European Retail Sales Fall, OECD Lowers Growth Forecast

Wednesday, 04 June 2008 10:33:53 GMT

Written by John Rivera, Currency Analyst

Fundamental Headlines

•    AUDUSD –  Australia’s GDP rose 0.6% in the first quarter after a 0.7% increase in the one prior. The economy grew twice as fast as economists predictions of 0.3% as strong Asian demand has boosted the mining industry. The industry’s growth has spurred a strong labor market which has fueled consumer consumption. However, expectations are that hey economy will weaken further as rising inflation curbs spending. For more news and resources, visit our Australian Dollar Currency Room.
•    GBPUSD –  U.K. services unexpectedly contracted for the first time in five years, as the PMI index fell to 49.8 from 50.4 in April. Meanwhile, consumer confidence fell to its lowest level since 2004 as the economy continues to approach a recession. The BoE is expected to keep rates unchanged as inflation is at their 3% threshold, but may need to re0focus on growth considering the declining fundamentals. Discuss the topic and your trade ideas in the GBP/USD Forum.
•    EURUSD –   European retail sales declined 0.6% in April leading to an annualized decline of 2.9%. The majority of the decline was in food and tobacco sales which fell 3.4% years-over-year, as consumers continue to see rising inflation sap their purchasing power. The ECB will need to see further deterioration in the fundamentals before they consider lowering interest rates, which they are expected to keep unchanged at their policy meeting tomorrow. Discuss the topic and your trade ideas in the EUR/USD Forum.

•    Bernanke Bolsters Weak Dollar (link) – Wall Street Journal
•    Obama Clinches Nomination, Capping Historic, Bitter Contest (link) – Wall Street Journal
•    Advanced Economies ‘Survive Perfect Storm” (link) – Financial Times
•    OECD Lowers Growth Forecast; Says Inflation Prevents Rate Cuts (link) – Bloomberg
•    Europe Retail Sales Drop By Record on Gas, Food Costs  (link) – Bloomberg

Euro Holds Ground at 1.5450 As Focus Turns to Trichet

Wednesday, 04 June 2008 09:43:53 GMT

Written by Boris Schlossberg, Senior Currency Strategist

Talking Points
•    Japanese Yen: lower Nikkei keeps yen bid pair below 105.00
•    Euro: consolidates at 1.5450 after yesterdays rout PMI Services hangs above 50
•    Pound: PMI services drops below 50
•    US Dollar: ADP on tap

Euro Holds Ground at 1.5450 As Focus Turns to Trichet
After a thorough drubbing yesterday which saw the euro lose nearly 200 points to the dollar, the unit stabilized at the 1.5450 level for most of Asian and European trade as the pair remained in a tense standoff between bargain hunters and momentum players looking to push the pair closer to the 1.5000 figure. Yesterday’s unusually strong remarks by Fed Chairman Ben Bernanke in defense of the dollar took currency traders completely by surprise, producing a major change of sentiment in the market.

Whether this change of trend will last remains an open question. Chairman Bernanke hinted that US interest rates are unlikely to decline any further and that piece of news rallied the dollar through out the day. However, the Fed’s ability to make good on its word is contingent on a stable US economy.

If US labor markets show significant deterioration, most specifically if NFPs print a –100K or greater job losses, the Fed may have no choice but stimulate further even in the face of dangerously high inflation. To that end today’s ADP data may provide an early clue to Friday’s payroll number, although the report has been woefully inaccurate in the past and markets are likely to view its reading with skepticism regardless which way it prints.

In the meantime, data from EZ offered little help to the euro. EZ PMI Services managed to remain above 50 boom/bust line, but only just so, while Retail Sales fell –0.5% versus expectations of a rise of 0.2% None of these data points are likely to change the attitude of ECB chief Jean Claude Trichet who remains unrepentantly hawkish, but they do form a clear picture of a slowdown in the region and suggest that EURUSD will continue this grinding range trade for the foreseeable future as both regions face a series of economic problems.
EURUSD 1.60 or 1.50?  Join us in EURUSD Forum

US Dollar: Fed Chairman Bernanke Jumps on Hawkish Bandwagon, Finally Notes Dollar Weakness

Wednesday, 04 June 2008 23:33:19 GMT

Written by Terri Belkas and John Kicklighter, Currency Analysts

• Euro: Euro-zone Retail Sales Could Prove To Be Disappointing On Wednesday
• British Pound Sees Fundamental Road Bumps Ahead Of The BoE Rate Decision

US Dollar: Fed Chairman Bernanke Jumps on Hawkish Bandwagon, Finally Notes Dollar Weakness
The US dollar rocketed higher on Tuesday following a speech by Federal Reserve Chairman Ben Bernanke, in which he issued hawkish commentary and finally commented on weakness in the national currency. Indeed, Bernanke ended any existing debate that the Fed would cut rates in June, as he said that “policy seems well positioned to promote moderate growth and price stability over time.” Unsurprisingly, he noted the upside inflation risks associated with the surge in commodities. However, it appears that there is now a fear within the Fed that the public’s long-term inflation expectations will rise, and “could ultimately become self-confirming,” as consumer face rising prices everywhere from the gas station to the grocery store. Furthermore, Bernanke even brought the US dollar into focus over a month after the currency tumbled to record lows versus the euro. The depreciation of the currency has been a contributor to the jump in import and consumer prices, but with the US Treasury highly unlikely to intervene in the foreign exchange markets anytime soon, Bernanke’s dollar comments should be taken as nothing more than lip service. Looking ahead to Wednesday, the greenback faces event risk from ISM services, and traders should watch this market-moving number to see if it manages to hold above 50 to signal expansion in the sector.

Euro: Euro-zone Retail Sales Could Prove To Be Disappointing On Wednesday
The euro started the European trading session on a strong note on Tuesday, only to have its rally against the US dollar cut short following a speech by Fed Chairman Ben Bernanke (see above). Euro-zone GDP accelerated faster than initially estimated in the first quarter on the back of jump in investment and construction spending in Germany. Indeed, GDP rose 0.8 percent from the fourth quarter due primarily to a revision to investment, which showed a 1.6 percent jump, the best reading since the second quarter of 2006. Meanwhile, the Euro-zone producer price growth outpaced forecasts, as the index rose 0.8 percent in April and jumped 6.1 percent from a year earlier. Inflation remains a major issue globally, and this will clearly weigh on the minds of the ECB’s policy makers this week. Nevertheless, the central bank is expected to leave rates unchanged at 4 percent, but traders shouldn’t write off the potential impact of hawkish commentary by ECB President Jean-Claude Trichet following the rate announcement. Looking ahead to tomorrow, the final reading of Euro-zone services PMI for May will be released. However, it is the Euro-zone retail sales index for April that the markets should watch, as unexpectedly weak spending in the German retail sector during the same period suggests that the broad European release could be similarly disappointing.

British Pound Sees Fundamental Road Bumps Ahead Of The BoE Rate Decision
Concerns that Bradford & Bingley’s financial problems could send the UK credit and housing markets reeling have clearly died out over the past 24 hours; but the damage has already been done with the pound now consolidating nearly 200 points below the week’s open. A few notable economic indicators have crossed the wires through Tuesday’s session. In early London trading, the construction activity indicator from the Chartered Institute of Purchasing and Supply sank more quickly than expected. In fact, according to the indicator activity contracted the most since records began 11 years ago. This indicator follows the already severe decline in home prices and mortgage applications and further confirms that the UK housing sector is in the same situation as its US counterpart – just nine months back. Much later in the day, the Nationwide consumer confidence survey for May crossed the wires with its own disparaging air. The sentiment report similarly hit record lows (this one going back to 2004) as Brits responded to evaporating home values, rising lending costs and soaring inflation. For Wednesday’s session, the PMI services and BRC consumer inflation reports will struggle to rouse volatility from the pound with most fundamental traders looking ahead to Thursday’s BoE rate decision.

Japanese Yen Looses Steam As Risk Aversion Settles, Data Approaches
Monday’s market-wide unwinding of risk and carry positions lost steam into the early trading hours of this morning. This pull back in demand for yen comes as fear that the UK’s Bradford & Bingley would catalyze the next leg of the ongoing credit crunch have clearly died down as the lender has yet to report any problems with liquidity (unlike the Northern Rock and Bear Stearns episodes). Instead, the Fed continued with its effort to snuff out financial turmoil with another scheduled $75 billion TAF auction and comments from Chairman Ben Bernanke that the outlook for the world’s largest economy was improving and rates would likely be held steady going forward. On the fundamental front, activity was otherwise muted. The BoJ reported a 0.9 percent drop in the monetary base to further highlight the lack of meaningful inflation throughout the Japanese economy. Looking ahead though, event risk will pick up with the Ministry of Finance’s capital spending report for the first quarter. A historical market-mover, this indicator has lost some of its sway recently. However, after the surprise strength in the preliminary 1Q GDP reading, the expected five-year low from the investment indicator may be more influential.

Commodity Dollars: RBA Holds Rates, Keeps Its Hawkish Tone
All of the com pair’s lost ground Tuesday as prices for crude, oil and other highly correlated commodities eased through the European and US sessions. Elsewhere, only the Australian docket was presenting substantial scheduled event risk. Action picked up in the Asian session with the release of the first quarter current account number. The broadest indicator for trading activity reported a smaller than expected increase in the deficit to A$19.5 billion. Far more important for the high-yielding currency was the RBA’s rate decision. Coming as little surprise, the central bank held rates at its 12-year high 7.25 percent for a third consecutive meeting while maintaining their concern for high inflation and cooling growth. The Aussie’s docket will finally taper off after the upcoming first quarter GDP release.

US Dollar: Will a Rebound In Services Add Further Support To The Dollar?

Tuesday, 03 June 2008 14:33:08 GMT

Written by John Rivera, Currency Analyst

The U.S. ISM Non-Manufacturing release – which accounts for 70% of the economy- is due out on Wednesday and is expected to show that the sector expanded for a second month. Economists are predicting that the measure will report at 51.0 down from 52.0 but above the 50 boom/bust level, following three months of contraction including January’s lowest ever recorded reading of 44.6. The sector has added jobs the last three months, and 12 industries reported growth in April led by Arts & Entertainment which should continue to improve with the bulk of the fiscal stimulus package reaching consumers in May.

What Are The Markets Facing?

The U.S. ISM Non-Manufacturing release – which accounts for 70% of the economy- is due out on Wednesday and is expected to show that the sector expanded for a second month. Economists are predicting that the measure will report at 51.0 down from 52.0 but above the 50 boom/bust level, following three months of contraction including January’s lowest ever recorded reading of 44.6. The sector has added jobs the last three months, and 12 industries reported growth in April led by Arts & Entertainment which should continue to improve with the bulk of the fiscal stimulus package reaching consumers in May. However, April saw new orders tick lower to 50.1 from 50.2 and new export orders fall into contraction at 48.5 from 55.0 the month prior, signaling that the sector could potentially contract again. Traders will focus on the employment component as last month’s better than expected NFP’s was led by the 90,000 jobs created in the service industry. However, the report may be overshadowed if the recent reemergence of banking woes continues as Lehman Brothers threatens to be the next bank to have a run on it, as it looks to raise capital for a second time.

Bonds – 10-Year Treasury Note Futures

The recent troubles of Lehman Brothers, Wachovia, and Washington Mutual sent traders seeking the safe havens of bonds and had the contract looking to test resistance at 116-08. That was until Chairman Bernanke spoke in Spain and raised inflation expectations and eliminated any chance of further rate cuts. A disappointing ISM Non-manufacturing report may resume the recent flight to safety and lend support to the 10 year note. Conversely, continued strength in the sector, which expanded last month, may serve to calm fears and weigh bonds lower towards support.

FX – EUR/USD

The dollar rallied on testimony from Fed Chairman Bernanke stating that “policy seems well positioned to promote moderate growth and price stability over time.” The monetary policy maker would also put the dollar in focus when he commented,”We are attentive to the implications of changes in the value of the dollar for inflation and inflation expectations and will continue to formulate policy to guard against risks to both parts of our dual mandate”. Euro bulls had taken control of the pair on the back of bullish European growth and inflation fundamental data, and the reemergence of concerns over the fallout from the subprime crisis in U.S. banks. Last week saw the dollar rally on better than expected Durable Goods Orders, Chicago PMI and New Home Sales. A better than expected ISM Non–Manufacturing may provide similar price action as it may alleviate some of the current banking concerns and feed the current dollar rally. However, a contraction in services, especially in the employment component could send EURUSD higher and reverse the dollars current momentum.

Visit our recently updated EUR/USD Currency Room for specific resources geared towards the US dollar.

Equities – Dow Jones Industrial Average

Equities have been weighed lower as concerns remerged that the financial crisis may not be over as several red flags were recently raised in the banking sector. Standard & Poor’s lowered it debt rating of Lehman brothers, Merrill Lynch and Morgan Stanley citing the potential for more write offs. Then Lehman announced that it is considering raising billions of dollars for a second time as speculation has increased that the bank may not have enough reserves to cover possible losses in its portfolio, threatening to put the bank on the run. This news followed upheavals at Wachovia and Washington Mutual that saw both banks oust their CEO’s and a profit warning from Bradford & Bingley – U.K.’s biggest mortgage lender. A decline in the service industry will add to the concerns of traders and may see the index threaten support at the March 31 low of 12,262. However, continued expansion in a sector that accounts for 70% of the economy may calm fears over future bank losses rally stocks.

US Dollar Bear Trend Resumes

Tuesday, 03 June 2008 12:34:50 GMT

Written by Jamie Saettele, Technical Currency Strategist

The EURUSD and GBPUSD are breaking higher from their respective bases that had formed over the past few days.  Both pairs are in the early stages of larger bull moves.  The USDJPY downtrend has resumed and are preferred count has the pair coming under 95.72 with 1.0586 remaining intact.  The only currency that is expected to weaken against the US dollar in the coming days/weeks is the CAD.

The EURUSD bull scenario is unfolding as expected to this point. “The decline from 1.5664 is nearly equal to the 1.5817-1.5608 decline. Corrections (a-b-c) often sport 2 identical legs. This combined with the possibility that the advance from 1.5283 is a 5 wave rally supports the bullish case.” Even if a larger more complex correction is unfolding from 1.6018 (such as a flat or a triangle), price is still expected to exceed 1.5817. Risk can be moved to 1.5486 although price ideally remains above 1.5519.

Visit our recently updated Euro Currency Room for specific resources geared towards this currency.

STRATEGY: Bullish, against 1.5486, target above 1.6018

The spike through 105.70 satisfies minimum expectations for wave Z. We wrote yesterday that “once we feel that we can confirm a top at 105.86, we will look for a short entry.” The short term USDJPY pattern strongly indicates that a top is in place (at least temporarily), so a bearish bias is warranted against 105.86.

Visit our recently updated Yen Currency Room for specific resources geared towards this currency.

STRATEGY: Bearish, against 105.86, target TBD

We wrote yesterday “there is no confidence lost in the larger count. Today’s low is at what should be strong support from the confluence of the 50% of 1.9364-1.9850 / 5/21 low at 1.9612. Think about positioning long in the 1.9550/1.9600 area, against 1.9364.” The GBPUSD rally from 1.9609 is probably a 3rd wave. Minimum expectations are for a push through 1.9850. A bullish bias is warranted against 1.9609.

Visit our recently updated British Pound Currency Room for specific resources geared towards this currency.

STRATEGY: Bullish, against 1.9609, target above 1.9850

We have altered the count somewhat for the USDCHF. There is little doubt that the advance from .9647 is corrective because a triangle separates the two legs. The only question is whether or not the rally from .9647 is a complete 3 wave rally or just the first wave of a larger more complex correction. Regardless, a bearish bias is warranted against 1.0527. Near term resistance is at 1.0385.

STRATEGY: Bearish, against 1.0527, target TBD

The USDCAD is working higher from the 78.6% of .9710-1.0324 at .9841. The push through .9997 is evidence that a low is in place. Risk can now be moved to .9823. Remember, the minimum objective is above 1.0324

Visit our recently updated Canadian Dollar Currency Room for specific resources geared towards this currency

STRATEGY: Bullish, against .9823, target above 1.0324

The advance from .8952 is likely the final leg of a diagonal that will lead to the major top mentioned in the longer term chart. “The rally from .8952 is wave C of a large 5th wave diagonal that could extend to a measured objective just below 1.00 in coming weeks (.9936).” Support has held at the trendline near .9500. A bullish bias is warranted against .9290 although price ideally remains above .9500.

STRATEGY: Bullish, against .9290, target .9936

From a price structure point of view, the decline since the March top at .8215 has been choppy and corrective. The drop counts well as a double flat (this is a complex correction). Moreover, the legs of the decline are roughly equal (a common characteristic among corrections). The leg up from .7536 is the closest thing to an impulse that the NZDUSD has shown since the March top. As such, a bullish bias is warranted against .7536 (ideally price remains above .7767) and the target is above .8215.

STRATEGY: Bullish, against .7536, target above .8215

Tell us what you think about this report: contact the strategist about the article at jsaettele@dailyfx.com

[1] STRATEGY is a summary of our best technical ideas. The ideas are subjective and are subject to change everyday although trades are typically held for at least a few days and sometimes a few weeks or more. Ideas are also included for crosses throughout the week; these are published at separate articles at DailyFX.

Euro Tightens Ahead of Looming Break-Out

Tuesday, 03 June 2008 06:28:05 GMT

Written by Ilya Spivak, Currency Analyst

Last week saw the EURUSD retrace higher to test the 1.58 level. The pair then collapsed, stalling briefly above the 23.6% Fibonacci retracement of the 05/08-05/22 rally at 1.5692 before falling straight down to the 61.8% level at 1.5488. The pair has since entered consolidation between that and the 50% Fib level. We have now identified an upward slowing trend line connecting recent lows as well as a downward-sloping resistance level at the highs. All signs appear to point to EURUSD coiling up for continued consolidation in the coming days. We expect to see some short-term upside momentum, but maintain that the fundamental forces embedded in the pair favor an overall bias to the downside. To that end, we see any potential up move capping out near 1.57, with a subsequent break downward out of consolidation targeting below 1.53.

Fibonacci Forum.

EUR/USD

Strategy: Bearish below 1.5700, Targeting 1.5287

Last week saw the EURUSD retrace higher to test the 1.58 level. The pair then collapsed, stalling briefly above the 23.6% Fibonacci retracement of the 05/08-05/22 rally at 1.5692 before falling straight down to the 61.8% level at 1.5488. The pair has since entered consolidation between that and the 50% Fib level. We have now identified an upward slowing trend line connecting recent lows as well as a downward-sloping resistance level at the highs. All signs appear to point to EURUSD coiling up for continued consolidation in the coming days. We expect to see some short-term upside momentum, but maintain that the fundamental forces embedded in the pair (see article) favor an overall bias to the downside. To that end, we see any potential up move capping out near 1.57, with a subsequent break downward out of consolidation targeting below 1.53.

For more resources on the EURUSD, please visit the DailyFX Euro Currency Room.

GBP/USD

Strategy: Bearish below 1.9760, Targeting 1.9400

Last week we noted that price action has been confined to a downward-sloping channel since mid-March. With the pair then stalling at the lower boundary of this channel, we held to our bearish bias. We suggested a scenario wherein the GBPUSD pulls up to the 61.8% Fibonacci retracement of the 02/20-03/13 rally just below 1.9760. In an alternative scenario, we thought the pair may rally all the way to the channel top above1.98 before a run lower toward 1.9400. As it happened, a mix of the two actually materialized. GBPUSD rallied to topside resistance above 1.98 and stalled between this and the 61.8% Fib before gapping lower at the weekly open. Needless to say, our bias remains bearish as we look for GBPUSD to test 1.94.

For more resources on the GBPUSD, please visit the DailyFX British Pound Currency Room.

USD/JPY

Strategy: Bullish against 102.90, Targeting 105.19

Previously, we saw USDJPY poised to test downside resistance at the 32.8% Fibonacci retracement of the 12/27/07-03/17 decline above 102.90. The preceding week, we had successfully gone long there with a target at 105.19, the 50% Fib level. Considering the bias as favoring the upside, we opted to go long at 102.90 again, targeting a return to 105.19. The approach yielded results once again, with USDJPY hitting our profit target only to pull back yet again. With consolidation looking to persist further, we will once again look to advance the same approach as before, buying USDJPY above 102.90 with an eye to the upside for another test at the 50% Fib level.

For more resources on the USDJPY, please visit the DailyFX Japanese Yen Currency Room.

USD/CHF

Strategy: Flat, waiting for confirmation

Our previous analysis saw us looking at the 12/27/07-03/17 down leg. We noted prices were ranging as USDCHF digested the preceding rally between the 38.2% and 50% Fib levels (1.0390 and 1.0625, respectively). We opted to play the range with a buy at Fib support. This analysis missed the mark as USDCHF collapsed through Fib support to approach the 1.02 level. Looking now at the 03/17-05/08 up move, we see that last week’s bottom coincides with the 38.2% Fibonacci retracement at 1.0251. Prices tried higher briefly, with USDCHF rallying above 1.0390 only to collapse lower again. With choppy price action around the 23.6% retracement level, the picture looks rather clouded. We will stay on the sidelines for the moment as we wait for a pattern to present itself.

For more resources on the USDCHF, please visit the DailyFX Swiss Franc Currency Room.

USD/CAD

Strategy: Flat, waiting for confirmation

Canadian dollar price action has remained choppy in recent weeks. Following a breakout of the 6-week range between 1.0010 and 1.0300, the pair descended below parity with the US dollar. The move likely borrowed some momentum from the brief spike rally in crude oil as prices spiked to $135/barrel. Price action has since retraced, currently pushing up against resistance at the 38.2% Fibonacci retracement of the 04/01-05/21 decline at 1.0010. We do not see a clear directional bias here at the moment and will remain on the sidelines as future price action provides more clarity.

For more resources on the USDCAD, please visit the DailyFX Canadian Dollar Currency Room.

AUD/USD

Strategy: Bullish against 0.9287, Target TBA

Writing on May 12th about AUDUSD resistance at 0.9500, we noted that “the more often a resistance tested, the likelier it is to break down.” We suggested going long on another retracement to 0.9287, marked by the 61.8% of the 02/28-03/20 decline. This support was made even stronger by the upward-sloping trend line that has held since August of last year, making a bullish reversal here likely. Price action validated our assertions as AUDUSD dipped to trigger entry and then mounted a bullish run to take out resistance at 0.95. We further noted that with the pair trading at levels unseen since 1984, we must rely on Fibonacci extensions to guide our thinking. To that effect, we pointed to an initial target at the 123.6% level at 0.9625. We chose not make this a “hard” take profit order however as we didn’t want to cut short profits from a potentially momentous move. Rather, we opted to monitor prices carefully and let the market show signs of slowing momentum before closing out. As it happened, AUDUSD found resistance precisely at the level we identified and slipped into consolidation between it and the resistance-turned support at 0.95. We will continue to hold the trade, expecting the current pause to give way to renewed upward momentum in the coming weeks.

For more resources on the AUDUSD, please visit the DailyFX Australian Dollar Currency Room.

NZD/USD

Strategy: Bearish against 0.7940, Target TBA

We initially reckoned four weeks ago that NZDUSD would retrace losses to re-test trend line support-turned-resistance near 0.7940. We looked to enter short from there as the bearish trend resumes. The pair followed through as expected – a high wick tipped the trend line before NZDUSD collapsed lower. Last week, price action stalled above the 0.7612, the 38.2% Fibonacci retracement of the 08/17/07-02/27 rally. We noted to expect some consolidation here and opted to hold off from taking profit, thinking downside momentum would resume in short order. The Fib level proved to act as support as expected. We then pointed to a downward sloping channel guiding the bearish trend. We opted to hold the trade, as we expect NZDUSD to retrace to the channel above 0.78 prior to further decline. We further suggested that those traders that did not enter short with us initially initiate a sell position on a fresh test of the channel top. Our thinking was validated as NZDUSD rallied above 0.78 and stalled at channel resistance. The second half of our preferred scenario is set to begin here. We will continue to hold short, expected a decline to extend through the 38.2% Fib level at 0.7612 to test 0.7500.

For more resources on the NZDUSD, please visit the DailyFX New Zealand Dollar Currency Room.

IMF: euro inflation “uncomfortably high”

IMF: euro inflation “uncomfortably high”
Monday June 2, 6:11 am ET

IMF says euro inflation is uncomfortably high, will likely stay high FRANKFURT, Germany (AP) — The International Monetary Fund said Monday that inflation in the 15 countries that use the euro is “uncomfortably high” and will likely stay above 3 percent in the near future.

Inflation close to record highs and well above the European Central Bank’s guideline of close to 2 percent — meaning the bank will likely avoid interest rate cuts until inflation cools.

The IMF does not see the risk of inflation spiraling out of control at present, saying second-round effects — such as a wage-price spiral that pushes prices up across the economy — “have essentially been kept in check.”

Outside of volatile food and fuel prices, so-called core inflation is still moderate at below 2 percent it said, and the overall rate may gradually return to less than 2 percent in late 2009.

In May, yearly inflation again hit 3.6 percent, according to an initial estimate from the European Union’s statistical agency Eurostat, the fastest pace of price increases in 12 years. It first rose to 3.6 percent in March before cooling slightly in April.

IMF official Alessandro Leipold told reporters at a Frankfurt news conference that high prices for basic goods would hurt economic growth this year.

The euro economy should bounce back from the current “mild slowdown” in late 2009, the fund says, predicting growth of 1.75 percent this year and 1.25 percent next year if financial turmoil does not deepen.

The IMF recommended the ECB keep borrowing costs on hold — as it has done since last June despite a credit crisis that saw the U.S. Federal Reserve and others slash rates to encourage banks to lend.

The fund also warned that the euro zone will see weaker exports as the global economy slows and the euro currency remains high against the U.S. dollar.

The strong euro cushioned Europe from high oil prices last year because oil is priced in dollars, cutting the cost of Europe’s import bill. But that effect is fading, Leipold said.

“Euro exports have been resilient but not immune and the euro has been a good shock absorber but not impenetrable,” Leipold said.

The IMF hinted that the euro may be overvalued, saying the exchange rate is “now on the strong side … having borne a disproportionate burden of the depreciation of the U.S. dollar.”

B&B woes send global stocks, pound lower

Reuters
B&B woes send global stocks, pound lower
Monday June 2, 7:41 am ET
By Natsuko Waki

LONDON (Reuters) – World stocks began June on a negative note and sterling hit a one-week low versus the dollar on Monday after a slump in profits at UK bank Bradford & Bingley (LSE:BB.L – News) added to concerns about the financial sector.

Government bonds remained under pressure in major economies, with a sell-off sending some Japanese government borrowing rates to 10-month highs. A fall in oil prices — now down nearly $10 a barrel from May record peaks — gave support to Asian stocks.

In an unscheduled trading update, the largest UK buy-to-let mortgage lender reported a near 50 percent year-on-year slump in profits for the first four months of 2008, scaled back a planned rights issue and announced a cash injection from a U.S. private equity firm.

Bradford & Bingley’s chief executive had quit on Sunday, less than a month after surprising investors with an emergency cash call. Its shares sank 25 percent on Monday.

“It rekindles concerns over the banking sector, and we’re probably going to see more asset writedowns in the market,” said Chicuong Dang, equity analyst at Richelieu Finance.

The FTSEurofirst 300 index (^FTEU3 – News) fell 1.2 percent while MSCI main world equity index (^MIWD00000PUS – News) slipped 0.15 percent on the day. U.S. stock futures were down around half a percent, indicating a weaker open on Wall Street later.

European banks (Zurich:^SX7P – News) fell 1.9 percent to a fresh two-month low with UK banks such as HBOS (LSE:HBOS.L – News) and Alliance & Leicester (LSE:ALLL.L – News) falling between 7 and 10 percent at one point.

European banks and cash strapped firms are expected to ask investors for a record $100 billion this year in the form of big rights issues. Banks have the biggest deals in the pipeline as they attempt to rebuild capital positions that have been hit by credit-related writedowns.

POUND UNDER PRESSURE

Sterling fell 1.2 percent to $1.9597, also coming under pressure after data showed the UK manufacturing sector stagnating and mortgage approvals tumbling to a record low.

“It’s hard to get much of an attraction to sterling at the moment,” said Mitul Kotecha, head of FX research at Calyon.

“We are going to get pieces of bad news like this (B&B), we know that not just UK banks but generally the financial sector troubles are not entirely over.”

Concerns over the banking sector pushed up the cost of borrowing three-month sterling funds (LIBOR), with the premium of interbank rates over anticipated official rates widening.

The cost of insuring European bank debt against default also rose after B&B news. The Markit iTraxx Senior Financials Index widened 5 basis points to 69.5 bps.

The June Bund future turned positive after B&B news depressed stocks, trading up 24 ticks on the day.

JGB SELL-OFF

Growing inflation concerns and nervousness about investor demand for an upcoming auction pushed Japanese government bonds lower, increasing yields across the board.

The two-year yield rose 2.5 basis points to a 10-month high of 0.930 percent, fully reflecting expectations for a quarter-point rate hike from 0.5 percent in the months ahead as well as the possibility of another.

Government bond yields in the euro zone, Japan and the U.S. hit 2008 highs last week as investors unwound safe-haven trades they had put on during the worst phase of the credit crisis after strong U.S. data and higher euro zone inflation figures.

U.S. light crude fell 1.3 percent to $125.73 a barrel. Gold rose on the day to $888.70 an ounce.

Emerging sovereign spreads tightened 4 basis points while emerging stocks (^MSCIEF – News) were up 0.15 percent.

(Additional reporting by Blaise Robinson and Veronica Brown; editing by Keith Weir)

Oil falls more than $1 as dollar edges up vs euro

Reuters
Oil falls more than $1 as dollar edges up vs euro
Monday June 2, 3:58 am ET
By Jonathan Leff and Maryelle Demongeot

SINGAPORE (Reuters) – Oil fell more than $1 to near $126 on Monday as the U.S. dollar edged up and traders shrugged off Tropical Storm Arthur, which marked the start of the Atlantic hurricane season by shutting two Mexican oil ports.

U.S. light, sweet crude oil futures fell $1.04 to $126.31 a barrel by 0749 GMT, extending last week’s nearly $5 tumble as traders took profits from the previous week’s record high above $135 on concerns over demand.

London Brent fell 98 cents at $126.80.

The dollar edged up on Monday, even as many investors awaited U.S. data this week to see if the reports reinforce expectations for higher interest rates.

The greenback has rebounded against the euro on the prospect of the Federal Reserve eventually lifting rates. The dollar scored back-to-back monthly gains against the euro in April and May for the first time since early 2007.

The market shrugged off Tropical Storm Arthur, which formed one day before the official June 1 start of the Atlantic hurricane season, buit quickly weakened into a tropic depression.

Arthur, the first storm of a June-November hurricane period that forecasters expect to be more active than usual, forced authorities to shut two of Mexico’s three main crude oil ports as a precaution.

State oil monopoly Pemex says its export volumes are rarely hurt by temporary port closures, as it reschedules delayed shipments once the weather clears.

“In the near term I think we’ll be looking at issues around supply, the potential for disruption in key regions,” said Gerard Burg, commodities analyst at National Australia Bank, noting the market will be more sensitive during the summer driving season.

“The peak (of the hurricane season) isn’t until September/October but obviously that’ll be a concern later into the third quarter.”

OFF PEAKS

Oil hit an all-time high of $135.09 a barrel on May 22, driven by rising flows of cash from investors and concerns supplies will struggle to match demand longer term, but a series of fuel price hikes across Asia and protests in Europe last week shifted focus to the potential for weakening consumption.

Demand in consuming nations such as the United States and Britain has already showed signs of faltering under the weight of rising fuel costs, and some analysts are concerned demand in some Asian countries could be hit as governments cut subsidies.

While the world’s number-two consumer China is resisting raising prices until after the August Olympics, other countries including Taiwan, Indonesia and Sri Lanka have been forced to hike pump rates as governments struggle to fund subsidies.

India is expected to raise prices slightly this week.

With the economic outlook shaky and demand for oil under pressure, OPEC has resisted calls to pump more crude, saying that the weak dollar, speculations and other factors — not a shortage of supply — are behind the one-third surge in prices this year.

OPEC President Chakib Khelil reiterated on Sunday the group would not make a decision on output policy ahead of its next meeting in September. (ID:nL31473671)

Oil traders are also bracing for the possibility of more surveillance of their markets from U.S. regulators, under political pressure to stem the rise in prices, a move they fear may shake some speculators out of the market.

The Commodity Futures Trading Commission said last week that it was investigating oil-market trading and beefing up reporting requirements. The New York Times reported on Saturday that the CFTC will unveil policy changes next week.

Crude oil speculators on the New York Mercantile Exchange cut their net long positions in half last week as prices began to fall, according to CFTC data. Net crude long positions fell to 25,867 in the week to May 27, from 50,060.

US Dollar Weighed Down By Slowing Spending, Watch for NFPs this Week

Euro Growth Comes Under Fire Just As ECB Decision Approaches
• Commodity Dollars: Canadian Economy Contracts For The First Time In Nearly Five Years

US Dollar Weighed Down By Slowing Spending, Watch for NFPs Next Week

The US dollar inched lower on Friday as US indicators only added to the pile of evidence suggesting that the economy is far from recovery mode. First, personal spending and personal income both slowed to a 0.2 percent pace during the month of April, indicating that consumption is not only weak, but will likely remain so through Q2. Indeed, record energy prices, a collapse in the housing sector, and a deteriorating labor market create a less-than-ideal environment for spending to recover. In fact, sentiment during the month of May was confirmed at a 28 year low of 59.8, according to the University of Michigan consumer confidence survey. It is not only the consumer side of the coin suffering though, as Chicago PMI held below 50 for the fourth consecutive month, signaling a contraction in business activity. A breakdown of the index shows a surge in the prices paid component, as rocketing commodity prices are undoubtly pushing input costs higher. Given the pick up we’ve seen in US CPI figures in recent months, it appears that businesses are passing these costs on to customers. Looking ahead to next week, the US dollar faces heavy event risk from the release of the ISM reports for the manufacturing (Monday) and services (Wednesday) sectors. However, Friday’s non-farm payrolls release should – as usual – prove to be the main event, especially as payrolls are expected to fall negative for the fifth consecutive month. Watch for our NFP Preview on Thursday in order to get a better sense of how the odds stack up ahead of the release, and if you should be watching for a surprisingly strong (dollar bullish) or weak (dollar bearish) number.

Euro Growth Comes Under Fire Just As ECB Decision Approaches

After three straight days of hearty loses, the euro was finally able to regain its footing. However, the rebound was modest and more a result of position squaring rather than a fundamental change of trend. The economic offerings from the docket were a mixed bag for the liquid currency. For the bulls, the second teir and infrequently market moving Euro-Zone CPI estimate for May boosted hawkish sentiment ahead of next Thursday’s ECB rate decision. The outlook for price pressures in the consumer basket jumped more than economists had expected to a 3.6 percent clip – matching a sixteen year high. This isn’t too suprising considering the pass through energy prices and rising costs of lending. On the other side of the monetary policy coin however, was the more market-moving German retail sales report for April. Measuring consumer spending trends in the Euro Zone’s largest economy, this indicator is understandably a top mover. And, considering the surprise drop in consumption, it is no wonder the future hawkishness of the central bank is in doubt. Retail sales dropped 1.7 percent last month – marking the six time in the past eight months that spending has dropped. Interestingly enough, inflation was blamed for the drop in consumption – an interesting consideration for the ECB when they meet next week.

Visit the Euro Currency Room for resources dedicated specifically to the Euro.

Commodity Dollars: Canadian Economy Contracts For The First Time In Nearly Five Years

The com bloc lost the support of its commodity correlation Friday as volatility for crude and gold settled. Instead, trading in the Canadian, Australian and New Zealand dollars were guided by active fundamental speculation. The loonie was arguably the most active currency among the three as traders received the growth numbers for March and the first quarter. Both readings would weigh on the Canadian dollar. Through March, the world’s 14th largest economy cooled 0.2 percent. Far more concerning though, the quarterly figure posted its first negative reading since 2003. Canada’s 0.3 percent clip of negative growth draws a notable contrast to the US’s as of yet positive readings. What’s more, the breakdown shows that the pressure on the economy is not just from the manufacturing sector’s troubles with unfavorable exchange rates and high input costs, but from trade and housing as well. For Australia, the Private Sector Credit report for April was a surprise fundamental driver. The 0.4 percent climb marked the smallest increase in borrowing in seven years – a reflection of high credit costs and perhaps fading consumer spending. No doubt, this will be a reading to consider next week when the RBA meets. There last report suggested they were considering a rate cut ealier this month. The RBNZ will likely raise similar concerns at their decision on Sunday.

Tell us what you think on the Canadian dollar Forum.

British Pound: Bank of England Likely to Leave Rates Unchanged Next Week

The British pound experienced a choppy day of trading between 1.97 – 1.98, as GfK consumer confidence dropped to a more than 18-year low of -29 from -24. Conditions in the UK economy are increasingly looking like that of the US, especially givent the sharp slowdown in the UK housing sector. While this is surely of concern to the Bank of England’s Monetary Policy Committee, they are expected to leave rates steady next Thursday at 5.00 percent as rocketing inflation pressures prevent the them from focusing on tighter credit conditions and the collapse of the UK property markets. Since the MPC is anticipated to leave rates unchanged, they are unlikely to issue a monetary policy statement, which should leave the market’s reaction to the news very muted.

Visit the British Pound Currency Room for resources dedicated specifically to the British Pound.

Fundamentals Add To Risk Pressures In Yen’s Retreat

Risk appetite settled through Friday as traders looked to square the books at the end of a busy week. However, fundamental yen traders would find no peace as economic indicators would take up the reins to the yen’s steady decline. Typically, Japanese data has little influence on price action; yet today’s offerings were too influential to ignore. The national inflation number retreated from its decade high after the expiration of a gasoline tax, curbing hawkish feelings. The outlook for growth was more concerning. Consumer spending fell the most in 19 months while industrial production marked consecutive contractions for the first time in four years. This leaves little hope for any BoJ hike.

Visit the Japanese Yen Currency Room for resources dedicated specifically to the Yen.