US Dollar
Dollar strength was limited yesterday with most of the majors making some
headway from Friday’s pullback. With no economic data, the fluctuations were
restrained to the current consolidation as comments from US Treasury Secretary
Snow helped spark the day’s dollar weakness. Speaking in Sharm el Sheik, Egypt
at an interview yesterday, Secretary Snow noted that the cash windfall from
Middle Eastern oil producers is likely to lead to improved school conditions and
roads in the region and not further investments in US assets.
With crude oil prices climbing 40% higher on the year, oil producers have
increased their holdings of US treasuries, notes and bonds. The amount has grown
phenomenally with members of the Organization of Petroleum Exporting Countries
increasing their holdings by 158 percent in the past three years. Although the
Treasury Secretary went on to note that global foreign interest remains
underpinned and that the market is so “huge that the sums” would “pale
compared to the size of that capital market” traders took to paring back
dollar positions.
Ultimately, with interest thinned concerns are surfacing that the twin deficits
may further weigh on the overall currency market. Looking ahead, with no
releases on the session, traders will be privy to the still nascent Richmond
index in dictating tomorrow’s direction. Should the report print higher than the
expected 15 reading, speculation could resurface of further rate hike
considerations.
Euro
Euro data was promising yesterday and continued the rather positive line seen
last week. For the month, Euro zone trade balance showed a seasonally adjusted
March surplus of 300 million euros. Expectations were for a deficit of 2.5
million euros as the consensus looked for a slow down in exports on an apparent
appreciation.
However, the better than expected result boosted euro fortunes on the session
when coupled with comments made on Sunday by the European Central Bank’s
Liikanan. The policy maker was quoted in a German newspaper as stating that the
current European economic scene remains “broad based”. Traders coupled
the positive statements with hawkish rhetoric from council member Liebscher and
a bullish deputy finance Mirow that repeated the government’s stance on a
resilient appreciation in the underlying currency.
Ultimately, further hawkish speculation could mount on the weak given the
upcoming sentiment results on Wednesday. However, with the most recent ZEW
lending to some bearish notions, expectations run slightly higher of a similar
IFO.
British Pound
Sterling trading was kept to a relative standstill aside from the usual euro
pattern bidding. With no economic data, the underlying spot fluctuations look to
follow euro bidders in the near term until Wednesday’s batch of surveys. Most
importantly will be the CBI industrial trends survey. Expected to continue the
recent improvement, the survey results would further the current optimism as the
report stands suggestive of underlying productive expansion in the United
Kingdom. This would be coupled with the recent underpinning in the housing
sector along with a seeming rebound in consumer sentiment and spending.
Subsequently, a positive report would also spur further speculation on the
rumored two rate hikes that the market may be expecting before yearend. With
inflation tepid, positive growth from all sectors looks to feed future price
increases and ultimately convince Mervyn King to raise interest rates in
remaining preemptive of such forces. Considered pound bullish, the consensus may
very well now expect a retest of the $1.9000 figure and a possible touch of $2,
not experienced since 1992.
Japanese Yen
Dour convenience store sales boosted yen weakness in the overnight only to fade
and see the spot price rebound lower in favor of the Japanese denomination. For
the month of April, convenience store sales declined 4.9 percent and sent some
shockwaves in the market that the economy may not be ready for an end to zero
interest rate policy. However, what is notable was the fact that a decline in
traffic of 0.8 percent lent to the overall weakness as consumer spending
actually improved over the span of the month, possibly skewing the report.
Nonetheless, the yen rebounded in midday as expectations run deep of an
improvement in the Tertiary industry index. A measure of the spending in the
services industry, which constitute 60 percent of the overall economy, the
report may lend to further bullish bias in favor of the near term rate hike.
Declining 1.5 percent in the month of February, expectations are for an increase
to a negative 0.2 percent reading.
Kathy Lien is the Chief Currency Strategist at
Forex Capital Markets. Kathy is responsible for providing research and analysis
for DailyFX, including technical and fundamental research reports, market
commentaries and trading strategies. A seasoned FX analyst and trader, prior to
joining FXCM, Kathy was an Associate at JPMorgan Chase where she worked in Cross
Markets and Foreign Exchange Trading.
