Fundamental analysis – 18th June 2012
Trading was muted last week as investors were holding on ahead of re-elections in Greece. This event and also the fact that traders wanted to book their profits have been the main driver for the trades. As a result, dollar slipped versus the euro, trading within tight ranges against the pound and the yen. At the end of the week, however, the dollar was placed under pressure as the Bank of Japan didn’t announce more quantitative easing during its meeting, and the pound had been chosen as the most safe-haven European currency. On top of it, weak economic data out of the US economy indicated risks of the third round of QE. As a result, dollar slipped across the board by the end of the last week. Turning to the upcoming five trading days, of importance will be FOMC meeting minutes, due of Wednesday – investors will be looking forward to hear comments concerning monetary policy outlook. Then, market attention will turn to construction sector. Building permits are expected to climb 1.0% m/m in May after the prior -7.0% m/m earlier. Housing starts are expected to slow down to 0.4% m/m versus the previous +2.6% m/m in April. Of interest will be existing home sales in May, which are likely to post 1.3% m/m versus +3.4% m/m earlier. Philadelphia Fed manufacturing index is expected to register growth in the month of June, to 1.3 after the prior -5.8 in April. In the spotlight, however, will be the news from Greece – the results of elections will be the main driving factor, especially at the beginning of the week.
Positive sentiment towards the euro was offset by concerns about Spain – Spanish bond yields rose to almost 7%. Apart from that, however, euro was bolstered, so it managed to close the week at its opening prices – i.e with some profit against the dollar, compared to the week before. Turning to this week, there should be more significant releases, most of them will be rather pessimistic –ZEW and Ifo reports are likely to come in with slipping current situation, economic assessment and business sentiment in June. Euro zone manufacturing PMI are expected with another decline in June. German Producer Price Index is likely to post -0.2% m/m, +2.2 y/y in May after the prior +0.2% m/m, +2.4 y/y. In other words, even if the results of elections in Greece turn out positive and new government will be pro-bailout, positive sentiment towards the euro will be only short-term and the currency may be placed back under pressure as soon as either in the middle of the week or at the end.
British pound traded within narrow ranges versus the dollar for the most week, but registered significant gains at the end. Looks like traders considered sterling the most steady European currency in the light of remaining uncertainty in the market. As for this week, the upcoming inflationary data may turn out driving factor for the sterling. Forecasts predict optimistic results – Consumer Price Index for the month of May are expected to slow down of inflation decline, posting +0.1% m/m, +3.0% y/y after +0.6% m/m. Core CPI is likely to post +2.2% y/y growth after +2.1% y/y earlier. The number of unemployed will probably keep on at -13. 7 K, Unemployment rate is likely to stay at 4.9% in May. Retail sales should come in at +0.8% m/m, +1.7% y/y versus -2.3% m/m, -1.1% y/y. Therefore, positive sentiment towards the sterling will be most likely observed this week too.
Japanese yen, which stayed within the ranges versus the dollar last week, unexpectedly soared at the end. The reason for such rapid growth should have been disappointment, triggered by the BoJ decision to leave its stimulus program unchanged. On the data front weren’t o many significant releases out of Japan, taking the middle of the month. This week calendar will cover April All industry activity index, expected to climb 0.2% m/m after -0.3% m/m earlier. Trade deficit is likely to narrow from -480.2 to -347.7 bln yen. Retail sales index is also due this week. As for political news, traders will eye on BoJ monthly report and its president Shirakawa comments. In case the BoJ’s rhetoric will favor more quantitative easing, negative sentiment towards the yen may recommence.
Analysis prepared by: