Forex Traders Scale Back Expectations Of Rate Hikes

EURO

The euro appreciated vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.5550 level and was supported around the $1.5460 level. Technically, today’s intraday high and low were right around the 38.2% and 23.6% retracements of the move from $1.6020 to $1.5280, respectively. Traders are scaling back their expectations regarding rate hikes by the Federal Open Market Committee. Many dealers now believe the Fed’s dramatic increase in hawkishness over the past couple of weeks was designed to lift market interest rates so that the Fed won’t have to raise official interest rates anytime soon. Richmond Fed President Lacker was quoted as saying “inflation is unacceptably high…despite several years of elevated inflation, the public’s expectation of future inflation has not become completely adrift as it was in the 1970s.”

Many data were released in the U.S. today. First, May producer prices soared at their fastest pace in six months, up 1.4% m/m and 7.2% y/y. Core inflation was up 0.2% m/m and 3.0% y/y. Second, May housing starts were off 3.3% to an annualized 975,000 rate, the lowest since 1991. Third, May industrial production was off 0.2% and capacity utilization fell 0.2% to 79.4%. Fourth, the Q1 current account goods/ deficit printed at US$ 174.9 billion and Q4 2007’s deficit was revised to US$ 167.2 billion. Finally, it was reported yesterday that the June homebuilders index fell to 18.

In eurozone news, the German ZEW June economic expectations index printed at -52.4 compared with -41.4 in April – the lowest level since December 1992. Also, the EMU-15 trade balance posted a €2.3 billion surplus. European Central Bank member Bini Smaghi reported “a hike, that I would describe as significant even if of only 0.25 basis points, should be enough to bring inflation within the (central bank’s) objective of 2 percent (a year) within the next 18 to 24 months.” Euro bids are cited around the $1.5230 level.

JPN/CNY

The yen appreciated marginally vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥107.60 level and was capped around the ¥108.40 level. The pair failed to sustain yesterday’s gains as traders pared back their expectations regarding interest rate increases from the Federal Reserve. Bank of Japan is not expected to lift interest rates anytime soon. Data released in Japan overnight saw May machine tool orders revised to +1.4% while the April tertiary index was up 1.8% m/m and 0.6% y/y. Prime Minister Fukuda reported he does not have current plans to promote an economic stimulus package and will instead continue reform efforts. The Nikkei 225 stock index lost 0.04% to close at ¥14,348.37. Dollar bids are cited around the ¥103.00/ 101.35 levels.

The euro moved higher vis-à-vis the yen as the crosses tested offers around the ¥167.80 level and was supported around the ¥167.05 level. The British pound and Swiss franc weakened vis-à-vis the yen as the crosses tested bids around the ¥210.65 and ¥103.45 levels, respectively. The Chinese yuan appreciated vis-à-vis the U.S. dollar as the greenback closed at CNY 6.8915 in the over-the-counter market, down from 6.9004 and the pair’s lowest close since the yuan revaluation of July 2005. Data released in China overnight saw January – May urban fixed-asset investment up 25.6% y/y.

STERLING

The British pound depreciated vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.9470 level and was capped around the $1.9695 level. Technically, today’s intraday high was right around the 50% retracement of the move from $2.0025 to $1.9360. As expected, Bank of England Governor King was forced to write a letter today to Chancellor of the Exchequer Darling because the U.K. inflation rate is more than 1% above the Bank of England’s 2.0% target rate. King reported inflation “is likely to remain markedly above the target until well into 2009.” May CPI inflation was up 3.3%, above expectations.

Traders are actually scaling back their expectations regarding a rate hike by BoE’s Monetary Policy Committee. King also characterized the higher inflation as “temporary” and said there has been “unnecessary volatility in output and employment.” Cable bids are cited around the US$ 1.9360/ 1.9100 levels.

The euro moved higher vis-à-vis the British pound as the single currency tested offers around the ₤0.7955 level and was supported around the ₤0.7870 level.

SWISS

The Swiss franc appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.0375 level and was capped around the CHF 1.0460 level. Technically, today’s intraday low was right around the 23.6% retracement of the move from CHF 0.9645 to CHF 1.0625. Data released in Switzerland today saw Q1 industrial production climb 4.3% y/y and was off 9.3% q/q. U.S. dollar bids are cited around the CHF 1.0250 level.

The euro and British pound weakened vis-à-vis the Swiss franc as the crosses tested bids around the CHF 1.6125 and CHF 2.0310 levels, respectively.

Posted in Categories: Contributor, External Research, Forex.

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