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Commentary for the week of 07/17/2009

The Australian dollar ended the week up 2.5% against the US dollar more than reversing last week's 2.3% decline as risk currencies found support from signs the global economy is on the mend and US corporate earnings are staging a comeback. Gold rallied 2.7% in the week. The Reserve Bank of Australia sold a net A$1.94bln in June, the highest amount recorded for any month which coincided with a 9-month high for the AUD. RBA is rather active in managing its reserves and does not tout its FX trading as directional or currency intervention per se. The NAB business conditions index rose to -2 in June from -14 in May and was the highest reading in nine months. Imports rose in June from May suggesting domestic demand is holding up. Export prices plunged a record 20.6% year-over-year in Q2 reflecting falling commodity prices on weak demand. Producer prices in Q2 fell 0.8% quarter-over-quarter, a record decline (series started in 1998).
In the coming week Australia releases data on PPI, CPI and new vehicle sales. RBA Assistant Governor Debelle speaks next week. In light of the growing optimism over the prospects for a global economic recovery and firmer commodity prices, look for the AUD to benefit more in the coming week we think.

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The British pound ended the week up 0.8% against the US dollar, lagging mot major currencies' advance versus the greenback. Lower risk aversion aided the pound's rise but concerns about the UK recovery and banking sector kept gains in check. Bank of England Deputy Governor Bean said the Bank will decide in August whether or not to continue with asset purchases (quantitative easing) as the current program expires at the end of this month. Bean also said the economy could take some time to recovery and may see growth by the end of the year (UK GDP for Q2 is out next week). UK June CPI rose 1.8% year-over-year, the lowest rate since September 2007, down from 2.2% in May. The unemployment rate (International Labor Organization) hit a 12-year high in the 3 months ending in May at 7.6% while jobless claims rose less than expected in June. June retail sales, according to the British Retail Consortium, rose 1.4% year-over-year after falling 0.8% in May. The Royal Institution of Chartered Surveyors reported June housing prices fell 18.1% year-over-year, the smallest decline in nearly 2 years. There were vague rumors late in the week of UK authorities demanding banks raise capital levels, though this talk was never confirmed.
In the coming week the UK releases data on the government borrowing requirement, retail sales and GDP. Minutes from the Bank of England's July meeting are published as well next week. We suspect the pound will move up against the US dollar next week as risk aversion remains in decline on corporate earnings and economic data from the US suggesting the odds for a global recovery are improving. However, the gains may prove more modest than other major currencies as was the case this week as the UK economy remains particularly challenged and the minutes of the BOE meeting could elevate expectations the Bank will extend its main quantitative easing program in August.

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After falling for four straight weeks, the Canadian dollar ended this week up a whopping 4.5% against the US dollar as risk aversion remained depressed and commodity prices firmed for the most part as markets were impressed with US corporate earnings data. Oil rose 2.5% on Friday alone. Market participants were largely indifferent to Canadian economic data suggesting deflationary pressures are emerging. Canadian inflation fell 0.3% year-over-year in June, the first decline since 1955. Factory sales fell 6% in May from April to the lowest level in almost 11 years. The index of leading economic indicators for June fell 0.1% from May. Bank of Canada reported Q2 business sentiment improved and firms reported credit conditions less tight than in Q1.
In the coming week Canada releases data on foreign investment in Canadian securities, wholesale trade and retail sales. Also the Bank of Canada announces its overnight rate decision as well as any plans for unconventional policy measures. Despite the fact that the BOC is widely seen leaving rates on hold and renewing its intention to keep them low through June 2010, we think the C$ will post more gains versus the US$ in the week ahead aided by the broad rally in risk assets and commodities on optimism the global economy and corporate earnings are bouncing back.

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The euro ended the week 1.2% higher against the US dollar as risk aversion fell on strong US Q2 corporate earnings from a number of leading financial and high tech firms as well as optimism on stronger global demand. Euro Zone industrial production in May rose 0.5% from April and was the first monthly rise since August 2008. Inflation in June fell 0.1% year-over-year confirming the preliminary release out early in the month and a record decline (since January 1999). Euro Zone trade balance was in surplus in May as imports fell more than exports with weak domestic and foreign economic activity depressing world trade. German economic sentiment index from think tank ZEW fell to 39.5 in July from 44.8 in June.
In the coming week, data from the Euro Zone include figures on industrial orders, current account and PMI. Germany releases data on the current account and business conditions (IFO institute's widely followed leading indicator). With risk currencies firmer on US corporate earnings this week and more of the same expected next week, we think the Euro will rally more against the USD next week.

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Falling 1.8% against the US dollar, the Japanese yen fell victim to the decline in risk aversion on renewed optimism over the chances for a global economic rebound in the wake of US corporate earnings and data released in the week. The Bank of Japan's monthly board meeting left rates on hold and decided to extend its program to boost corporate lending and other special liquidity programs hatched during the global financial crisis. Japan May industrial production was revised down slightly to +5.7% month-over-month from +5.9% in the preliminary report. Manufacturing confidence as measured by Reuters Tankan survey was up for the fourth straight month in July. Consumer confidence in June rose to 37.6 from 35.7 in May.
In the week ahead Japan releases data on international trade. Japan's markets are closed Monday for a national holiday. We think the yen will remain weak in the period ahead as risk aversion remains in retreat in the face of market optimism finding lift in corporate earnings and economic data from the US primarily.

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The Mexican peso rebounded 2.7% against the US dollar from last week's 3.4% slump as risk aversion fell in the wake of some upbeat earnings for a number of key US firms and higher oil prices. The Bank of Mexico lowered its key rate to 4.50% from 4.75% and the lowest rate in 6 years. It was the seventh rate cut by the Bank in the last seven months. However, the market expects the Bank to leave rates on hold ahead hopeful the global economy will recover and lift Mexican exports. Auto output fell 48.1% in June from a year ago reflecting weak US demand. The government announced plan to launch an incentive program for citizens to trade in old cars for new cars (cash for clunkers) to support domestic auto sales. April gross fixed investment fell 17.8% from a year ago. Same-store retail sales were down 3.5% from a year ago in June.
In the coming week Mexico releases data on unemployment, inflation and retail sales. Look for the MXN to advance more in the week ahead lifted by a broad USD decline on falling risk aversion and optimism the global economy and corporate earnings are turning the corner we think.

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The Russian rouble rose 2.9% against the US dollar this week partly reversing last week's 4.4% tumble as risk aversion receded and investors piled into emerging market FX and assets. Higher oil prices also contributed to a firmer RUB. The central bank was a seller of RUB in the week according to market talk as the currency rallied. Russia's Economic Ministry issued an estimate for 1H 2009 GDP and forecast a 10.2% year-over-year decline. June PPI rose 2.2% month-over-month but fell 9.4% year-over-year. A central bank official said the RUB at 35 per USD would not be frightening. June industrial output fell 12.1% year-over-year. The unemployment rate in June fell to a sixth month low at 8.3%.
In the coming week Russia releases data on housing completions, retail sales, capital investment, unemployment and wages. Look for the RUB to recover more against the USD in the coming week as risk currencies benefit from higher global equity prices, higher commodity prices and lower risk aversion on confidence the global economy will recover we think. Also expect higher oil prices to support the RUB next week.

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The Swedish krona ended the week up 1.2% versus the US dollar nearly reversing last week's 1.7% decline as risk currencies rallied on US corporate earnings for Q2 and better news on the global economy. There were no major economic releases this week. Sweden's central bank governor Ingves said the Riksbank could lend more to banks at fixed interest rates and may need to use additional measures to boost the economy. The central bank announced Monday it would add SEK100bln in 12-month loans to banks at a fixed rate.
In the week ahead Sweden releases data on unemployment. We believe the SEK will firm more against the USD in the week ahead as risk aversion remains depressed and the USD broadly suffers. Look for SEK direction in US corporate earnings which should on balance lift hopes of a global recovery and support risk assets and currencies.

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The Swiss franc ended the week 0.9% higher against the US dollar aided by the broader USD decline and slide in risk aversion following solid corporate earnings from some key US banks and tech firms. Swiss June PPI fell 5.6% year-over-year, the steepest drop since 1986. Retail sales fell 1.4% year-over-year in real terms. And the ZEW institute's investor sentiment index fell to 0.0 from 9.7 in June.
In the coming week Switzerland releases data on international trade. Look for the CHF to move higher next week as the USD faces broad selling pressure on better earnings reports from US companies and signs of the global economy improving we think.

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With the height of US corporate earnings season in full swing and the likes of Goldman Sachs, JPM Chase, Intel and IBM posting impressive results, the US dollar index ended the week down 1.2%, the largest decline since May. US stock indices were up sharply with the Dow Jones Industrial Average ending the week up 7.3%. Commodity prices were also higher and this lent added lift to the Canadian and Australian dollars. China also reported Q2 GDP and it grew 7.9% year-over-year after 6.1% in Q1 supporting the notion the global economy is on the mend. Minutes from the June 23-24 FOMC meeting showed Fed officials were reluctant to increase its asset purchase program fearing markets would react badly to the news. The Fed also upgraded its forecasts for GDP for 2009 and 2010. Headline (all-items) PPI and CPI for June showed large month-over-month gains reflecting the jump in gasoline prices, though year-over-year CPI was down 1.4%, the largest since 1950, and PPI was down 4.6% from a year ago. Housing starts in June rose 3.6% from May while permits were up 8.7% which helped boost confidence in the recovery in housing and more broadly the economy. Industrial production for June fell a less-than-expected 0.4% month-over-month suggesting the decline in manufacturing was slowing. Business inventories fell 1% in May from April suggesting manufacturers will need to replenish stocks of goods ahead lifting output. Jobless claims for the week ending July 11 fell 47,000 to 522,000, the lowest level since January. The index of home builder sentiment rose to 17 in July from 15 in June and the highest reading since September (National Association of Home Builders). US June retail sales rose 0.6% month-over-month beating expectations of a 0.4% rise helped by a surge in auto sales and elevated gasoline prices. But the week was not all wine and roses on the economy and earnings. US budget deficit in June hit a record $94.32bln reflecting elevated government spending and depressed revenues. The Philadelphia Fed business index (measures manufacturing) fell to -7.5 in July from 2.2 in June. Market participants were also wary over earnings results from Bank of America and Citibank where pressures on the balance sheet from souring consumer loans was evident. GE also reported a steep decline in Q2 revenue from a year ago reflecting weakness in the global economy. Net private capital outflows were reported in May for the second straight month as investors sold US Treasuries as risk aversion fell while China's government was a large net buyer of Treasuries. US Treasury Secretary Geithner was in Europe and the Middle East assuring governments and investors that the US is committed to a strong dollar and will address the budget deficit once the economy has recovered.
In the week ahead the US releases data on leading indicators, home prices, initial claims, existing home sales and consumer sentiment. Fed Chairman Bernanke testifies in Congress on monetary policy and the economy as well. Chinese economic policy officials are in Washington for Strategic Economic Dialogue talks. We anticipate risk currencies and assets will extend this week's rally as market participants fin encouragement in data and earnings suggesting the US and global economy is improving leaving the US dollar vulnerable. Bernanke's testimony will be key for markets as well as the Chairman is expected to outline an exit strategy from unconventional monetary policy which should aid confidence in the recovery we think.

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