Expert Analysis of Today's Market

• The dollar traded mixed on Wednesday ahead of important data releases tomorrow and Friday that may push the FX market out of its recent trading range. The euro fell and the yen traded modestly higher against the dollar. The dollar drifted slightly lower after the FOMC minutes indicated that the Federal Reserve remains worried about inflation.


• The EUR/JPY dropped after Chinese stocks slumped and risk aversion increased dampening demand for carry trades. The pair is struggling to penetrate the 164-handle resistance. If this resistance is broken, the pair will rally. The pair is trading in lockstep with the global stock market and a more serious correction in international stocks will lead to a significantly lower EUR/JPY exchange rate.

Financial and Economic News and Comments

US & Canada

• The Federal Open Market Committee reiterated that inflation remains uncomfortably high and remains the Fed’s predominant concern. Housing is expected to weigh on the economy longer than expected as the downside risk to capital investment has diminished. The labor market remains tight and leaves an upside risk to inflation. The FOMC minutes stated “nearly all participants viewed core inflation as remaining uncomfortably high and stressed the importance of further moderation. All participants agreed that the risks around the anticipated moderation in inflation were to the upside.” The committee expects GDP to expand “a little below the economy’s trend rate of growth through the remainder of this year and then pick up to a rate broadly in line with the economy's trend rate in 2008,” the minutes stated. Trend growth is believed to be around 3%.


• ADP estimated May US private sector payroll growth at 97K. That added the 3-month average of government payroll growth for a 123K estimate for total payroll growth, not far from the 135K consensus estimate. We think the both estimates are on the low side.

Europe

• European Central Bank council member Nicholas Garganas said the ECB will probably raise its inflation forecast next month and keep options open on interest-rate increases after June.


• Bloomberg’s PMI for eurozone retail sales declined to a seasonally adjusted 48.4 in May, a 4-month low, from 54.6 in April. The reading indicates an end to the expansion in the EMU retail sector.

Asia-Pacific

• Japan’s industrial production unexpectedly fell 0.1% m/m in April on weakness in the transport equipment sector, after declining 0.3% m/m in March, the Ministry of Economy, Trade and Industry said. The industrial production rose 2.3% y/y. According to the survey of production forecast in manufacturing, industrial production is expected to rise 1.8% m/m in May and increase 1.4% m/m in June.


• China’s stock index CSI 300 fell 6.8% after the Chinese government tripled stamp duty on share trades to 0.3% “to promote the healthy development of the securities market,” according the Finance Ministry.


• China’s National Development and Reform Commission said China should keep US dollar assets stable and invest the FX reserves in energy and resources and said that shift away from the dollar would create a panic and cause losses in China’s FX reserves of which 70% are in dollar-denominated assets.


• Australia’s retail sales rose a less-than-expected 0.1% m/m in April after a downwardly revised 1.0% in March, the Bureau of Statistics said.

FX Strategy Update