Forex Commentaries

• The dollar fell modestly on Wednesday on better risk appetite. US consumer-price inflation was lower than expected in May, reducing the possibility of early Fed rate hikes. The lack of inflationary pressures reduced the chance of premature Fed tightening and renewed deflationary pressures. The S&P 500 fell 1.26 points to 910.71 after trading in a narrow range. The yen rose on narrowing yield differentials as Fed hike expectations diminished. The euro rose as the eurozone seasonally adjusted trade deficit narrowed more than expected. Sterling was supported by smaller-than-expected UK job losses despite the Bank of England’s concern about the recent pound appreciation. The Australian dollar rose as Australia’s LEI rose for a second month indicating rising economic activity.


• The USD/CAD fell for the first time in four days. After trading near the 1.15 resistance, the pair was pressured by improving risk appetite and a less-than-expected decline in Canada’s LEI. After peaking on March 9, the USD/CAD has been pressured by rallying commodity and stock prices. The inverse relationship is likely to continue; thus, we expect further modest consolidation in stock and commodity prices before prices move higher again. After breaking the well defined downtrend last week, the USD/CAD is in a tentative uptrend. Resistances are in the 1.15 and 1.18 areas and we do not think the 1.18 resistance will be broken. There are supports in the 1.10 and 1.08 areas.

Financial and Economic News and Comments

US & Canada

• US consumer prices increased a less-than-expected 0.1% m/m in May after 0.0% m/m in April, CPI data from the Labor Department showed. May CPI declined a more-than-expected 1.3% y/y, the largest 12-month drop since April 1950. The core CPI, which excludes food and energy, increased 0.1% m/m, as forecast, following April’s 0.3% m/m advance. May core CPI rose 1.8% y/y, as expected. Real average hourly earnings were unchanged m/m in May but rose 4.6% y/y. May CPI figures indicate inflation and deflation threats are subdued.

• The US current-account deficit narrowed to $101.5 billion in Q1 2009, the smallest deficit since Q4 2001, from a revised $154.9 billion in Q4 2008, the Commerce Department said.


• Canada’s leading economic indicators index fell for a ninth consecutive month in May, falling a less-thanexpected 0.1% m/m, following April’s upwardly revised 0.9% m/m decline, according to data from Statistic Canada. The May LEI fall was led by a 12.0% m/m drop in new manufacturing orders and a 1.0% m/m decline in furniture and appliance sales.

• Canada’s wholesale sales fell for a seventh consecutive month in April, dropping 0.6% m/m to C$40.3 billion ($35.5 billion), in line with forecast and the lowest level since December 2005, following March’s upwardly revised 0.4% m/m decline, data from Statistics Canada showed. The April wholesale sales drop was led by a 2.9% m/m decline in building materials and a 1.2% m/m slide in machinery and electronic equipment sales.

Europe

• Eurozone exports declined a seasonally adjusted 1.3% m/m in April, the most in three months, while imports fell 2.7% m/m, Eurostat reported. The seasonally adjusted trade deficit narrowed more than expected to €300 million ($417 million) from March’s revised €1.8 billion.


• Eurozone construction output increased a seasonally adjusted 0.6% m/m in April after an upwardly revised 0.6% m/m advance in March, according to a separate report from Eurostat. April construction declined 4.7% y/y wda.


• UK jobless claims rose a less-than-expected 39,300 in May, the smallest increase since July 2008, to 1.54 million, the highest since July 1997, following a downwardly revised 49,600 rise in April, figures from the Office for National Statistics showed. The claimant count rate increased to 4.8% from April’s downwardly revised 4.6%. The unemployment rate based on International Labour Organization methods increased to 7.2% in the three months through April from 7.1% in the three months through March. Average earnings including bonus increases 0.8% y/y in the three months through April, while average earnings excluding bonuses rose 2.7% y/y.

• The Bank of England said “the risk of a continued sharp contraction in output in the near term had receded somewhat,” adding that “there was no reason to conclude that the medium-term outlook for the economy, and thus inflation, had changed materially since the Inflation Report had been finalized,” according to minutes of the June 3-4 BOE monetary policy committee meeting released today.


• Switzerland’s retail sales increased 1.2% y/y in April, the same rate as in March, the Swiss Federal Statistical Office said.


• The Swiss government cut its 2009 economic forecast for a second time this year. The Swiss GDP may contract 2.7% in 2009 and 0.4% in 2010, the State Secretariat for Economic Affairs said.


• Norway’s central bank unexpectedly lowered its key interest rate to 1.25%.

Asia-Pacific

• The Westpac–Melbourne Institute Australian leading economic indicators index, measuring future economic activity in Australia, rose for a second month in April, rising 0.7% m/m, after March’s upwardly revised 0.4% m/m increase, Westpac Banking Corp. and the Melbourne Institute reported. The LEI’s annualized growth rate was -3.5% in April, still deep in negative territory but a significant improvement from -5.1% in March. “If this rate of improvement in the growth rate continues, we can look to positive growth in the first half of 2010,” according to the report. The coincident index, measuring current economic activity, increased 0.5% m/m in April, but its annualized growth rate was -0.5%. 

• Australia’s seasonally adjusted dwelling starts decreased 4.0% in Q1 2009 after a downwardly revised 11.5% drop in Q4 2008, the Australian Bureau of Statistics said.


• The Japanese government and the Bank of Japan raised their assessments of the economy for a second month. The Cabinet Office said demand is picking up although “the economy is in a difficult situation.” The BOJ said the economy has “begun to stop worsening.” “It seems clear the economy bottomed out between January and March,” Japan’s Finance Minister Kaoru Yosano said, adding that “there are signs the decline in personal spending on some items is ending.”

FX Strategy Update