Expert Analysis of Today's Market

• The dollar was little changed against most key currencies on Wednesday. Sterling rallied after surprisingly hawkish Bank of England minutes. The Swedish crown rose across the board after the Riksbank raised its key interest rates to 3.5% and revised its forecast for future rates by more than expected. The Swiss franc strengthened after Swiss producer and import price inflation in May was much higher than expected. The yen fell to near a record low against the euro and declined versus the dollar after minutes of the BOJ May meeting reinforced the idea of a gradual change in rates. The carry-trade theme continues, supported by rising bond and equity prices. The high-yielding Australian and New Zealand dollars hit 16- and 20-year peaks respectively versus the yen.


• The EUR/USD is testing the 1.34-area resistance. There is another resistance from the downward trend around 1.35. We expect the EUR/USD to go slightly higher and plan to sell it then.

• Having been in downward sloping trend for over a year, the US dollar index is now at a crucial technical level. The resistance of this trend was unsuccessfully tested last week; however, the test is not over yet. If the resistance is broken, the greenback will rally and a dollar bull market will begin.

Financial and Economic News and Comments

US & Canada

• Canadian wholesale sales unexpectedly fell 3.1% m/m to C$42.8 billion ($40.1 billion) in April, the biggest decline in almost four years, as car shipments plunged, Statistics Canada reported. Separately, the statistics agency said the index of leading economic indicators increased 0.5% m/m in May, matching estimates.


• US Treasury Secretary Henry Paulson said he will look for ways to be “more creative” in pressing China to increase flexibility of the yuan. “We have room to be more creative and accomplish a good deal more….I share your frustration on the pace of change in China,” Paulson said in testimony on the international financial system to the House Financial Services Committee.

Europe

• German producer-price inflation rose a stronger-than-expected 1.9% y/y and 0.3% m/m in May, after rising 1.6% y/y in April, the Federal Statistics Office said.


• The Bank of England voted 5-4 to keep its key interest rates unchanged at 5.5%, according to the BOE Monetary Policy Committee minutes of the June 6-7 meeting released today. BOE Governor Mervyn King, wanting to increase interest rates, was outvoted for the second time of his tenure. King argued an interest-rate increase was needed because of upside inflation risks. The MPC hawks said consumption needs to slow and there is no reason to wait with the rate increase. This raises the likelihood that the BOE will raise rates at its next meeting.

Asia-Pacific

• The Bank of Japan remains committed to increasing interest rates gradually as pace of rate hikes is determined by the Japanese economy and price development, BOJ Deputy Governor Toshiro Muto said. “The pace of needed interest-rate adjustments will be determined based on improvements in the economy and price situation,” Muto said.


• Westpac’s leading economic index for Australia rose to 6.7% y/y in April from 6.4% y/y in March.

FX Strategy Update