Osaka to see if policymakers discuss the U.S. dollar’s weakness, the Chinese yuan, etc. Notably, Federal Reserve Chairman Bernanke last week verbally intervened to support the U.S. dollar thus some believe the U.S. may be more inclined to multilaterally promote a strong-U.S. dollar.  Data released in the U.S. today saw the University of Michigan preliminary June consumer sentiment indicator fall to 56.7, below expectations.  Also, May headline consumer price inflation was up +0.6% m/m and +4.2% y/y while the ex-food and energy component was up +0.2% m/m and +2.3% y/y.  Additionally, real hourly earnings rose 0.3% in May.  In eurozone news, Irish voters appear to have voted against the referendum regarding the Treaty of Lisbon.  This is a setback for the euro because its stymies the European Union’s political integration process and could potentially result in a less cohesive economic policy.  Data released in the eurozone today saw EMU-15 Q1 wage growth accelerate at its fastest pace in more than six years, up 3.7% y/y and up from 2.9% in Q4 2007.  Moreover, EMU-15 Q1 unemployment was up 0.3% q/q and 1.6% y/y while German final may CPI was up 0.6% m/m and 3.0% y/y.  Also, Bank of France reduced its Q2 GDP growth estimate to 0.2% from 0.3%.  Euro bids are cited around the $1.5230 level.

¥/ CNY

The yen depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥108.40 level and was supported around the ¥107.65 level.  Technically, the pair reached its highest level since 14 February. As expected, Bank of Japan’s Policy Board kept its overnight call rate unchanged at 0.50%. BoJ Governor Shirakawa reported “Rises in energy and basic material prices have led to a deterioration in the terms and conditions of trade, thereby weakening income growth. We now, therefore, need to assess if and how a weakening of the income growth momentum, stemming from the deterioration of the terms and conditions of trade, will pose downside risks to domestic private demand…how expectations on inflation and how the price-setting behaviour (by companies) hold the key to deciding how we should manage our monetary policy.” Some traders expected Shirakawa to be more hawkish given the recent increase in hawkishness among Federal Reserve and European Central Bank policymakers. Also, the central bank kept its economic assessment unchanged noting “Japan's economic growth is slowing, mainly due to the effects of high energy and material prices” and cautioned the economy is expected to “grow at a slower pace for the time being and follow a moderate growth path thereafter.”  The government reported its May consumer sentiment index printed at 33.9 compared with 35.2 in April.  Also, April industrial output was downwardly revised 0.2% m/m.  Finance minister Nukaga and U.S. Treasury Secretary Paulson met overnight ahead of this weekend’s Group of Eight meeting in Osaka and discussed exchange rates, inflation, and the global economy.  Traders will pay close attention to see if G8 finance ministers go beyond their “sharp fluctuations in major currencies” comments from April.  The Nikkei 225 stock index climbed 0.61% to close at ¥13,973.73.  Dollar bids are cited around the ¥103.00/ 101.35 levels.  The euro came off vis-à-vis the yen as the single currency tested bids around the ¥165.65 level and was capped around the ¥166.90 level.  The British pound gained ground vis-à-vis the yen as sterling tested offers around the ¥210.80 level and was supported around the ¥209.65 level while the Swiss franc moved lower vis-à-vis the yen and tested bids around the ¥102.70 level.  The Chinese yuan appreciated vis-à-vis the U.S. dollar as the greenback closed at CNY 6.9018 in the over-the-counter market, down from CNY 6.9075 – the pair’s lowest close since the yuan revaluation of July 2005.  People’s Bank of China reported it will take “effective measures to prevent prices from growing too rapidly and guard against big fluctuations in asset prices.” Data released in China overnight saw May retail sales climb 21.6% y/y to CNY 870.4 billion.

₤

The British pound gained ground vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.9510 level and was supported around the $1.9410 level.  Technically, today’s intraday high was right around the 23.6% retracement of the move from $2.0025 to $1.9360.  Bank of England Monetary Policy Committee member Tucker reported the U.K. is “facing a nasty shock to costs from rising commodity prices and sterling's depreciation. That is going to push up UK inflation over the next few months, creating a risk of upward pressure on pay and higher inflation expectations.” The Daily Telegraph reported the government is revising its economic growth and inflation projections that were set forth in the March budget. Many traders believe Bank of England will next week become more hawkish about interest rates and possibly signal higher borrowing costs.   Cable bids are cited around the US$ 1.9360/ 1.9100 levels.  The euro weakened vis-à-vis the British pound as the single currency tested bids around the ₤0.7870 level and was capped around the ₤0.7950 level.

CHF

The Swiss franc depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.0540 level and was supported around the CHF 1.0385 level.  Technically, today’s intraday low was right around the 50% retracement of the move from CHF 1.0625 to CHF 1.0145.  U.S. dollar bids are cited around the CHF 1.0250 level. The euro and British pound gained ground vis-à-vis the Swiss franc as the crosses tested offers around the CHF 1.6145 and CHF 2.0495 levels, respectively.