Expert Analysis of Today's Market

• The dollar was little changed against most key currencies on Friday. The yen, sometimes trading as a proxy for the yuan, rose after the People’s Bank of China announced it will let the yuan trade in a wider band. However, the yen’s gains faded as the changes were pretty modest and did not rattle equity prices in China or globally. The Canadian dollar rallied against all currencies on speculation of the Bank of Canada’s further rate hikes after strong Canadian retail sales. The USD/CAD traded at its lowest level since 1978.


• The USD/JPY has moved higher in a well-defined trading channel. The pair is moving closer to the upper trading band and the relative strength index indicates the pair’s overbought condition. The pair will possibly test the support from the early-2007 highs at the 122-area. The USD/JPY is supported by carry trades and the biggest risk to further gains would be a drop in global equity prices.

Financial and Economic News and Comments

US & Canada

• The Reuters/University of Michigan’s preliminary index of US consumer sentiment unexpectedly rose to 88.7 in May from 87.1 in April. The expectations index rose to 79 from 75.9. The current conditions fell to 103.8 from 104.6.

• Canadian retail sales increased a more-than-expected 1.9% m/m in March, after rising 0.2% in February, Statistics Canada reported.

Europe

• UK retail sales fell a more-than-expected 0.1% m/m in April after an upwardly revised 0.5% m/m gain in March, the Office for National Statistics said. April retail sails rose 4.2% y/y.


• German producer-price inflation rose a less-than-expected 0.1% m/m and 1.6% y/y in April, the Federal Statistics Office said.

Asia-Pacific

• In a tightening move to ease tension with the US and alleviate the risk of economic overheating, the People’s Bank of China increased the amount the yuan can appreciate, raised interest rates and increased reserve requirement. The PBC said it will widen the yuan’s trading band against the dollar to 0.5% from 0.3% effective May 21. The benchmark 1-year lending rate will be raised by 18 basis points to 6.57% and the 1-year deposit rate will be increased 27 basis points to 3.06% in an effort to control rapid credit and investment growth while keeping consumer prices stable. The PBC also said it will raise banks’ reserve requirement ratio by half a percentage point effective June 5.


• The Japanese department store sales fell 1.3% from a year earlier to ¥598.5 billion in April, after a 1.5% drop in March, down the second straight month, the Japan Department Stores Association said.


• Japan’s tertiary index, measuring activity in the service sector, fell a stronger-than-expected 2.2% m/m in March, the Ministry of Economy, Trade and Industry said. A 0.8% fall was expected.

FX Strategy Update