The dollar stabilized in May, as the worst fears of the bears did not materialize. The US economy managed to avoid slipping into a full blow recession experiencing only a slowdown as GDP rose slightly to 0.9% in Q1 of 2008. Furthermore, signs of slowdown were evident in EZX as well. However, ECB officials remained preoccupied with inflation and threatened to raise rates in near future. The US meanwhile continued to grapple with the fallout from the housing crisis and its impact on the labor markets. Just how well it resolves these issues will determine whether the buck sees new lows or not
Boris Schlossberg
Senior Strategist
Dollar stabilized and gained some ground against the euro in the month of May as US economic data showed no further signs of deterioration. Granted, most of the economic activity was lackluster at best, but the fact that it did not worsen was good enough for most market players which have been pricing the currency for a US economic recession. The one clear bright spot has been an improvement in the Trade Balance which shrank to less than -$60 Billion deficit. Combined with steady TIC data inflows, the greenback remain well supported from structural point of view. The key to further strength however lies with the employment figures. If NFP’s print at t -100k or worse, the greenback will have a difficult time holding ground even at these modest levels– BS.
Despite relatively decent economic data the euro could not hold its gains against the greenback as it fell from record highs. The key reason for its weakness was early evidence of economic slowdown in the region especially in the retail sector Retail Sales once again declined sharply as high energy costs hurt consumer spending. Nevertheless, as we write this report President Trichet is announcing that the ECB is considering yet another rate hike, as EZ monetary authorities remain steadfastly focused on combating inflation at the expense of economic stimulus If ECB stays true to its word the EURUSD may retest its highs regardless of the slowdown in it economic fundamentals - BS
Sliding back is the only way that one can describe the economic situation in Japan as key measures of activity turned negative. Most important was the sharp decline in Overall Household spending which dropped to -2.7% versus projections of -0.9% Japanese consumers hampered by record high energy costs stagnant wages have cut back spending significantly, making it impossible for the BOJ to even consider raising rates for the foreseeable future. Little wonder then that USDJPY went back to the 105.00 figure as the better equity flows and lackluster Japanese fundamentals reawakened the interest in the carry trade. For yen to appreciate – it sonly source of hope is the return of risk aversion - BS
Sterling managed to bounce in May mainly on the conclusion that BoE would remain stationary rather than ease monetary policy for the time being. UK economic situation remained precarious with housing sector suffering especially hard. However, Retail Sales stabilized and wages continued to rise while the labor market saw no further deterioration. Most important of all inflation continued to rage and that more than any other reason prevented the BoE from lowering rates at the present time. As a result cable got a boost as traders be bid the currency on the assumption that they may get to enjoy the unit’s 5% for a few months longer. Sterling’s rebound may be short lived however. If housing continues to crater dragging consumption along with it, the BoE may not have a choice irrespective of the price pressures still extant in the system -BS
The economic picture out of Switzerland was generally positive in the month of May, but the unit traded more on return of risk appetite flows and suffered as a result. Swiss Trade Balance, and Retail Sales all improved in May, but the KOF LEI gauge continued to drift lower indicating that a slowdown may be on the horizon. The unit however, ignored most of the economic data and traded mostly on risk assumption flows as improved investment sentiment lifted equity prices and brought carry trade demand back in play. If ECB goes through on it promise to raise further the Swissie may see more weakness ahead, but if equities falter the Swissie will find a safe haven bid once again. BS
Broadly speaking, the Canadian fundamentals have continued to suffer as the US slows down. GDP is down to multi-year lows, putting interest rates on a downward trajectory as the BoC tries to steady the economy. While retail activity has rebounded modestly following a sharp drop to start the year, conditions it he manufacturing sector (as measured by Ivey PMI) have continued to deteriorate. Employment has remained steady for now, but the persistent down trend in CPI is indicative of slowing economic activity. The suspiciously positive trade balance level is distorted by booming oil prices. Other key exports have slumped dramatically - lumber shipments fell 7.7% and automotive goods fell 4.9% in March. – IS
Australia’s economy has settled into protracted slowdown under the weight of record high interest rates at 7.25%. Retail and manufacturing activity are headed south, though GDP has remained somewhat supported as the mining export sector has continued to expand. Tellingly, the trade balance has started to improve: the fall in consumption crimps demand for imported goods all the while an end to shipping disruptions from bad weather has seen exports of iron ore and coal skyrocket. The RBA now finds itself at a crossroads, as high borrowing costs are substantially slowing domestic demand but doing little to reverse inflation. If high input costs and low unemployment via expansion in mining will keep upward pressure on CPI, the RBA will have to make hard choices to get price stability. – IS
Recent data has seen profound decline in NZ fundamentals. Retail Sales have plummeted, while a recent uptick in business sentiment is precious little considering the entrenched decline since the third quarter of last year. Unemployment ticked up sharply in the first quarter and the trade balance has sunk deeper in to deficit as booming energy and food costs inflate import readings. While GDP remained strong going into the first quarter, the RBNZ slashed forecasts to reflect next to nil for this year’s economic growth with only a modest recovery in 2009. CPI tells of continued buoyancy in inflationary pressure, but RBNZ Governor Alan Bollard still boldly declared that rate cuts are on deck by the end of the year to buffer growth prospects. – IS