Union Bank of California's Weekly Update provides global market information, trends, forecasting, and rates.

May 5, 2008

USD – The greenback reached a two-month high against the JPY and peaked against the EUR at 1.5360 during Friday’s session.  Disappointing German Retail Sales data set the tone for the euro ahead of the much anticipated US Non-Farm Payroll data.  The surprise result of only 20K jobs lost sent the USD higher, coupled with another liquidity-boosting measure announced by the Federal Reserve, also aided the dollar’s rally.  This will increase liquidity in the financial system by expanding the Term Auction Facility auctions from $50B to $75B.  The news came as a positive following last week’s FOMC signal to the markets that interest rates may be on hold for the first time since the credit market turmoil began late last year.  The week ahead is relatively light on the US data front.  However, former Federal Reserve Chairman Greenspan is due to speak about the mortgage situation on Tuesday with comments likely to make headlines. 

EUR – The euro yielded dollar strength as the American economy took center stage last week.   The Eurozone, meanwhile, is showing signs that the strong growth which powered the euro to record highs above $1.60 is moderating.  E-15 economic sentiment fell to 97.1 in April from 99.1 previously—the weakest reading since 2005.  Inflation also eased to 3.3% annually, although still well above ECB’s target of 2%.  While sentiments call for further euro moderation vs. the dollar in the near term, longer term forecasts call for the currency to return to the 1.60 levels based upon a continuing slowdown in the US and a resumption of interest rate cuts later this year. The market will be anticipating Eurozone PPI, Retail Sales and the ECB’s interest rate announcement on Thursday.

JPY – The yen began a retreat last week in line with other major currencies as markets perceived signals that the monetary loosening cycle by the US Fed may be coming to an end.  The yen retreated a little over 1% last week topping the 105 mark during the weekend for the first time since February. Continued interest in carry-trade financing was a catalyst for the depreciation in the currency as well as big gains in Asian stocks for the second week in a row.  As markets calm, currency traders are beginning to focus on rate differentials once more.  Expect the yen to continue a reactionary course as gains in emerging market equities renew interest in carry-trade positions.

GBP – A restart of BP’s Forties pipeline, which carries 40% of the UK’s oil supply, precipitated a near $0.70 drop in the price of crude last week.  The pound fell against the dollar and the euro after a private report showed an annual decline in UK house prices for the first time since 1996.  GBP dropped for three consecutive days as house prices fell in April from a year earlier, after the credit squeeze dried up financing for property purchases. Official data last week showed mortgage approvals fell in March to the lowest level in at least nine years.  UK consumer confidence dropped to the lowest in more than 15 years according to the April reading.  Expect sterling to remain under pressure as expectations mount for a rate cut on Thursday.

CAD – The loonie rose against the greenback today as oil prices rose to more than $119 a barrel and high gold prices.  However, it remained in a tight range ahead of key economic data due later in the week, which isn't expected to offer any clues on the BoC's rate outlook or any new economic projections.

MXN – The peso is holding up well, and is less than two centavos below a two year-high, amid a solid economy (Feb. GDP of 5.8%), and despite the recovering dollar, which spiked on the back of the better-than-expected US jobs data on Friday.   Investors were spurred to buy riskier assets and came into the market amid Standard & Poor's raising of Brazil’s bonds to investment-grade last week, which increased the appetite for Latin American assets.

CNY – The Chinese yuan held moderate gains at 6.99 as the currency appears to have decisively broken below the 7.0 level.  After appreciating steadily most of this year, Chinese authorities appear to be moderating the yuan’s rise in response to the effect of a strong currency on exporters.