Forex Investment and Currency Trading

UK The Rightmove house price index posted a surprising 1.2% mom gain in May and rose 2.2% yoy, up from 1.3% in April. However, Rightmove commented that given current market conditions the price increase reflects unrealistic expectations on the part of sellers against a backdrop of reduced credit availability for buyers. The latest indices based on agreed transaction prices showed declines, with the HBOS index slightly below year-ago levels. Meanwhile, it was confirmed that BoE Deputy Governor Rachel Lomax would be stepping down from her posts as Deputy Governor for Monetary Policy and MPC member at the end of June. BoE Governor King is reportedly in favor of replacing Lomax with someone with financial markets experience. Lomax’s voting pattern in the last two years suggests she was on the dovish side of the MPC. The new appointment will not alter the course of monetary policy in a significant way. Market would expect Chancellor Darling to follow Mr. King’s suggestion and to
appoint a new Deputy Governor that by virtue of his/her focus on the financial markets, would initially have a dovish bias as long as the UK banking system remained under pressure.

Eurozone There were scant economic data releases today. The Bank of France business sentiment index declined to 101 in April from 104 in March. Euro area construction output was down -2.2% mom in March and -1.4% yoy, down from +4.4% in February. However, the average construction output in Q1 was up 7.6% q/q at an annual rate, up from 0.7% in Q4. This confirms that construction was one of the drivers of the good growth performance recorded by the Euro area in the early months of the year.
The weakness in March may have been due to the difficulty of adjusting the data for the early Easter holiday. The consensus view is that the Euro area will slow significantly in Q2. An important test of this view will come on Wednesday from the May IFO survey and next week, from the French, Italian and EC business surveys.

Japan According to the May 17 Nikkei, 1,467 March-reporting listed nonfinancials (about 89% of the total listed nonfinancials) expect an average 5.8% drop in their pretax recurring profits in FY2008 (to March 2009) following an average 2.7% gain in FY2007. Notably, 868 listed manufacturers expect an average 10.3% decline in their pretax profits in FY2008 following an average 3.7% rise in FY2007. Many of them assume an average USD/JPY rate of 100 for FY2008. The macroeconomic forecast assumes an average USD/JPY rate of 104.5. Profit projections are also subject to expectations of overseas demand growth (paricularly in the US and Asia) as well as oil price assumptions. Market expects a pretax profit drop of about 2% for TSE1 nonfinancials. Usually, companies begin to restrain capital spending and labor cost growth when they expect profit declines, boding ill for the domestic economic outlook. In fact, according to Reuters’ Tankan, the business conditions judgment diffusion index (DI) for major manufacturers dropped from 8 in March to 1 in April and to -2 in May, the lowest since July 2003, paced by a plunge in the DI for the transportation equipment industry (from +10 in April to -14 in May) and the iron/steel industry (from +20 in April to 0 in May). The DI for nonmanufacturers edged up from 2 in March to 3 in April but fell to 0 in May, the lowest since December 2003. Despite relatively high inflation by Japan’s standards, the deteriorating economic picture suggests that a BoJ rate hike this year is highly unlikely. JGB yields were mostly lower, particularly in the 5- and 10-year sectors on buying on weakness. Currencies traded in a narrow range with a public holiday in Singapore.