British Pound Shoots Up Against Dollar

EURO

The euro appreciated vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.5520 level and was supported around the $1.5345 level. The common currency retraced some of last week’s losses after the Group of Eight finance ministers who met in Osaka this weekend failed to address concern over ongoing U.S. dollar weakness. Policymakers instead focused on the rise in commodity prices and the lack of attention on the dollar in their communiqué renders it less likely there will be a concerted global intervention to support the U.S. dollar. Data released in the U.S. today saw the June Empire State manufacturing index print at -8.68, worse than expected. Also, April net foreign purchases of long-maturity U.S. securities reached US$ 102.8 billion, up from US$ 53.3 billion in March. Net buying excluding non-market flows reached US$ 115.1 billion, up from US$ 79.6 billion in March. The “monthly net TIC flows” that measures net foreign capital inflows reached US$ 60.6 billion in April compared with an outflow of US$ 48.7 billion in March. These data suggest the U.S. was able to more easily finance its current account deficit at the beginning of Q2 compared with Q1. In eurozone news, the EMU-15 May harmonized consumer price index printed above expectations at 3.7% and this increases the chances the European Central Bank will lift its main refinancing rate by 25bps to 4.25% next month. The euro may still have some overhang from the political uncertainty that has resulted following Ireland’s rejection of the Lisbon Treaty late last week. One dollar-supportive factor may be Saudi Arabia’s decision to lift crude oil production from July. ECB member Tumpel-Gugerell was quoted as saying eurozone monetary policy “remains on the accommodative side” and reiterated borrowing costs may rise next month. Germany’s IW institute lifted its 2008 GDP forecast to 2.5% from 1.7%. The European Commission warned Europe needs to remain “extremely careful” to avoid a wage and inflation spiral. Euro bids are cited around the $1.5230 level.

JPN/CNY

The yen appreciated marginally vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥107.90 level and was capped around the ¥108.55 level. The pair reached its highest level since 14 February as traders continued to speculate that Japanese interest rates will not be climbing anytime soon. Finance minister Nukaga reported that exchange rate issues were not discussed at the ASEM meeting in South Korea or at the Group of Eight finance ministers’ meeting in Osaka this weekend. Former finance minister official Watanabe verbally intervened overnight saying “If the dollar falls sharply against the yen, the U.S. may intervene in (the foreign exchange) markets and Japan may help the move.” The Japanese government reduced its assessment of the economy for the second time in three months, downgraded its view on exports, corporate profits, and industrial output. The government reported “attention should be given to downside risks due to the risk of a recession in the United States, the fluctuations in the stock and foreign exchange markets mainly caused by the sub-prime mortgage problem, and the effects of developments in oil prices.” Data released in Japan overnight saw May Tokyo-area condominium sales off for the ninth consecutive month. The Nikkei 225 stock index climbed 2.72% to close at ¥14,354.37. Dollar bids are cited around the ¥103.00/ 101.35 levels. The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥167.65 level and was supported around the ¥166.40 level. The British pound and Swiss franc gained ground vis-à-vis the yen as the crosses tested offers around the ¥212.80 and ¥104.00 levels, respectively. The Chinese yuan appreciated vis-à-vis the U.S. dollar as the greenback closed at CNY 6.9004 in the over-the-counter market, down from CNY 6.9018 and the pair’s lowest close since the yuan revaluation of July 2005. Data released in China overnight saw industrial valued-added output up 16.3% between January and May. Also, People’s Bank of China reported May wholesale prices were up 9.6% y/y.

STERLING

The British pound rocketed higher vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.9685 level and was supported around the $1.9455 level. Technically, today’s intraday high was right around the 50% retracement of the move from US$ 2.0025 to $1.9360. Sterling shook off CBI’s gloomy 2009 U.K. economy growth forecast that predicts the economy will slow to its lowest level since 1992. The Financial Times reported U.K. Chancellor of the Exchequer Darling will institute a major regulatory shake-up in this week’s Mansion House speech. Bank of England released research today that suggests the recent spike in U.K. inflation is having a negative impact on the public’s inflation expectations, raising the risk that inflation will remain “materially” elevated in the medium-term. Some traders believe BoE’s Monetary Policy Committee will become more vocal this week about the prospect of raising rates in the near term. Cable bids are cited around the US$ 1.9360/ 1.9100 levels. The euro came off vis-à-vis the British pound as the single currency tested bids around the ₤0.7860 level and was capped around the ₤0.7915 level.

SWISS

The Swiss franc appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.0380 level and was capped around the CHF 1.0520 level. Technically, today’s intraday low was right around the 23.6% retracement of the move from CHF 0.9645 to CHF 1.0260. Data released in Switzerland overnight saw April retail sales climb 2.4% y/y. U.S. dollar bids are cited around the CHF 1.0250 level. The euro and British pound gained ground vis-à-vis the Swiss franc as the crosses tested offers around the CHF 1.6150 and CHF 2.0535 levels, respectively.

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