Forex Investment and Currency Trading

Eurozone Higher than expected CPI estimates for the Eurozone and Italy, both at 4.0% yoy in June and up from 3.7% in May, play in the hands of the hawks on the ECB Governing Council. We need to wait for the second estimate to know if core inflation has accelerated noticeably, or if the rise in inflation is still a food and oil story. Market expects headline inflation to stay above 3% yoy until the end of this year, provided that oil prices stabilize. Meanwhile, growing unemployment in Spain, Italy and France should dampen second round effects through wages. Market thus expects only a subdued acceleration in core inflation going forward, which should enable the doves at the ECB to resist calls for additional rate hikes in 2H2008 after the July move. The Euro rates market sold off sharply, and the Euro posted marginal gains, on the back of the CPI releases.

UK BoE mortgage approvals slumped to record low of 42k in May (consensus: 51k) from 58k in April. Mortgage lending also fell more than expected to £4.1bn, the lowest since March 2001, from £6.2bn. Interestingly, consumer credit rose to £1.4bn from £1.1bn, above expectations for £1.0bn. This could be a sign that households are depending more on credit card and personal loans for mortgage payments and other rising utilities bills.

Norway May retail sales were much stronger than expected, rising 1.2% mom and 6.1% yoy from 0.4% mom/ 3.2% yoy in April Last month’s gains were on the back of 2 consecutive months of subdued sales (April at 0.4% and March at -0.4%), while the yoy reading was also lifted by a low base effect in May 2007. High inflation amid rising food and oil prices, coupled with Norges Bank previous rate hikes, should continue to have a denting impact on private consumption going forward. Meanwhile, credit growth slowed to 14.0% yoy in May from 14.4% previously, yet remained elevated despite rising interest rates (6-month moving average at 14.3%).

Japan USD/JPY broke below the trend support across lows since March, with the 55-day moving average support at 105.09. The JGB yield curve bull flattened on long-term investors’ alleged duration extension. Market participants did not react much to Moody’s abrupt upgrading of the JGB rating to “Aa3” from “A1” without a prior positive outlook or review. Market participants were somewhat surprised by Moody’s judgment that the Japanese government and the ruling party are “firmly committed to fiscal consolidation”, as the Fukuda Administration’s latest structural reform plan report did not even set a numerical target for spending cuts and a fixed date for a consumption tax hike. While the upgrading is in general a positive to JGBs, higher yield levels would probably be needed to attract a broad range of global real money investors. Meanwhile, the reform plan report included promotion of repatriation of Japanese multinationals’ retained earnings at their overseas subsidiaries. No specific measure was shown, but the proposal presumably means a tax cut (in the form of no additional taxation at home resulting from the higher corporate tax rate in Japan than in most other countries) on multinationals’ repatriated incomes from abroad. While any impact of such a tax cut would be positive for the JPY due to additional repatriation flows over time, there is no mention that such a tax change would be a temporary measure, like the US HIA in 2005, which caused a rush of repatriation and EUR/USD drops in late 2005. Unit housing starts fell by 6.5% yoy in May following April’s -8.7% yoy. Seasonally adjusted floor space fell by 7.9% mom in May, leaving the April-May average 4.9% below the 1Q average, suggesting that the housing deterioration in business conditions and a gradual expansion of spare capacity. Market expects no BoJ rate hike during 2008.

Australia Private sector credit growth picked up moderately to 0.6% mom in May, right on consensus after a very low (0.4%) outcome in April. Finance for owner occupied housing slowed to 0.5% mom. Business credit was stronger than in April but the annual growth rate has decelerated from 23.6% in the year to January to an annualized 7.6% in the next four months. The monthly experimental inflation gauge increased strongly again in June at 0.5% mom with the year on year accelerating from 4.5% to a new record 4.8%, well above the official inflation target range of 2-3% over the average of a business cycle. In year on year terms, petrol (25% yoy) and rents (14% yoy) are driving a large portion of the inflation overshoot.

NZ Building permits fell off sharply as expected in May as the result of a fee increase, and are back to almost the cycle level low of March. The NBNZ business survey measure of business confidence unexpectedly improved from -49.7 in May to -38.7 in June but the important own-activity index was subdued at -4.0 from -4.4 in May. Still, more encouraging from the report were a healthy assessment of exports (14.5 points) and a less gloomy outlook for residential and non-residential construction than the terrible readings in May.