Expert Analysis of Today's Market

• The dollar fell modestly against most key currencies on Tuesday. The euro rose to a record versus the yen and advanced the most in two weeks against the dollar as traders boosted bets on higher interest rates in the EMU on hawkish ECB comments. The implied rate on the euribor interest-rate future maturing in December rose to 4.51%, the highest over the past 12 months. The yen initially rose on strong Japanese consumption and employment reports; however, it later pared gains, tested important support and made a marginally new all-time low against the euro. The Canadian dollar rose to a 30-year high after the Bank of Canada said an interest-rate increase may be needed “in the near term” to restrain inflation.


• The USD/JPY has been rising in a well-defined trading channel since early-March. After reaching resistance from the upper trading band of the channel last week, the pair has moved sideways. There is strong resistance at the 122-handle. If this is broken, the pair will rally. Today the pair fell initially on stronger-than-expected Japanese data but recovered on better-than-expected US consumer confidence. Japanese consumer spending, having been the weak link in the Japanese economic recovery, is finally showing signs of improving. This may allow the Bank of Japan to normalize rates. However, we do not expect any BOJ rapid moves, but the weakness in consumption is what has restrained the BOJ.

Financial and Economic News and Comments

US & Canada

• US consumer confidence rose more than expected in May on rising stock prices and a strong labor market. The Conference Board’s index of consumer confidence rose to 108.0 in May from an upwardly revised 106.3 in April. The measure of present conditions rose to 136.1 from 133.5 and the gauge of expectations for the next six months rose to 89.2 from 88.2.


• US home prices in 20 metropolitan areas dropped 1.4 % y/y and 0.3% m/m in March following a 0.8% y/y decline in February, according to a report by S&P/Case-Shiller. The 10-city composite index decreased 1.9% y/y in March. Nationally, home prices also fell 1.4% in the first quarter from the same period last year, the fist decline since 1991. This “is a reaffirmation of the pullback in the U.S. residential real estate market,” Robert Shiller, the chief economist at MacroMarkets LLC and a professor at Yale University, said in a statement.


• The OECD said the Federal Reserve should only cut rates once core inflation falls.


• The Bank of Canada, as expected, kept its benchmark interest rate at 4.25% but indicated the BOC may be ready to raise interest rates for the first time in more than a year to control faster-than-expected inflation.

Europe

• ECB Governing Council member Axel Weber said in an interview with the Financial Times Deutschland that the ECB is prepared to shift to a restrictive monetary policy if needed to keep inflation in check. Meanwhile, ECB Executive Board member Juergen Stark said the ECB is on high alert over inflationary dangers in the eurozone and ready to respond as necessary given strong money growth and high capacity utilization.


• The eurozone posted a €5.4 billion current-account surplus in March, after a €3.7 billion deficit in February, the ECB reported.

Asia-Pacific

• Japan’s jobless rate unexpectedly fell to a 9-year low in April. The unemployment rate dropped to 3.8% from 4%, the Statistics Bureau said.


• Japan’s household consumer spending rose a more-than-expected 1.1% y/y, in both nominal and real terms, the Statistics Bureau said. Meanwhile, household disposable income fell 0.4% y/y in April, the first fall in more than six months.

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