By DailyFX - US Dollar. The US dollar is stronger today but the move has been primarily based upon the retracement in commodity prices rather...

... than meaningfully strong US data.


Gold prices experienced its biggest drop since August of 1993
while oil prices are hovering back around $70 a barrel. New home sales
came in better than expected, rising to 1.198 million in April, but it
should not go unnoticed that home sales were revised down quite
significantly the previous month as well, offsetting most of the April
rise. Existing home sales due for release tomorrow is not expected to
be as pretty as homeowners are less flexible in giving discounts and
upgrades like home builders can offer. Overall, the report indicates
that so far we have been seeing a soft landing in the housing market but
the path is still downwards with inventories rising. MBA mortgage
applications fell 6 percent last week after rising 4.6 percent the
previous week. The question is whether this will have an impact on
consumer spending. Meanwhile durable goods were very disappointing,
falling by a whopping 4.8 percent last month against expectations for
only a modest 0.5 percent fall. The less volatile ex transportation
indicator also fell 1.1 percent, against expectations for a 0.5 percent
rise. This is the biggest decline in 10 months and suggests that second
quarter growth could be weaker than what we have seen in the first
quarter. Tomorrow we are expecting the first quarter GDP report and the
market is reaching very high with expectations set at 5.8 percent growth
for the first three months of the year. With the market able to shrug
off the extremely bad durable goods number and focus primarily on the
good headline new home sales figure, sentiment for the time being seems
skewed towards more dollar recovery. After such a deep sell-off over
the past few weeks, we would not be surprised to see a retracement, but
it should not be forgotten that the pressures on the dollar still exist
and are growing by the day. On a side note, the large Bank of China IPO
on the HK stock exchange illustrates how protectionism in the US is
hurting the US dollar. In the past, rarely have IPOs this size been
down outside of the NYSE. The listing on the HK exchange and the desire
of funds to participate will send more capital to the East and keep less
here in the US.

Euro
The Euro weakened against the dollar, but gained ground against the
Japanese Yen, British pound and Swiss Franc. To the market’s
surprise, the IFO report for the month of May fell less than expected
from 105.9 to 105.0. The current assessment actually rose from 106.4 to
107.3, the highest level since September 1991, while the expectations
component declined from 105.5 to 104. It seems that business sentiment
is reflecting the fact that the strong Euro has yet to hit the economy.
With exchange rates, the impact on trade tends to be delayed as some
contracts are fixed in advance. Nevertheless, the number is strong and
provides confirmation for the European Central Bank to move forward with
their plans to raise interest rates. European officials continue to be
unconcerned about the rise in the Euro, focusing exclusively on their
desire to raise interest rates. French Finance Minister Breton joined
the Dutch and German Finance Ministers in expressing comfort with
Euro’s current rate, by saying that we are “within acceptable
ranges.” Last time, the central bankers became worried around the
1.30 handle and so it seems that unless we hit that level over the near
term, they will probably focus on inflation risks. Meanwhile, inflation
numbers from the various regions within Germany came in softer than
expected, which is in line with the forecasts that consumer prices in
Germany as a whole dropped this month. Most of the rise in oil prices
came in April and not May, which indicates that the fall in gasoline
prices is the primary basis for slower consumer price growth.

British Pound
The British pound is weaker for a second consecutive day against both
the Euro and US dollar despite firmer economic reports. Total business
investment rose a more than expected 1.7 percent in the first quarter
compared to a 0.9 percent drop the previous quarter. CBI industrial
trends orders also improved from -16 to -12. However, with the British
pound having appreciated far more than the Euro over the past month, it
also has far more room to retrace. Fundamentals are still more pound
bullishness than bearish especially with news that David Blanchflower
will be replacing Steve Nickell as a member on the Bank of England’s
monetary policy committee. Interestingly enough, Blanchard is a British
born US citizen who will be commuting from the US to the UK for the
monetary policy meetings putting to doubt his commitment to the UK and
creating some internal conflict within the committee. As a labor market
expert, some fear that he may not be experienced enough to match wits
with the committee’s internal economists. Nevertheless, he is the
central bank’s choice and judging from his comments, he appears to be
more hawkish than Nickell, the solitary member that has been voting in
favor of an interest rate cut. Like many of his new peers, he seems
concerned about the second round effect of oil prices.

Japanese Yen
The Japanese Yen continues to weaken against the other major
currencies. Disappointing tertiary activity index raises concern that
the strong yen may be hurting the country’s growth. In addition, the
IMF took the Japanese government’s stance over that of the Bank of
Japan when they said that the central bank should probably keep short
term rates at zero for the time being given the outlook for inflation to
remain very low. Tomorrow’s consumer price figures will be extremely
important then in determining whether this is true. If consumer price
growth does slow, the Bank of Japan will face less pressure to raise
interest rates. If it comes in strongly however which is possible given
the rise in energy prices, the yen could recuperate some of its recent
losses.


Kindest Regards,

Kathy Lien
Chief Strategist
Forex Capital Markets LLC
32 Old Slip, 10th Floor
New York, NY 10004
Tel (212) 897-7660
Fax (212) 897-7669
E-mail: klien@fxcm.com

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