Forex Investment and Currency Trading

Eurozone Data from five German states suggest that the CPI in May rose 0.6% mom, which implies a 3.0% yoy reading for the domestic CPI and 3.1% yoy for the harmonised index, up from 2.4% (domestic) and 2.6% (HICP) in April. In turn, this points to a significant risk that Euro area inflation this month will rise to 3.7% from 3.3% in April – higher than the 3.6% peak that was reached in March. A separate release showed Germany’s import prices growing 5.7% yoy in April, unchanged from March.
Meanwhile, French consumer confidence continued to drop in May, with the balance of responses at -41 from -38 in April. The contraction in Spain’s mortgage loans deepened to -39.7% yoy in March, from -25.8% in the previous month. Finally, Italy’s survey of the services sector showed a marked improvement in May, at 19 from 4 in April. Italian retailers were more pessimistic in May, however, as the ISAE index fell to 102.8 from 106.1. On the whole, the Euro area inflation data are getting
uncomfortably high, and market expects the ECB to revise up its inflation forecast once again in June. The activity continue to show a mixed picture, with France worsening and Italy improving at the margin, but the common theme seems to be that firms are doing better than cash-strapped consumers. The ECB will harden its rhetoric, but market does not think they ready to signal a rate hike just yet.

Japan Lower equities led to a reversal of the earlier JPY drops , while the JGB 2s-10s curve bull flattened. The Shoko Chukin’s small firm business conditions index, which offers some indications of small firm reading in the BoJ Tankan, dropped to 42.2 in May from 43.1 in April and from 46.6 in March, staying below the boom-bust line of 50 for the 14th consecutive month. In his opening remarks at the BoJ’s international conference, BoJ Governor Shirakawa stated that too much focus on current high inflation could lead to a delay in monetary policy response, but that economic bubble in recent years resulted from low interest rates. Market expects the BoJ to maintain its neutral stance this year even with emphasis of near-term downside risks to the economy. METI’s annual White Paper on Energy (in Japanese) published on May 27 referred to quantitative analysis concluding that “premiums (factors other than fundamentals),” which include speculation, arbitrages and geopolitical risks, contributed to more than $30 of the $90/barrel crude oil price average in 2007. The White Paper argued that Japan is one of the most energy efficient with primary energy supply needed per unit of real GDP reaching only one third of the world average, about half of the EU’s and the US’s, and less than one eighths of China’s in 2006. The White Paper argues that short-run price elasticity of crude oil is low, but that the oil price surge since 2004 should undermine demanders’ confidence in oil and accelerate ongoing shifts to alternative energy and/or energy conservation measures over the medium term. In some view, terms of trade for the Japanese corporate sector due to higher energy and other materials costs have been deteriorating faster than companies’ efforts to improve energy and materials cost efficiency, and the continued profit squeeze is entering a stage of cutbacks of capital spending and labor costs, boding ill for the economic picture.
Australia Construction work done rose by 2.3% qoq in real terms in 1Q 2008, not far from consensus in what is a volatile series. Private sector construction rose a solid 2.8% qoq but public sector construction rose only 0.5%, cooling off after a very strong 2H 2007. New residential (0.5% qoq) and non residential (-0.5% qoq) building were quite flat as were renovations (-0.7% qoq) but engineering was strong (5.2% qoq) after a surprisingly subdued prior quarter. Capital spending will again rise as a percentage of GDP in the first quarter, although the business equipment spending piece is not out until tomorrow. The Westpac/MI leading economic indicator moderated to 3.3% annualized in March, below the long-term trend of 4.4% and after peaking at 6.9% in November based on revised data. For the first time since February 2005, both the Leading and Coincident Indexes were below trend at the same time. In a third set of data, skilled vacancies were subdued in May. Market thought that the next two weeks would be difficult for economic data but remain convinced that the market is underestimating the impact of income gains related to terms of trade in the period ahead.

AUDUSD While we think that AUD/USD is still on target to reach parity with the USD in this cycle, a possible near-term rise in risk aversion and the likelihood of a very low print on Australian GDP on June 4 makes it prudent to book the gains on the trade.