Expert Analysis of Today's Market

• The dollar traded mixed Thursday as crude oil posted the biggest drop in 11 weeks and US economic data indicated continued economic weakness. Sterling soared as UK retail sales posted their largest monthly gain in 22 years in May. The dollar block currencies gained, for a fourth straight day for the Canadian dollar and for a fifth straight day for the Australian dollar. The euro fell slightly ahead of the FOMC meeting next week when we may get a reading on the Fed’s inflation-fighting spirit. The Swiss franc dropped after the Swiss National Bank left its key interest rate unchanged at a 6-year high of 2.75% for a third consecutive quarter. The yen was little changed at the important technical 108-resistance.


• Since breaking its uptrend last week, the AUD/USD has gained and risen to the 0.95-resistance. If the resistance is penetrated, the pair will probably retest the high. However, it is more likely the pair will be forming a top with bearish long-term implications. A less dovish stance by the Fed will push the pair lower.

Financial and Economic News and Comments

US & Canada

• US initial jobless claims fell 5,000, less than expected, to 381,000 in the week ended June 14, data from the Labor Department showed. The prior week was revised up slightly. The 4-week average of new claims rose 3,250 to 375,250, the second-highest level since October 2005. Continuing claims fell 76,000 to 3,060,000 in the week ended June 7, remaining higher than three million for an eighth-straight week. The numbers indicate US labor markets remain weak.
  
• The Conference Board’s index of US leading indicators modestly rose 0.1% in May to a reading of 102.1, slightly more than forecast and matching April’s gain, the Conference Board reported. The coincident indicators index increased 0.1% in May to a reading of 106.8, the first rise in seven months, after a revised 0.1% decline in April. Overall, the figures suggest the US economy has not fallen into a deep contraction despite weak heading into the summer.


• The Federal Reserve Bank of Philadelphia’s general business activity index fell more than expected to -17.1 in June, a seventh month of contraction, as measures of orders and sales weakened, from -15.6 in May, according to data from the Philadelphia Fed. A reading less than zero signals a manufacturing contraction in the Philadelphia region. The new orders measure decreased to -12.4 in June from -3.7 in May, and the shipments gauge fell to -6.7 from 2.2. A prices paid measure rose to 69.3, the highest level since November 1980, from 53.8. The prices received measure declined to 29.7, from 31.6. The future general activity index, measuring the manufacturing outlook for the next six months, dropped to 21.3 in June from 28.2 in May. Overall, June figures reflect continued manufacturing weakness in the Philadelphia region and a less optimistic manufacturing outlook.

• Treasury Secretary Henry Paulson joined Federal Deposit Insurance Corp. Chairman Sheila Bair in calling for bank regulators to have clear procedures for dealing with failing investment banks. “There still seems to be uncertainty surrounding the process by which a large complex institution is wound down and what impact it would have on the overall financial system,” Paulson said. Market “discipline” must be strengthened, with firms not expecting that Federal Reserve aids will be “readily available,” he said.


• US securities companies are strengthening their ability to withstand shocks as the Fed studies “a range of options” for the lending channel for the firms, Fed Vice Chairman Donald Kohn said. “Primary dealers are strengthening liquidity and capital positions to better protect themselves against extreme events,” Kohn said in testimony to a Senate Banking Committee subcommittee in Washington. “We continue to monitor the effect of the PDCF and are studying a range of options going forward,” he said.


• Canada’s consumer-price inflation rose 2.2% y/y in May, more than expected and the fastest pace since January, led by surging gasoline prices, data from Statistics Canada showed. The May CPI rose 1.0% m/m, the most since January 1991, exceeding forecast. The core inflation rate was unchanged at 1.5% y/y and the monthly core inflation rate stayed at 0.3% m/m, in both cases matching median forecast, according to the Bank of Canada core CPI. Today’s CPI report supports the case for the Bank of Canada to keep its key interest rate unchanged as prices may keep rising all year and economic growth slows.

• Canadian wholesale sales rose a more-than-forecast 1.4% m/m to C$43.4 billion ($42.8 billion) in April on a 7.2% m/m gain in electronics, following an upwardly revised 0.7% m/m increase in March, Statistics Canada reported.

Europe

• UK retail sales unexpectedly rose 3.5% m/m in May, the most since the series started in 1986, after falling 0.3% m/m in April, the Office for National Statistics said. Sales jumped 8.1% y/y, the most since 2002. The surprisingly high May retail sales numbers indicate UK consumer spending is not collapsing despite a decline in confidence and gloomy business surveys.

• The Swiss National Bank’s Governing Board, led by Jean-Pierre Roth, left the 3-month Libor target unchanged at a 6-year high of 2.75% for a third consecutive quarter. The SNB signaled it is in no rush to raise interest rates, saying the acceleration in inflation is “transitory” because economic growth is slowing.

Asia-Pacific

• Japan’s economic outlook is “extremely uncertain” as record oil and commodity prices squeeze companies and households in Japan, Bank of Japan Governor Masaaki Shirakawa said. “Given that the economic outlook is extremely uncertain, the Bank of Japan will closely examine risk factors and implement policy flexibly,” Shirakawa said.


• China may be overwhelmed by speculative capital inflows if not allowing greater exchange-rate flexibility, the World Bank said. The World Bank today forecast inflation in China of 7% this year, up from a February estimate of 4.6%.

FX Strategy Update