Forex Investment and Currency Trading

FX Update
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USD
Last week proved a roller coaster ride for the dollar after Bernanke expressed concern for USD weakness and inflation as well as ECB President Trichet’s indication that the ECB is preparing for a July rate hike.  Market anticipates another verbal expression of discomfort with USD weakness from the Fed; however, market thinks that physical intervention is unlikely.  A rate increase in the US also seems unlikely given the state of housing and labor markets.  A dramatic surge in oil prices, the 5.5% unemployment rate, and the forecast for widening interest rate differentials are all contributing to the extremely low USD.  The market will look toward Bernanke’s speech about heightened inflation at the Boston Fed Conference.  At the end of the week, US retail sales will provide insight into the US consumer, and a surprise supporting renewed confidence will provide USD upside.  
EUR/USD

The euro surged last week after Trichet’s suggestion of a near-term rate hike.  Now that a potential July rate hike has been priced into the market, the EUR will be sensitive to any indications of inflationary concerns and general economic health of the Euro-area this coming week.  Investors will look to capitalize on the diverging central bank rhetoric, the hawkishness of the ECB versus the predicted rate cuts in New Zealand, Japan, and Canada.  April German exports came in stronger than expected; however, such data seems minor compared with the market’s focus on Trichet.  

GBP/USD

Headline PPI printed higher than expectations at 1.6% vs 0.8%. This puts PPI inflation at 8.9% oya, the highest reading since 1982. The market will look to King’s speech this week for heightened inflationary concerns, and this event will prove to be a market mover for the GBP. The MPC is put in the position of balancing slowing growth with rapidly climbing inflation

USD/JPY

Equities in Asia retreated following Friday’s sell-off in the US, leaving JPY as the weakest G10 currency overnight, failing to capitalize on the down move in equities. For the coming week, there is more evidence that Japanese activity is easing. May economy watchers’ survey printed weaker than expected with current conditions at 32.1 vs Street 34 and April 35.5. Recent risk aversion in the US and a flight to safer investments such as gold and treasuries, may cause some upside on the JPY.  However, as investors capitalize on the widening interest rate differentials, JPY will most likely depreciate even further.

AUD/USD

The Australian dollar performed strongly last week as Q1 GDP came in higher than the consensus.  The subtle hawkishness of the RBA as well as confidence in overall economic health will support continued AUD strength in the week ahead.

NZD/USD

NZD volatility stood out as the biggest mover in a rather eventful week for G10 FX, as spot broke lower sharply on the back of dovish central bank commentary. Despite the poor USD performance at the latter end of the week, NZD/USD stays in positions for closer test, if not break of the May low. Based on interest rate momentum, the NZD is set to further weaken against the dollar as well as against the AUD.
USD/CAD

Canada’s recent decline in GDP as well as a stunted labor market have led to CAD depreciation.  CAD weakness is set to continue as the Bank of Canada is widely expected to cut rates by 25bp.  Along with this potential rate cut, any accompanying comments made by the BoC hinting toward additional future rate cuts will encourage further CAD downside.

Commodities Update

 Oil surged almost $11 on Friday of last week to more than $138 a barrel, contrasting expectations that oil prices were due to fall in the near-term.  A weakening dollar as well as discomfort in consistency of crude supplies worldwide caused the dramatic turn of events for oil. The US average gasoline price rose above $4.00/gallon.  To hedge the domestic and global inflationary concerns, investors poured their money into gold last week.