General Commentary
Last Week’s Currency Trading Review:
The EUR/USD continued to decline ahead of the June ECB meeting where it is expected that the bank will offer some new form of stimulus to help the economy as inflation continues to decline, manufacturing and GDP falter. The euro closed at 1.3632after starting the week at 1.3703. Analysts are now expecting a 10 to 15 bps rate cut in both the refinancing and deposit rates looks highly likely. Indeed, past ECB press conferences made it clear that the negative impact of a strong Euro on growth/inflation forecasts needs to be addressed. At the last ECB press conference, the strength of the euro was indeed seen as “a cause for serious concern”. Recent speeches from the ECB’s president emphasized that addressing this specific point would be made through conventional actions (i.e., adjusting rates lower), and acting on the refi rate and pushing the deposit rate into negative territory could be required to have a powerful impact on the exchange rate.
TheAUD/USD eased to 0.9239 against a strong US dollar and declining iron ore prices as traders reviewed the new budget introduced by the government. Continued worries about the Chinese economy Australia’s main trading partner weighed on the currency this week. China’s economic expansion is decelerating due to a transition to a new stage of economic development that relies more on productivity improvements than factor inputs In this context, the Third Plenum’s economic reform plan, unveiled last November, shows determination by the authorities to decrease the role of the government in resource allocation, which will lead to efficiency gains and a more sustainable growth model. As policymakers continue their efforts to curb shadow banking activities, economists foresee a slowdown in investment, causing China’s expansion rate to decelerate to 7.3% in 2014 and further to 7.0% in 2015.
TheUSD/JPY closed the week at 101.85 in a fairly tight range after the Bank of Japan meeting and the Ukraine and Thailand situations pushed safe haven trading. The government on Friday remained relatively upbeat about the economy in its May report but downgraded its views on output and imports following the first consumption tax hike in 17 years. Emphasizing that the negative impact of the April 1 tax hike is expected to fade soon, Prime Minister Shinzo Abe’s team also upgraded its assessment of capital spending, describing it as “increasing” for the first time in about six years.
“The Japanese economy is on a moderate recovery trend, while some weak movements are seen lately due to a reaction after a last-minute rise in demand before a consumption tax increase.”
