FX Awaits US Data, FOMC

At 8:30 AM US Weekly Jobless Claims (exp 318k, prev 324k)
US Q1 GDP (exp 0.8%, prev 0.6%)
US Q1 core PCE (exp 2.2%, prev 2.2%)
At 2:15 PM FOMC Monetary Policy Decision (Exp 5.25%, Prev 5.25%)

Garnering the lion’s share of market attention today will be the FOMC monetary policy decision, due out in the afternoon at 2:15 PM. While the Fed is widely expected to leave rates unchanged at 5.25%, traders are eager to decipher the accompanying statement – particularly for any acknowledgement of the continued deterioration in the housing market stemming from the sub-prime debacle. Further, the overall outlook for inflation will be closely scrutinized as markets continue to assess the likelihood for a possible shift to an easing stance over the remainder of the year. We’re not anticipating any significant alterations from the previous statement, except for a minor comment on the sub-prime market and more specifically, reassuring markets’ fears of any spillover and discounting the situation as more of an isolated incident.

US economic data due out in the coming session will see the final reading for Q1 GDP, expected to edge up to 0.8% from 0.6% and the Q1 core PCE price index, seen unchanged. Weekly jobless claims are expected to slip to 318k, compared with the prior week at 324k.

UK Inflation Takes Centerstage

At 1:00 AM Japan May Confidence Index (exp n/f, prev 47.4)
At 4:30 AM UK May CPI m/m (exp 0.3%, prev 0.3%)
UK May CPI y/y (exp 2.6%, prev 2.8%)
UK May RPI m/m (exp 0.4%, prev 0.5%)
UK May RPI y/y (exp 4.3%, prev 4.5%)
UK May RPI-x m/m (exp 0.4%, prev 0.5%)
UK May RPI-x y/y (exp 3.3%, prev 3.6%)
UK April Trade Balance (exp –7.0 bln stg, prev –7.04 bln stg)
At 5:00 AM E-13 April Industrial Production m/m (exp 0.2%, prev 0.4%)
E-13 April Industrial Production y/y (exp 4.4%, prev 3.7%)
At 2:00 PM US May Federal Budget (exp $-70.0 bln, prev $42.91 bln)

GBP Edges Higher Ahead of Inflation Reports
Cable recovered the 1.97-level in early Tuesday trading with several key indicators of UK inflation due out later in the session. Markets will try to discern how aggressive the Bank of England will be over the coming months to rein in inflation as CPI continues to hover well above its 2% target. The barrage of reports today consist of May CPI, RPI, RPI-x and April trade balance.

Dollar Rose Above 123 Yen

EST Exp Prev
00:00 Japan Bank of Japan Monetary Policy Decision 0.5% 0.5%
01:00 Japan BoJ June Monthly Report n/a n/a
01:00 Japan April Leading Indicator n/f 20.0
08:30 US Q1 Current Account Deficit $201.0 bln $195.79 bln
08:30 US May Real Earnings 0.1% -0.5%
08:30 US June NY Fed Manufacturing Survey 10.8 8.03
08:30 US May CPI y/y 2.6% 2.6%
08:30 US May CPI-x y/y 2.3% 2.3%
08:30 US May CPI-x m/m 0.2% 0.2%
08:30 US May CPI m/m 0.6% 0.4%
09:00 US April TICS n/f $67.7 bln
09:15 US May Capacity Utilization 81.6% 81.6%
09:15 US May Industrial Production m/m 0.2% 0.7%
10:00 US June University of Michigan Survey prelim 88.0 88.3

The dollar rose above a technical resistance at 123 versus the yen on Thursday. After breaking the key level at 122.20 yesterday, the pair initiated an upward trend with next target at 123.50.

The Bank of Japan is widely expected to leave interest rates unchanged at 0.5% on it policy meeting tonight. US interest rate futures indicated that traders have already priced out a chance of a Fed rate cut within the year. The US bond yield premium over Japan equivalents widened further, pushing the dollar trade higher versus the yen.

MRPL hedging policy to soften forex shock

NEW DELHI: Fluctuations in the foreign currency market has forced Mangalore Refinery & Petrochemicals (MRPL) to devise a risk-management policy to hedge its annual forex receipt of over $6 billion (over Rs 24,000 crore).

There has been risk of adverse movement in the foreign currency vis-à-vis rupee, hence the
oil company is considering to implement a forex policy soon based on a draft prepared by Ernst & Young (E&Y).

According to the draft policy, constitution of a foreign exchange risk management committee (FRMC) is proposed. FRMC will approve hedging activities including approving currencies and instruments. Proposed instruments are; spot, cash spot and tom; forwards, plain vanilla currency options, zero-cost option structures and currency and interest rate swaps. Additional instruments could be added with the approval of FRMC. It is also proposed that any activity that is speculative in nature would not be allowed.

“Hedges will initially permitted only against the underlying exposures. The hedge position shall at no time be in access of the outstanding forex exposures,” the draft said. Members of the proposed committee would be director (finance), one member from outside the finance department (of at least vice-president level), deputy general manager (finance & accounts), senior manager (international trade), back-office incharge and a representative from the internal audit department (with observer status). It is also proposed to set up a finance department (forex) to look after front office and back office operations.

The company had already undertaken a mock exercise in 2006-07 for the crude oil imports, product exports, and buyers credit, a company source said. The net result of hedging was a loss of Rs 96.87 crore. Summarising the conclusion of the mock exercise, a company source said that the total exposure in the period (April 2006 to March 2007) was of $6,856 million.

Exports of $2,537 million took place in the period while imports was of $3,967 million. Buyers’ credit was to the tune of $352 million. Forward premium paid in risk management was Rs 42.14 crore, while forward premium received in the process was Rs 9.75 crore.

Summarising the benefits of institutionalising a forex policy, a source said it would help in addressing all forex risk centrally. It will also help in creating an ability to take “informed decision to protect margins that can be hurt by adverse movement in foreign currency.”

Stand Out With Forex Yellow Pages

It almost goes without say that in today's world of trade and commerce, an organization must do all it can do stand out and be noticed. Forex trading is no exception; and with Forex Yellow Pages, organizations will have the kind of exposure they need to be noticed and thus attract potential investors and traders. The fact that the forex market is the biggest one in the world, with more than 2 trillion dollars being bought and sold everyday, only adds further importance to the need to stand out and be noticed amidst the competition.

Convenience is also another advantage that forex related companies get. Anyone who has a computer with an internet connection can participate in forex trading today. It has become a borderless world with the internet and it is simply impossible to be able to target everyone who is interested in forex trading. Forex Yellow Pages again solves this problem as it saves forex related companies from figuring out where, how, when, and to whom they should advertise. In essence what Forex Yellow Pages does is that it brings people to the company and not the other way around, consequently saving companies from spending thousand of dollars in advertising.

Forex reserves rise

Mumbai, June 1: Forex reserves increased by $952 million to $204.934 billion during the week ended May 25 against $203.982 billion during the week ended May 18. The reserves had decreased by $9 million during the week ended May 18. Foreign currency assets increased by $953 million to $197.438 billion during the week, according to the figures released by the Reserve Bank.

Tata appeal

Mumbai, June 1: Ratan Tata today asked the private sector to focus on social development of the country. “We must not forget the fact that there are numerous people living below the poverty line, especially in rural areas,” he said.

Mining pact

Calcutta, June 1: Coal India Ltd and Damodar Valley Corporation have entered into a pact to develop manufacturing facilities for underground mining machinery and material handling equipment. They also aim to revive the Mining and Allied Machinery Corporation, Durgapur.

Bharti move

Ludhiana, June 1: Bharti Enterprises will enter general insurance business in the second half of this year in a joint venture with Axa Group.

Realty JV

New Delhi, June 1: DLF has entered into an agreement to float a joint venture with Fortis Healthcare to set up hospitals across the country with about Rs 6,200 crore of investments.

Forex reserve to have more Euros

China plans to increase the ratio of Euros in its foreign exchange holdings given the stability in the European Union (EU) economic growth and in the value of the European single currency, said a central bank vice governor on Thursday.

However, China has no plans yet to reduce the proportion of US dollar assets in its coffers, Wu Xiaoling told an economic forum in Brussels, the Shanghai-based Oriental Morning Post reported Friday.

China's forex reserves reached US$ 1.2 trillion at the end of March and about 70 percent of the holdings are believed to be in US dollar assets, especially US treasuries.

To address the trade imbalance with western countries, China could take measures to stimulate domestic consumption and improve the flexibility of the Chinese currency.

"If we intend to solve the problem of imbalanced trade, we will first increase the flexibility of the yuan exchange rate, but that will not be the main means," Wu said.

The downturn is over - if there ever was one

Our quarterly Global Scenarios hit the streets today with a relatively upbeat message. We have long argued that the ISM index would bottom out around the 50 level in Q1 and recover during the rest of 2007. It now seems that this movement has come more quickly and more strongly than we anticipated. The outlook for global industrial activity therefore looks bright for the rest of the year. The US downturn had little impact on the rest of the world - in fact it was the rest of the world that rubbed off on the US.

But the fundamental reason why the US looks like making a comeback in H2 is not so much the rest of the world growing strongly as the recession in the US housing market being on its last legs. The latest data show that construction is already stabilising and looks set to stop dragging down GDP growth as early as Q3. Since homebuilding has been the main reason for the US growing below trend in recent quarters, this means that the economy is probably headed back to abovetrend growth even now in mid-2007.

This is good news for global growth - but bad news for the central banks because, as we have stressed here many times before, there is little capacity left in the global economy.

The U.S. dollar crept higher this morning

The U.S. dollar crept higher this morning following news that U.S. job creation in May was greater than expected, with 157,000 new jobs, further reduced expectations that the Federal Reserve will cut benchmark interest rates this year. The payrolls report was the latest in a string of better-than-expected readings of the U.S. economy which have underpinned the dollar in recent sessions. Additionally, U.S. manufacturing index (ISM) for May rose to its highest since April 2006 with a reading of 55.0. A Commerce Department report showed U.S. core consumer prices, a key measure of inflation which strips out food and energy costs, inched up a less-than-expected 0.1 percent. The dollar remains near 4 month highs against the yen and held to 7-week highs versus the euro. Positive dollar sentiment was supported by comments from Federal Reserve Board Governor Randall Kroszner who said U.S. economic growth should rebound in the course of 2007 and that the main threat to the economy was inflation.

The Euro remained confined to the weaker end of its recent ranges against the U.S. dollar following strong economic data releases out of the U.S. Euro zone policymakers also sounded a hawkish note, with European Central Bank Governing Council Member Klaus Liebscher saying the ECB would remain strongly vigilant and Vice President Lucas Papdemos saying such vigilance is of the essence. The single currency was little changed on purchasing managers' data showing expansion in the eurozone manufacturing sector slipped unexpectedly to its weakest rate in 15 months. Focus remains on the European Central Bank??™s next policy meeting, which gets underway next Wednesday, where expectations remain for a rate hike of 25 basis points.

With no major economic data out of the U.K. today, the British pound edged lower against the dollar following U.S. jobs data. The market is pricing in another U.K. interest rate hike in the summer and a third of economists recently polled by the Reuters news agency believe that rates will rise to 6% percent this year.

The Japanese yen continues to languish near multi-year lows against its major counterparts. Falling victim to 15 and 17 year lows against the AUD and NZD due to strong carry-trade activity. Look for USD/JPY to continue to remain confined to its recent ranges as the currency pair tries to break above 122.30 levels last seen in January 2007.

The Canadian dollar remains near 30-year highs against the USD. Talk of parity with the USD by year end is rampant. The rise in the Canadian dollar all week has been pegged to a combination of strong domestic data, soaring commodity prices and growing expectations for summer rate hikes by the Bank of Canada.

The Australian dollar reached fresh two-week highs against the U.S. dollar as carry trades came back into the picture pushing the Aussie to 15 year highs against the yen. Analysts said the global growth outlook, firmer base metals prices, domestic data pointing to strong first-quarter economic growth, and stability on regional stock markets despite China's gyrations this week, were all helping to boost the Aussie. The data, however, did little to change expectations that the Reserve Bank of Australia will hold interest rates in the short term, but potentially raise rates by the end of the year to 6.50%.

The New Zealand dollar followed in the footsteps of it??™s Aussie cousin, climbing to a one-month high against the U.S. dollar and rose to a 17-year high against the yen, driven by carry trades by investors seeking its high yield. Analysts are starting to price in a rate hike to 8%, possibly as early as next week, due to strong consumer spending, as well as, strength in the housing market. The New Zealand market will be closed on Monday for the Queen's Birthday holiday.

The Mexican peso strengthened to its strongest level in 14 months and stocks rose after a robust U.S. jobs report reassured investors about the strength of the economy in the United States, Mexico's main trading partner.

Indicative Rates:

USD Mixed Ahead of Data

At 2:00 AM Germany Q1 GDP q/q (exp 0.5%, prev 0.5%)
Germany Q1 GDP y/y (exp 3.6%, prev 3.6%)
At 4:00 AM Germany May Ifo Current Conditions (exp 113.5, prev 113.2)
Germany May Ifo Index (exp 108.8, prev 108.6)
At 8:30 AM US Weekly Jobless Claims (exp 305.0k, prev 293.0k)
US April Durable Goods Orders (exp 1.0%, prev 3.8%)
US April Durable Goods Orders ex-transports (exp 0.6%, prev 1.4%)
At 10:00 AM US April New Home Sales (exp 860k, prev 858k)

The greenback is mixed in early Thursday trading, firmer against the euro and yen while continuing to trade on its heels versus the sterling and Loonie. Currency movements have been largely dictated by sentiment on the outlook for global interest rate differentials, with the currencies of the central banks most likely to further tighten policy benefiting from market expectations. Inflation remains buoyed in countries such as the UK and Canada resulting in heightened expectations for rate hikes from their respective central banks.

US economic data for the coming session will see weekly jobless claims, April durable goods orders and new home sales. Weekly jobless claims are forecasted to edge up to 305.0k, from 293.0k the previous week. Durable goods orders for April are seen retreating to 1.0%, versus a robust 3.8% reading previously. Durable goods orders excluding transports is also lower to 0.6% from 1.4% in March. Meanwhile, April new home sales are seen edging higher to 860k versus 858k a month earlier.

Dollar Advanced on New Home Sales

The dollar advanced after a report showed US new home sales growth rate in April reached the highest in 14 years, dampening the expectations that the Fed may need to cut interest rates this year.

US new home sales rose 16.2% in April to 981k, beating the estimate of 860k. The unexpectedly robust housing data added evidence that the spillover from housing sector to the whole economy is limited. The Fed is widely expected to hold interest rates unchanged in its June monetary policy meeting and is likely to make no move for the rest of the year. The greenback rallied following the housing report. The euro fell from 1.3450 to a day low at 1.3417 versus the dollar, and the sterling dipped around 50 pips against the dollar.

Earlier, the dollar was little changed after the release of two US second-tier data. The weekly jobless claims rose to 311k, compared to a forecast of 305k. The durable good orders rose 0.6% in April, below the expectation of 1.0%. Ex-transport index was up 1.5%, better than an expected 0.6% rise.

USD Buoyed Against Eur, JPY

At 4:30 AM UK Q1 GDP y/y (exp 2.8%, prev 2.8%)
UK Q1 GDP q/q (exp 0.7%, prev 0.7%)
At 10:00 AM US April Existing Home Sales (exp 6.14 mln units, prev 6.12 mln units)

The dollar remains buoyed against the euro and yen following yesterday’s upbeat US housing data, with new home sales posting its steepest gain in 14-years. Sentiment over central bank interest rate decisions continues to be the primary driver in the foreign exchange market, as expectations for a Fed rate cut this year are slowly diminishing, ultimately supporting the greenback.

The OECD released its semi-annual Economic Outlook this week and called for global central banks, with the exception of Japan, to “err on the side of tightness” given lingering inflationary pressure. Further, it urged the Fed to refrain from shifting to an easing stance until early 2008, citing “more persistent than expected” inflation in the US. The OECD anticipates two more rate hikes from the ECB to 4.25% and sees further possible tightening from the BoE throughout the remainder of this year as well. Also, to highlight the growing disparity between the economies of the US and the rest of the world, the OECD cut the growth forecast for the US while simultaneously upwardly revising the growth rates for the Eurozone, UK, Japan and Australia.

$ Slipped On Existing Home Sale$

The dollar slipped after a report indicated an unexpected decline in US existing home sales, re-igniting concern over the downturn of housing sector and the Fed interest rate cut possibility.

US existing homes sales declined 2.6% to an annual rate of 5.99 million units in April, below the estimate of 6.14 million. The tame housing data surprised the market, which had anticipated a number as robust as the new home sales released yesterday. The euro rose from around 1.3445 to as high as 1.3471, and the sterling gained 30 pips to 1.9868 versus the dollar.

With recent upbeat economic US data, the dollar rebounded versus the euro and sterling. The dollar has gained against the euro for four weeks, which constitutes the longest rally in 5 quarters. However, the dollar failed to break the 1.3415 level versus the euro following the surprisingly good new home sales. The 1.3410-15 area therefore became a base of the pair¡¯s consolidation range.

FX Trading Thinned by Holiday$

Germany Market Closed for Holiday
UK Market Closed for Holiday
Swiss Market Closed for Holiday
US Market Closed in Observance of Memorial Day

The foreign exchange market will be off to a slow start with several markets closed for holiday on Monday, including Swiss, Germany, UK and the US. However, the economic calendar is stacked with key reports this week and culminates with the closely anticipated US labor report on Friday. Currency movements have predominantly been dictated by sentiment over the outlook for global central banks and should continue to prevail in the coming week.

Some key highlights will be the Bank of Canada’s rate decision on Tuesday, Eurozone money supply, Germany’s unemployment report, Canada’s March GDP, US Q1 GDP, Eurozone Q1 GDP, and manufacturing reports from the US, Japan, UK and Eurozone. Although the BoC is not seen raising rates this week from 4.25%, the policy statement will be closely scrutinized given the recent uptick in Canada’s consumer price inflation as traders gauge whether additional tightening is a possibility. Meanwhile, the growth rates from Swiss, Canada, Eurozone, and US will also be analyzed, with GDP in the Eurozone seen outpacing its counterparts, effectively providing the ECB with additional room to tighten.

Loonie Surges on BoC

The major currency pairs were mixed in Tuesday trading with the return of several major markets from holiday. The biggest advancer in the session was the Canadian dollar, pushing to a fresh 30-year high against the greenback on the heels of a hawkish policy statement from the BoC.

Meanwhile, the Conference Board’s consumer confidence reading for May improved to 108, edging out forecasts for a slight improvement to 105 from 104.