Forex Investment and Currency Trading

Eurozone Industrial production was strong in April at +0.9% mom vs. 0.0% consensus, only partly offset by the downward revision to March data from -0.2% to -0.5% mom. The April industrial output was subsequently up by 0.7% on 1Q average, a respectable start into the second quarter. While the German outcome was weak at -0.8% qoq vs. 1Q, France enjoyed a 0.9% gain, followed by Italy at 0.6%. However, the data may have been biased upward by seasonal adjustment difficulties due to the early Easter holiday. Market expects the Eurozone economy to weaken noticeably soon, in line with much weaker order growth and softer leading indicators. That said, the April outcome plays into the hands of the ECB hawks for a 25-bp rate hike at the July 3 meeting.

UK According to the BoE/Gfk survey, expectations of future inflation surged to a record high of 4.3% in May vs. 3.3% in the previous survey in February. Meanwhile, Britons’ perception of current inflation rate spiked to 4.9% from 3.9% previously, and vs. the actual headline CPI of 3.0% in April. While market still believes there is a slightly better-than-even chance that the BoE could resume cutting rates late this year, the intense inflation pressures may delay any monetary easing into next year.

Australia Australian employment fell by 19.7K vs. consensus of +13.5K, with full time employment -10.4K and part timers - 9.3K. Employment for the prior month was revised up to +37.5K from +25.4K but the result was disappointing nonetheless. The unemployment rate stayed at 4.3%, by way of a drop in the participation rate in the labor force from 65.5 to 65.2. That said, employment is still growing at a year-on-year rate of 2.2%, and leading indicators of employment growth and surveys have indicated that last year’s frenzied pace of hiring could and would not be sustained, and would probably ease to 2% yoy or lower in 2H 2008. Wednesday’s consumer sentiment showed a sharp drop to a fifteen-year low with most respondents citing how inflation was eating into their disposable income.  An explosion at a key natural gas mining site last week at Varanus Island off Western Australia, geographic center of the resources boom, cut off one third of the state’s gas supply. The West Australian Chamber of Commerce and Industry said on Wednesday that 14% of local businesses could shut down. Some mining firms in WA are switching to more expensive fuel sources such as diesel to get by, but this accident has the potential to eat into export revenues in June and perhaps July. With soft data the past two days and this gas rig accident, Australia’s trade weighted 2-year swap rate advantage over its trading partners has slipped by 20bp, and the currency is down about 2% on a trade weighted basis this week, including almost 2 big figures against the NZ dollar. The medium term traders should be focused on the prospective 20% terms of trade boost delivered to the economy in the next few quarters, which should keep Australia’s economy performing better than many peers.

Japan EUR/USD dropped allegedly on some market participants’ concerns about Thursday’s referendum in Ireland on the EU governing treaty. USD/JPY dropped on risk aversion spurred by lower equities and a major US financial group’s announcement of closing a hedge fund, which helped promote a bull flattening of the JGB 2s-10s curve. The office building vacancy rate in the center of Tokyo rose from 3.03% in April to 3.29% in May, the highest since April 2006, consistent with growing concerns about business conditions.