By DailyFX - US Dollar. The currency market has been relatively quiet today with little meaningful price action except for the movements in the commodity...

... currencies.


The US dollar is mostly unchanged against the majors aside from a mild rally against the Japanese
Yen. Both the first quarter current account balance and the University of Michigan
consumer confidence surveys were stronger than expected. The current account
deficit narrowed from US$223.1 billion to US$208.7 billion thanks to higher US
overseas purchases and foreign investment in the US. Though encouraging, it is a
bit distorting since net foreign purchases in the first quarter were decent. A
first look at demand in the beginning of the second quarter is less encouraging. If
you recall, yesterday we learned that foreigners only purchased $46.68 billion worth
of US investments in April, the weakest accumulation since March 2005. In addition,
the increase in income on overseas investments is telling us that US investors are
making more income on their international investments over their domestic
investments, which is not necessarily good for the US dollar because it means that
along with foreigners buying less US investments, US investors are also finding more
attractive opportunities abroad. Thankfully, the rise in US consumer confidence was
less ambiguous as consumers were cheerier following stabilizing gasoline prices in
the month of June. With crude prices still hanging below $70 a barrel, softer
prices could continue to boost confidence for a while longer. Unlike this past
week, the economic calendar for the week ahead is relatively empty which means that
we could be setting up for a week of consolidation. The continued hawkish comments
from Fed officials should keep dollar strength dominant. At the same time, prices
in the EUR/USD are holding up exceptionally well above the 1.25 level. Therefore in
all likelihood, we could be looking at a 1.2550-1.2750 week.

Euro
After sliding down to a low of 1.2530 on Tuesday, the EUR/USD has ended the week
unchanged. The currency pair first lost ground after the stronger US numbers, but
quietly recuperated its losses on news that Germany has gained permission from the
Paris Club to repay all of its debt early. Russia owes the Paris Club of nations
$22 billion in addition to a 700 million euro compensation to Germany for lost
revenue streams. Although Russia already has some Euros in their reserves,
repayment of the debt will probably involve more accumulation of Euros, especially
for the special payment to Germany. Therefore over the long term, this is another
positive for Euro in an environment where other than the US Federal Reserve’s
interest rate hikes, there is little going for the US dollar. In the week ahead,
there are more important Eurozone numbers than there are US numbers. We are
expecting the Eurozone trade balance, German Producer Prices and French consumer
spending. All three reports are forecasted to show weakness in the Eurozone economy
instead of growth. However, none of them are expected to shift the central bank’s
stance on interest rates which mean that they could have only minimal impact on the
currency.

British Pound
Like the Euro, the British pound has ended unchanged for the week. Looking back over
the past week’s solid run of data, we understand why there has been no meaningful
price action. Economic data was mixed with core consumer prices showing signs of
slowing, retail sales increasing and housing market indicators improving. There was
no reason to believe that the central bank would shift their neutral stance anytime
soon and we expect to see the same message from the economic data due out next week.
The Rightmove housing gauge will offer the most up to date read on the sector’s
health while the minutes from the MPC’s June 8th meeting will reveal whether a hike
could be on the table before the end of year. In contrast, the US’ protectionism
measures continue to benefit the UK at the expense of the US. UK equity investors’
fears over the possible transatlantic merger between the NYSE and Euronext was put
to rest after officials assured that European firms would not have to conform to US
Sarbanes-Oxley rules.

Japanese Yen
Given no new Japanese economic data releases on the day, markets turned their
attention to ongoing domestic political turmoil and newly announced changes in
Chinese monetary policy. Troubles persisted for the Bank of Japan’s Governor Fukui
as opponents continued to call for his resignation due to his involvement in an
insider trading scandal. In a statement today, Fukui promised lawmakers that he
would surrender documents revealing the profits he made last year in an investment
fund operated by a man arrested for insider trading. Despite the scandal’s tangible
effects on Japanese markets, however, the Governor asserted that it would in no way
alter the BoJ’s commitment to gradually bring the ZIRP to an end. In related
monetary policy news, officials from the PBOC declared that they would tighten
Chinese money supply, raising bank reserve requirements by 0.5%. The action comes in
response to an M3 growth rate 3.5% above target at 19.5%, and many strategists claim
that this the first step in allowing a faster appreciation in the Yuan. FX markets
took the news as Yen bearish, as any slowdown in China’s breakneck economic
expansion would translate to less trade with Japan. Moving forward, traders next
anticipate the coming week’s Trade Balance data on the 19th and BoJ meeting minutes
on the 20th. Though we suspect that the Trade Balance will have relatively little
effect on currency markets at this point, any surprising revelations in the
transcript of the BoJ’s most recent meeting could cause large fluctuation in
currency prices.


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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