Forex Investment and Currency Trading

FX Update
Consumer Price Index MoM (Survey: 0.5%, Actual:0.6%)
CPI Ex Food & Energy MoM (Survey: 0.2%, Actual: 0.2%)
U. of Michigan Confidence (Survey: 59.0, Actual: 56.7)

USD
Better-than-expected US retail-sales data and continued concerns about inflation from the Fed helped keep the dollar strong yesterday.  Event risk remains the dominant trading theme over the coming sessions.  The upcoming G8 Summit, which will most likely discuss the international need for a stronger US currency, may push the USD to its biggest weekly gain in three years against the euro.  Market now looks for the Fed to hike rates by 25bp by September.  A rise in inflation expectations, a component of the Michigan consumer confidence report, will add to the pressure on the Fed to begin its process of rates normalization.  This should further support US yields and thus USD sentiment.  Headline CPI coming in higher-than-expected at 0.6%, will reinforce hawkish Fed rhetoric and bolster the forecast for a tightening policy in the near-term. However, lower consumer confidence has placed marginal pressure on the USD.

EUR/USD

European data releases have been thin on the ground and in the absence of clear fundamental drivers; event risk has been the dominant theme for FX markets.  EUR/USD, which had been under pressure through the day, fell through 1.54 following comments that officials have been discussing currencies and FX volatility prior to the G8 meeting in Osaka.  EUR sentiment has not been helped following reports that the “no” camp are ahead in the EU Treaty referendum.  The timing of the vote could not have been worse for the euro, following the aggressive upgrade in US yields and the G7 meeting this evening.  In the run-up to the G7 meeting, EUR/USD is likely to remain on the defensive.  

GBP/USD

The pound fell against the dollar yesterday on further speculation that a housing slump will catalyze an economic slowdown in the UK.  While not directly related, the broader changes in the EU are encouraging the pound to move lower in sympathy.  Broad dollar strength should continue to keep the pound week into the weekend.

USD/JPY

USD/JPY climbed above 108 this morning for the first time in three and a half months. Dollar strength ahead of the G8 Summit is largely responsible for the move.   BoJ left its overnight lending rate at 0.5%, the lowest among major economies due to the risk of higher oil and food prices. With the stock market trading higher in the US, JPY should remain under pressure.

AUD/USD

The Australian dollar was weaker against the dollar yesterday, coming in at a four-week low and posting its largest weekly fall in almost three months.  Recent AUD depreciation can be attributed to speculation of future US rate hikes.  RBA Governor Stevens’ statement that 12yr high policy rates are essential, and labor costs could cause problems also caused AUD weakness.  Continuing on these same themes, AUD underperformance is expected today.
NZD/USD

The kiwi dollar fell for the third straight week, hurt by stronger USD sentiment and potential US rate hikes in the near-term.  With New Zealand’s rates poised for a cut, the narrowing interest rate differential will most likely cause continued NZD depreciation.  

USD/CAD

Falling in line with most other currencies, the USD/CAD rose yesterday, stunted by continued USD strength.  So far this month, the CAD has depreciated against 14 of the most-active 16 currencies.  Economic concerns in Canada will provide further underpinnings for CAD depreciation.  Oil, already down for the day, could also contribute to CAD underperformance into today.    

Commodities Update
Oil declined during the day yesterday, mostly due to a stronger USD; however, oil ended the day relatively unchanged, up only 36 cents.  Gold also recovered from intra-day lows, but still fell by more than $10.  Both commodities are poised to trade off through the day as dollar strength continues.