Forex Update
USD is flat to mixed on the day, with the biggest disparity in Cable up 103 pips to 2.035. The USD Index dropped 82 ticks to 80.765, though is still off last Friday’s low of 80.117. An ease in credit concerns globally increased the demand for higher yielding currencies and a re-initiation of the carry trade. The USD picked up some strength when Consumer Confidence for June came in at a higher than expected 112.6 vs. the consensus estimate of 105. December interest rate futures lowered the likelihood of a near term rate cut. Dec Euro$ deposit have factored in a full rate hike before years end; Dec Fed Funds show an implied rate of 5.09% indicating a 64% likelihood of a cut before year’s end.
GBP/EUR is up 84 pips to 1.4867, helped by the carry trade and increased bets that the BOE will have multiple rate hikes before year’s end. Dec interest rate futures in the UK show an implied yield of 6.18%. This increase may be due to yesterday’s report from The Centre for Economic & Business Research in the UK reporting that recent flooding in the South may add up to .5% to inflation. GfK Consumer Confidence for July came in at a lower than expected -6 vs. the consensus estimate of -4. It appears that recent rate hikes are restraining the economy but with these recent inflationary developments it is likely the BOE will enact monetary policy to control inflationary pressure.
The EUR is down vs. all major currencies as today’s releases showed a drop in Euro-zone economic confidence, unemployment and estimated YoY CPI. These releases suggest the ECB’s current benchmark is restraining price pressure and unemployment, while the decrease in economic confidence suggests the potential for slowed growth under tighter economic circumstances. The ECB is expected to hold its benchmark steady at 4% when it meets Thursday. French Minister for European Affairs Jouyet mentioned today that the ECB should position itself better to react to FX volatility and he doesn’t believe the free market should determine currency levels. He feels the ECB should be more transparent and make decisions that are in favor of growth and competitiveness. He claimed that it isn’t his intention to influence the ECB or question its independence.
JPY is lower against all of the higher yielding currencies today as a shift toward riskier assets leads to more yen borrowing to finance even riskier assets. Japanese Housing Starts came in at a much higher than expected 6% vs. the -3.5% consensus estimate, while YoY Construction Orders came in at 26.4% crushing the consensus estimate of 1.6%. These releases reflect the benefits of the BoJ’s low borrowing costs and recent JPY depreciation, as a cheaper JPY appears to be a positive influence on manufacturing and home building. It is still uncertain what the BoJ will do during its next policy meeting. Continued growth will lend support to the rate hike argument but recent deflation may leave the BoJ with its hands tied.