Expert Analysis of Today's Market

• After important technical levels were broken last week, the dollar fell against major currencies on Monday and continued its decline on technical selling. Fundamentally the greenback was hurt by diminishing US growth and yield advantage. The EUR/USD continued its strong rise, after breaking resistance on Friday, possibly testing all-time highs later this week. Sterling traded close to its 26-year high versus the dollar before a widely expected Bank of England interest-rate increase to 5.75% on Thursday. The Australian and New Zealand dollars rose to multi-year highs versus the dollar. The yen and Swiss franc strengthened after terrorists targeted central London and Glasgow. The yen was also supported after the Bank of Japan’s Tankan report showed confidence among manufacturers held near a 2-year high and speculation Japanese investors will bring back some of the money invested in German bunds as Germany will pay more than €16 billion ($21.7 billion) in coupon and principal on German government debts on July 4.


• The USD/JPY rose to a 4 1/2-year high last month as investors sent Japanese funds overseas in search of higher yields. We expect the yen’s strength to be short-lived as interest-rate differentials will push the yen lower. After failing to penetrate resistance of the upper trading band of the 4-month bull-channel, the USD/JPY has been consolidating gains supported by huge interest-rate differentials and risk appetites. We expect the pair to find support at the 122-handle and the uptrend to resume.

Financial and Economic News and Comments

US & Canada

• The ISM’s US manufacturing index rose to 56 in June from 55 in May, the highest level in 14 months, boosted by an increase in production and new orders, the Institute for Supply Management reported. The data indicates a strong rebound in the US manufacturing sector. The ISM’s prices paid index fell to 68 from 71.

Europe

• The eurozone manufacturing PMI rose slightly more than expected to 55.6 in June from 55.0 in May, helped by rises in the production, new orders, and employment sub-components. The data indicates continued strong growth in the EMU manufacturing sector.


• UK manufacturing purchasing managers’ index fell to 54.3 in June from a revised 54.7 in May, according to the Chartered Institute’s purchasing managers/RBS survey.


• UK house prices rose 0.3% m/m and 6.4% y/y in June, according to the latest Hometrack house price survey.


• UK services output fell 0.1% m/m but rose 3.9% y/y in April, the National Statistics said.

Asia-Pacific

• Japan’s Tankan confidence business survey showed confidence among large manufacturers was unchanged at 23 in June from March and near December’s 2-year high of 25, the Bank of Japan reported. Sentiment among service companies held at a 15-year high of 22 points for a third quarter. A positive number means optimists outnumber pessimists.


• The average monthly cash earnings per regular employee in Japan fell 0.6% y/y in May, down for the sixth consecutive month, the Ministry of Health, Labor and Welfare said.


• Manufacturing activity in China expanded at the slowest pace in four months as June’s purchasing managers’ index fell to 54.5 in June from 55.7 in May, the China Federation of Logistics and Purchasing and the National Bureau of Statistics said.

FX Strategy Update