Expert Analysis of Today's Market

• The dollar surged early Friday against most major currencies as the Asian and European equity markets fell and global government bonds dropped. The greenback pared gains and the carry-trade currency pairs recovered after US yields fell back in New York after touching important resistance at 5.25% overnight. US stocks stabilized after yesterday’s rout. The yen and the Swiss franc earlier gained as investors liquidated riskier assets funded by borrowing in Japan and Switzerland. The Canadian and Australian dollars were flat against the dollar.


• The EUR/USD fell for a third day and broke support at the 1.34-handle. There is support at the 1.33-handle. If this is broken, it will be bearish for the pair. There is a debate whether higher bond yields are the result of higher inflation or growth expectations. Higher growth expectations are likely to be positive for the dollar and the carry-trades. An indication of high growth and low/moderate inflation would be stable to higher stock prices.

• The EUR/JPY fell for the fourth day after touching an all-time high on Tuesday. The pair is dependent on risk appetites in the asset markets. We think the correction in the stock markets still has further to go; therefore, we believe support will be broken and the EUR/JPY and other carry-trade pairs will fall.

Financial and Economic News and Comments

US & Canada

• The US trade deficit narrowed unexpectedly to $58.5 billion in April from a revised $62.4 billion in March, the Commerce Department said. Exports increased $0.3 billion and imports fell $3.6 billion in April. Trade subtracted one percentage point from the real GDP growth rate in Q1. Today’s lower trade deficit is likely to add almost 0.5% to Q2 GDP, which will be around 3%.

• The Canadian trade surplus widened to C$5.8 billion ($5.4 billion) in April from C$5.1 billion in March, Statistics Canada said.

Europe

• Germany’s seasonally adjusted trade surplus widened slightly in April, as growth in exports exceeded a rise in imports, according to data released by the Federal Statistical Office.


• The UK manufacturing output rose 0.3% m/m in April and 1.3% y/y, National Statistics reported.


• The median UK private sector pay settlement remained unchanged at 3.5% in May from the previous 3-month period, IDS said.


• The OECD’s composite leading indicators (CLI) for April suggested that “continued moderate economic expansion lies ahead” in the G7 economies, while steady growth is likely in the largest emerging economies.


• A number of elements have been pointing to stronger eurozone inflation, making the European Central Bank act in advance to assure price stability, ECB Executive Board member Lorenzo Bini-Smaghi said.

Asia-Pacific

• Japan’s core private-sector machinery orders increased a less-than-expected 2.2% m/m in April following a 4.5% fall in March, the Cabinet Office said.


• The Economy Watchers’ Survey index for current conditions in Japan fell to 46.8 in May from 49.7 in April, staying below the key 50 level for the second consecutive month, the Cabinet Office said.


• Japan’s money supply, M2 plus certificates of deposit (CDs), rose 1.4% y/y in May following a 1.1% y/y rise in April, the Bank of Japan said.

FX Strategy Update