Forex Investment and Currency Trading

Eurozone Headline inflation for May was revised up from 3.6% to 3.7% yoy, after 3.3% in April. However, the core inflation did not accelerate as much as the market expected (1.7% instead of 1.8%, from 1.6% in April). This suggests that, while the headline figure supports the ECB hawks’ view that a pre-emptive rate hike is warranted for July, the signs of second round impact from oil and food prices on the rest of the consumer basket remain subdued. This could help the doves to prevent further rate hikes for a relatively long period after the July hike.

Switzerland Retail sales posted +2.4% yoy in April after -2.5% in March. However, when adjusted for shopping days, sales unexpectedly fell by 9.4% yoy after +9.7%, well below market expectations for +4.1%. The breakdown shows year-on-year declines for all components except for electronic goods. As rising inflation and oil prices continue to curb consumer purchasing power, while softening economic activities weigh on job growth, Swiss household consumption is set to slow gradually in 2008. Nonetheless, market expects a 25bp rate hike by the SNB at its June 19 meeting as inflation pressures are mounting, with the latest CPI at a 15-year high of 2.9% yoy.

G8 As expected, the G8 finance ministers meeting without central bankers’ participation was a non-event for FX policy with no mention of FX issues in the joint communiqué. Japanese FM Nukaga stated that there was no debate over FX issues and no mention of intervention, adding that there is no change from FX policy as of the April G7 meeting. At the press conference, US Treasury Secretary Paulson repeated that a strong dollar is in the nation’s interest, but he also indicated that the oil spike could prolong the US downturn, perhaps recognizing downside risks to the USD with the ECB likely to hike rates much earlier than the Fed. Although French FM Lagarde, as usual, supported Paulson’s statement, FM Nukada once again avoided commenting on the USD or JPY. At any rate, markets’ focus should return to relative monetary policy/interest rate expectations as well as the upcoming US financial institutions’ results announcements. EUR/USD held the May 8 low (at 1.5286) and rebounded modestly, while USD/JPY exceeded the 200-day moving average resistance (currently at 108.26) but has failed to gain further momentum so far. It is premature to expect a sustainable USD recovery anytime soon, as markets expectations of nearly 75bp Fed rate hikes by year-end seem overdone.

Japan As last Friday’s statements from BoJ Governor Shirakawa did not hint at Japan’s joining of anti-inflation stance, 2- and 5- year JGB yields dropped despite higher long bond yields on firmer equities and hedge selling ahead of Tuesday’s 20-year JGB auction. As for FM Nukaga’s press conference statements avoiding exchange rate issues, a stable USD/JPY rate should be the best. While sharp JPY appreciation would hurt Japanese exporters, sharp JPY depreciation would probably be unwelcome when companies are suffering from higher energy and raw material costs. In this regard, the RBA Governor Steven’s speech on June 13 showed a terms-of-trade gain/loss ranking, and Japan was ranked as the worst of 16 countries for its terms-of-trade loss. New supply of new condominiums in the Tokyo area fell by 17.7% yoy in May, following a 29.7% yoy decline in April, with a rise in the contract ratio to 71.0% from April’s 63.1%. The average price rose slightly (by 0.4% yoy) to Y48.21mn. Meanwhile, the 1Q flow-of-funds accounts revealed that the share of JPY deposits for Japanese households rose to 48.9% at the end of 1Q from 47.6% at the end of 4Q 2007, perhaps due to their wait-and-see stance in face of the March market turmoil.