Forex Investment and Currency Trading

Eurozone The advance PMI for April showed a slight gain for the composite index, which edged up to 51.9 from 51.8 in March. This resulted from opposing trends in services and manufacturing, as services rose to 51.8 from 51.6 in the previous month, while manufacturing fell to 50.8 from 52.0 in March. Germany’s readings remained stronger than the Euro area’s, but showed a similar tendency between the two macro sectors, with services rising to 54.6 from 51.8 and manufacturing falling to 53.6 from 55.1. Given that manufacturing is more exposed to international competition, one can read the drop in the manufacturing survey as a sign that the strengthening of the Euro exchange rate and the slowdown in global growth are beginning to take a toll on the Euro area economy. On the whole, the PMI readings for the first four months of the year are consistent with a more moderate growth slowdown than in H2 2007, but they do not point to a reacceleration. On the policy front, following a deluge of hawkish ECB comments, on Wednesday ECB member Noyer corrected some of his previous statements, suggesting he was not telegraphing a rate hike later in the year; while Eurogroup President Junker reiterated his verbal intervention, arguing that the current levels of exchange rates are not consistent with the latest G7 Statement. On balance, the Noyer retraction had a more
meaningful impact on the market (rates rallied a few basis points at the short end), but the IFO and INSEE surveys due out tomorrow, along with the US data, will be key in determining if EURUSD can extend its recent gains.

UK The Bank of England’s decision to lower the Bank rate by 25bps to 5.0% in early April was taken via a 3-way split vote, according to the minutes released on Wednesday. This reaffirms the BoE’s apparent reluctance to engage in rapid rate easing given concerns about the near-term inflationary pressures. With Besley, Sentance and Blanchflower voting in line with their perceived “form,” the focus for future rate decisions rests upon the majority of the six members who voted for the 25-bp ease. The minutes also recorded that that the UK housing market was continuing to weaken although the MPC was also “unclear how far these housing market developments would amplify the expected slowdown in consumption growth.” In the meantime, nearterm inflationary pressures remained the immediate concern. The 12% decline in the sterling effective exchange rate since late last year “would tend to increase import price inflation in the short run.” The key debate for the majority is whether, and to what extent, the deteriorating economic outlook might lead to CPI inflation undershooting the 2% target in the medium term. With core CPI inflation at a very subdued 1.2% yoy, it is clear the inflation boost is coming from the external shocks to food and energy costs. As a result, the slowing economy is likely to keep a lid on underlying inflationary pressures. Overall, there was little sign that the MPC is looking for a back-to-back move in May. On the assumption that inflation eases through 2H 2008, the Bank rate could be lowered to 4.25% by end-2008 with the ongoing correction in the housing market through into next year requiring a further 25-bp rate cut in 1Q 2009 to a trough of 4.0%.

Sweden The Riksbank kept rate on hold at 4.25% as expected. While the central bank sees the same repo rate path from the previous assessment at 4.3% for the rest of year, there were revisions to the most important forecasts. In details, the Riksbank revised upward its inflation forecasts, with 2008 CPIX seen at 2.6% vs. 2.5% in the February report, 2009 inflation up to 2.4% from 2.2% previously. Furthermore, GDP growth is revised higher in 2008 at 2.6% from 2.4%, but 2009 growth was revised down to 1.8% from 2.0%. Positive SEK sentiment amid improved risk appetitive environment is further boosted after the Riksbank rate decision.

Japan The March unadjusted trade surplus narrowed to a smaller-than-consensus Y1.12tn from Y1.60tn a year ago. In March real exports gained by 4.7% mom (down 4.9% mom in February) and real imports by 5.9% mom (down 3.1% mom in February). In 1Q, real exports rose by 3.3% qoq and real imports by 0.8% qoq, suggesting continued positive contribution to real GDP growth. As for March industrial production, despite the 4.7% mom real export gain, large-scale electricity demand was down mom with a sharper drop in domestic new motor vehicle registrations. The regional breakdown of export volume suggests slower growth in exports to Asia. Growth in export volume to Asia slowed to 4.6% yoy in March from 16.7% yoy in February, taking the three-month moving average to +9.9% yoy in March from +12.2% yoy in February. The yoy drop in export volume to the US narrowed to -3.8% yoy in March from -5.0% yoy in February. Export volume growth to EU slowed to 9.8% yoy in March from 15.7% yoy in February, but the three-month moving average picked up to 15.5% yoy in March from 13.6% yoy in February. The ruling coalition has decided to revive the gasoline tax surcharge by a Lower House overriding of the bill on April 30. The reintroduction of the surcharge should avoid a drag on growth from reduced public investment spending, but higher gasoline prices will undermine consumer sentiment and help push up inflation readings. In sympathy with growing inflation concerns abroad, the yen OIS market priced in modest chances of a BoJ rate hike in the autumn. However, in view of the expected deterioration of the Japanese economy, chances of a BoJ rate cut should be greater than those of a rate hike during 2008. A major bank’s upward
revision to its subprime-related losses resulting in a pretax deficit during FY2007, as well as banks’ less generous lending stance toward small firms and an expected tightening of the Basel II capital adequacy standards for banks’ structured product holdings, suggests that banks’ preferences for JGBs are likely to persist for the time being..

Australia Australian headline CPI inflation was at the higher end of market expectations at 1.3% qoq/4.2% yoy in 1Q 2008. The underlying measures were above the high end of expectations with trimmed mean 1.2% qoq/4.1% yoy and weighted median 1.3% qoq/4.4% yoy, the average surging from an already uncomfortable 3.6% yoy in 4Q 2007 to a positively restless 4.25% yoy in 1Q 2008. While the RBA had flagged a high 1Q CPI outcome in recent speeches and meeting minutes, numbers this high may revive the debate about whether interest rates need to rise further later this year. Another example of the broad based nature of the inflation threat right now is that inflation for non-tradables or “domestic” products surged from 4.1% yoy to 5.0% yoy while that for goods traded on world markets (tradables) accelerated from 1.4% yoy to 3.3% yoy. Food inflation, a problem all around the
world, surged to 5.7% yoy but inflation ex food was also elevated at 4.0%. After the decision, the yield on the one-month interbank futures market for August (coinciding with the month after the next CPI report) jumped 7.5 bp to 7.375%, i.e., pricing in about a 50:50 chance of another 25-bp hike in the 7.25% cash target. The 2-year interest rate spread between Australia and its trading partners rose by 8bp and the trade weighted AUD rose about 0.5%. With the ANZAC long weekend coming up and little data out in the week ahead, technicals will determine if the AUD can now advance toward the March 1984 post float high of .9653 USD.