by Darrell Jobman, Editor-in-Chief TraderPlanet.com
There were no significant US economic developments as bond markets consolidated following the sharp rise in yields and volatility seen last week. Markets will be looking closely at US data this week for further evidence on growth and inflation trends. The first major test will be the retail sales data on Wednesday, although comments from current and former Fed officials will also be monitored on Tuesday. Existing yields should provide further short-term dollar support.
ECB President Trichet continued to take a firm stance in comments on Monday. He stated that upside risks to inflation continued and that the bank will do all that is necessary to control inflation. The remarks overall will maintain expectations of further ECB interest rate increases.
The latest IMM positioning data recorded a further decline in long Euro positions, but there is still scope for a further position unwinding which will restrain the Euro.
The Japanese currency stabilised in Asian trading on Monday at around 121.60 against the dollar with some support from an upward revision in first-quarter GDP growth to 0.8% from 0.6%. There will be further speculation over an early Bank of Japan increase in interest rates, especially following comments from Bank Governor Fukui that the bank is looking at asset prices in determining policy.
The New Zealand Reserve Bank decision to intervene to weaken the New Zealand dollar strengthened the Japanese currency slightly on greater caution over carry trades, but the yen failed to sustain the gains. The net impact is likely to be increased volatility levels and the yen drifted weaker in US trade as stock markets were firm.
The UK currency weakened to near 1.9650 against the dollar on Monday before rallying back to near 1.97 as the UK currency edged stronger against the Euro.
Headline producer prices rose 1.2% in May, but the April increase was revised down and the core increase in output prices was held to 0.2% with the annual increase slowing to 2.4% from 2.5%. The data overall will not increase fears over greater corporate pricing power and will cause some relief within the Bank of England.
The retail spending, inflation and earnings data will be very important indicators for Sterling this week. The UK currency will be vulnerable to further selling pressure if there is convincing evidence of a slowdown in inflation or growth. In contrast, an inflation move back above 3.0% would indicate a further Bank of England rate increase in July which would support Sterling. Bank Governor King stated that the bank may need to tighten policy again if inflation indicators stay elevated.
Carry trades will also remain important with Sterling trends linked with the global risk appetite. Any renewed declines in global stocks would tend to weaken the UK currency.
The Swiss franc was on the defensive against the Euro on Monday and weakened to levels around 1.6530. The franc also drifted weaker to near 1.24 against the dollar as risk aversion was contained.
There will be continuing speculation that the National Bank could increase interest rates by 0.5% at this week’s council meeting and this should support the Swiss currency ahead of Thursday’s announcement. A 0.25% increase remains the more likely outcome which could weaken the franc after the decision unless there is a tough National Bank statement.
The franc performance will also remain correlated strongly with global stock markets trends.
The Swiss currency will tend to weaken if markets stage a significant recovery and investors continue to target high-yield currencies for fresh capital inflows. New Zealand Reserve Bank intervention to weaken the local currency did not have a significant franc impact on Monday, but sustained intervention could have a bigger impact.
The Australian dollar gains seen late on Friday were reversed in local trading on Monday as the New Zealand central bank intervened to weaken the local currency. The Australian dollar dipped to test levels below 0.84 before a recovery back to 0.8430.
Confidence in the domestic economy will remain strong in the short term with further speculation that the Reserve Bank will move to increase interest rates within the next 2-3 months. A sustained recovery in global stock prices would support the local currency, but there is still likely to be increased caution over carry trades.