Expert Analysis of Today's Market

• Supported by rising yields, the greenback rose modestly against most key currencies on Tuesday. Falling stock prices pressured the carry trades. The euro fell on weaker-than-expected Eurozone industrial production. Sterling strengthened on Bank of England Governor Mervyn King’s comments that the BOE may need to raise interest rates again if capacity pressures, pricing intentions and inflation expectations remain elevated. The pound’s gains were capped by softer-than-expected May inflation data.


• The EUR/USD fell for the fifth day pressured by rising US interest rates. The euro is also pressured by increasing risk aversion as stocks have traded lower and the EUR/JPY carry trades have been moderately unwound. The EUR/USD is trading just above support from the 1.33 handle. US inflation and retail sales data later this week are important to the EUR/USD’s short-term outlook. The pair is oversold and bond yields are approaching the important 5.25 resistance level. If the CPI and retail sales data are weaker than expected, we may see a recovery in the EUR/USD and an opportunity to sell the pair again.

Financial and Economic News and Comments

US & Canada

• Canadian Q1 productivity rose 0.7% q/q, and unit labor costs increased 0.7% q/q and 4.0% y/y, Statistics Canada reported. The rise in unit labor costs will prove worrisome for the Bank of Canada.

Europe

• Eurozone industrial production unexpectedly fell a sharp 0.8% m/m in April, Eurostat reported. Output rose 2.8% y/y.


• German wholesale prices rose 0.3% m/m in May but eased to 2.4% y/y in May from 2.9% y/y in April, the Federal Statistical Office said.


• The UK inflation rate increased less than expected in May. The UK consumer price index (CPI) rose 2.5% y/y in May after rising 2.8% y/y in April, the Office for National Statistics said. However, core inflation accelerated to 1.9% y/y from 1.8% y/y, matching the highest level since 1997.


• Despite the latest easing in inflation, Bank of England Governor Mervyn King’s hawkish comments yesterday suggested that interest rates are poised to rise further.


• The high level of borrowing from Asia by the major western economies is a major concern, according to BOE Governor Mervyn King. “Savings from Asia are coming into financial markets, bidding down interest rates, and that’s bidding up asset prices,” King said in an interview with the Western Mail published Tuesday.

Asia-Pacific

• Japan’s consumer confidence index fell slightly to 47.3 in May from 47.4 in April, the Cabinet Office said.


• Japan’s corporate goods price index rose 0.5% m/m and 2.2% y/y in May, the Bank of Japan said.


• China’s inflation accelerated at the fastest pace in more than two years in May as pork prices soared, increasing the likelihood of further interest-rate hikes. Consumer price inflation rose 3.4% y/y in May, the National Bureau of Statistics said. Inflation rate in April was 3.0% y/y, matching the central bank’s 2007 target.


• Australia’s business confidence climbed to the highest level in more than two years in May. The sentiment index rose 2 points to 15 in May, according to National Australia Bank Ltd. A reading above zero signals improving conditions.

FX Strategy Update