EURO

The euro gained significant ground vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.5615 level and was supported around the $1.5490 level. The common currency reached its highest level since 10 June as traders positioned themselves ahead of the weekend. The move higher was partially precipitated by stronger-than-expected German May producer price inflation data that evidenced increases of +1.0% m/m and +6.0% y/y. European Central Bank officials have made it very clear that there is likely to be a +25bps rate hike in July but today’s data suggest inflation remains strong. Euribor interest rate futures are now pricing in the chance that rates will be hiked at least twice before the end of 2008. Other data released today saw Italian April industrial orders up 13.9% y/y.

ECB member Bini Smaghi reported “Unless technological innovations lead to substantial savings or to an increase in supply, the world economy will have to learn to live with continuously increasing commodity prices. For central banks, continuing to assume that these price increases are one-offs could put their credibility at risk. If the price of commodities, in particular food and energy which represent on average about 30 per cent of the consumption basket in the euro area, increases at a yearly rate above 2 per cent, as has been the case on average over the past 10 years, price stability can be achieved only if other prices rise on average by substantially less than 2 per cent. Experience has shown that if inflation is left to creep up, the cost of bringing it down later will be even higher. The central bank must ultimately act if this is what is needed to maintain price stability. All should be aware of this.”

In U.S. news, the Federal Reserve convenes next week and is widely expected to keep the federal funds target rate unchanged. As usual, the Federal Open Market Committee’s policy statement will be closely reviewed to see if it yields any clues as to when Fed policymakers may being raising rates. Fed Vice Chairman Kohn spoke about the attempt by U.S. financial institutions to improve their balance sheets saying “Broadly speaking, we believe that primary dealers are strengthening liquidity and capital positions to better protect themselves against extreme events.” Euro bids are cited around the $1.5230 level.

JPN/CNY

The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥107.60 level and was capped around the ¥108.05 level. Traders booked profits following yesterday’s move higher. Traders await the release of May consumer price inflation data due next week followed by Bank of Japan’s quarterly tankan survey of consumer sentiment due 1 July. Most traders continue to believe the central bank’s Policy Board will keep the overnight call rate unchanged at 0.50% for the foreseeable future. BoJ Governor Shirakawa last week indicated the inflationary risks in Japan are increasing but did not indicate there was a need to raise borrowing costs. The Nikkei 225 stock index lost 1.33% to close at ¥13,942.08. Dollar bids are cited around the ¥103.00/ 101.35 levels. The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥168.00 figure and was supported around the ¥167.20 level. The British pound moved lower vis-à-vis the yen as sterling tested bids around the ¥212.35 level while the Swiss franc gained ground vis-à-vis the yen as the pair tested offers around the ¥103.85 level. The Chinese yuan appreciated vis-à-vis the U.S. dollar as the greenback closed at CNY 6.8796 in the over-the-counter market. The government of China announced it is raising gasoline and diesel prices by 16% to 18% to reduce soaring oil demand.

STERLING

The British pound appreciated vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.9765 level and was supported around the $1.9700 figure. Technically, today’s intraday low was right around the 50% retracement of the move from US$ 2.0025 to $1.9360. Sterling is still bid following yesterday’s record May retail sales report that triggered speculation Bank of England may need to raise interest rates. Earlier this week, BoE Governor King dampened rate hike expectations in his letter to Chancellor Darling that explained why consumer price inflation remains above 3.0%. BoE Deputy Governor Gieve today said the current market environment is the “most challenging” faced since 1997 when the central bank gained independence. Gieve reported “We judge that in order for inflation to return to target it will be necessary for economic growth to slow this year, reducing the pressure on supply capacity of the economy and dampening increases in prices and wages. But the risks to both the upside and downside remain large.” Cable bids are cited around the US$ 1.9360/ 1.9100 levels. The euro moved higher vis-à-vis the British pound as the single currency tested offers around the ₤0.7905 level and was supported around the ₤0.7855 level.

SWISS

The Swiss franc appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.0355 level and was capped around the CHF 1.0455 level. Data released in Switzerland today saw May producer and import prices up 1.2% m/m and 3.9% y/y. Swiss National Bank voted this week to keep monetary policy unchanged although an upward bias remains. 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 1.6170 and CHF 2.0460 levels, respectively.

Posted in Categories: Contributor, External Research, Forex.