Forex Investment and Currency Trading

USD starts this week on the defensive following the barrage of USD negative news last week. Bernanke’s USD bullish comments made last Tuesday were long forgotten by Friday, with the focus clearly on soft US employment data (unemployment rate up to 5.5% from 5.0%) and the ECB’s extremely hawkish tone. EUR/USD is starting the week around 1.5800, the highest level since April 24. The higher oil prices and news that Lehman Brother reported US$2.8bn in losses and will raise US$6bn in new capital, are not helping to quell US economic worries. Sharply higher oil and gas prices will partly offset the US$600-US$1200 tax rebates to US households, increasing the risk that US consumer spending might follow consumer confidence down, pushing the economy toward a recession. With that in mind, the release of the retail sales data (Thu) will be closely scrutinized for an early indication of the tax rebate impact. According to the Treasury Department, as of May 30, US$50.0bn worth of payments had been sent out, almost half of the expected US$107bn. On Friday this week, the latest concern for the Fed and therefore the market – inflation – will be in the spotlight. Headline and core inflation are expected to remain unchanged on a y/y basis. The risk going into the inflation numbers are symmetrical for the USD. Bernanke (20:15) speaks at the Boston Fed’s annual research conference on inflation. Will he try to lean against the trend and again highlight the Fed’s concern about USD weakness and imported inflation? It might have worked last week, but the same wording in the current environment is unlikely to ignite USD interest.

Oil: Defying gravity, oil rocket to a new record high of US$139.14/b on Friday, adding US$17 in a 30h period. Momentum traders were seemingly driving the trend as analysts struggled to find solid reasons for the sharp spike. Among the most common reasons floated were “a weak US dollar”, investors realizing the true “supply and demand” situation, increased fears of an imminent attack on Iranian nuclear sites and the risk of further supply disruptions in Nigeria. Oil trades at US$137/b this morning. Petro-currencies, however, failed to take advantage of the rally, with EUR/NOK only losing 0.5% during the previous two trading days, while USD/CAD rallied 0.3%. CAD: Early in the week attention will be on the BoC rate decision (Tue) and the accompanying statement. Market is looking for a 25bp cut, but the BoC is likely to signal an end to the current easing cycle. Trade and manufacturing are also released this week, but will take a back seat to oil, broad-based USD sentiment and US equity markets. Housing starts are unlikely to provide any meaningful direction, except if the number truly disappoints, i.e. below 200K.

EUR: All eyes on Mr Trichet at 12:30. After last week’s surprisingly hawkish statement, the market will be looking for confirmation of near-term hikes. Whether today’s comments in Paris will deliver that, is doubtful as Trichet speaks at the “Forum for New Diplomacy”.

GBP: Inflation pressures are spreading beyond food and energy prices, with core May PPI increasing by a shocking 5.9%y/y, well above expectations of 4.8% and sharply up from 4.6% a month earlier. GBP reacted immediately, EUR/GBP fell 15pts to below 0.80, while GBP/USD jumped 50pts to an overnight high of 1.9792. Dec interest rate futures fell 21pts.

CNY: The People’s Bank of China announced that the reserve requirement ratio (RRR) for financial institutions’ yuan deposits will be raised for the fifth time this year to curb inflation that is at an 11-yr high. The increase will be enforced in two stages; a 50bp increase up to 17% effective from June 15th, and a further 50bp to 17.5% as of June 25th.