Dollar Correction Supports Risky Assets

* The dollar fell against its counterparts on Tuesday. Modest US inflation and slowing economic growth indicate interest rates should stay low for the foreseeable future. US import prices declined for the first time in three months; US homebuilder confidence fell after the government tax credit ended; and New York manufacturing expanded for an 11th straight month. The WSJ reported Federal Reserve officials are beginning to debate what steps they might take if the recovery surprisingly falters or the inflation rate falls much more. Prices of US treasury securities dropped and commodity prices rose as investors sought riskier assets. The S&P 500 surged 25.60 to 1,115.23. Stocks broke their downtrend. The question is whether this is the beginning of the right shoulder in a head-and-shoulder top. The euro rose for the fifth day out of six. German investor confidence plunged in June and eurozone employment stabilized. The yen pared overnight gains. Sterling advanced on slightly weaker-than-expected UK inflation numbers, but failed to penetrate the 1.48-area résistance. The Australian and Canadian dollars gained as commodity prices rose.

* The dollar index fell as deflationary fears eased and investors bought riskier assets. The USD decline is relieving pressures on financial institutions’ balance sheets and supporting stock and commodity prices. After reaching a 15-month high last week, the dollar index fell for five out of the last six trading days and broke the 87-area support. The short-run trend and momentum indicate that a test in the lower trading band in the 85 area may occur. If this support is broken, the dollar correction will continue and the long-term uptrend may be challenged.

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Financial and Economic News and Comments

US & Canada

* The Empire State manufacturing index increased to a lower-than-expected 19.57 in June from 19.11 in May, indicating New York manufacturing activity expanded for an 11th successive month and at a slightly faster pace, according to the latest Empire State manufacturing survey released by the Federal Reserve Bank of New York. The new orders index rose to 17.53 in June from 14.30 the previous month, showing new orders expanded for a 12th straight month and at a faster rate. The employment index fell to 12.35 from May’s 22.37, showing employment expanded for a sixth consecutive month but at a slower pace.

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* US import prices declined a less-than-expected 0.6% m/m in May after an upwardly revised 1.1% m/m advance in April and a downwardly revised 0.4% m/m increase in March, according to data from the Labor Department. The decline was led by a 4.9% m/m price decrease in fuel imports. May import prices grew 8.6% y/y, following an upwardly revised 11.2% y/y April rise. Meanwhile, export prices grew 0.7% m/m in May, a third consecutive monthly increase, after a 1.2% m/m rise the prior month. May export prices climbed 5.8% y/y.

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* The National Association of Home Builders/Wells Fargo housing market index declined to a lower-thanexpected 17 in June from 22 in May, suggesting US homebuilder confidence fell the most since November 2008, an NAHB report showed. A reading below 50 means most respondents view conditions as poor. The measure of current single-family home sales decreased to 17 from May’s almost-3-year-high 23. The gauge of buyer traffic slipped to 14 in June from 16 in May. The measure of sales expectations for the next six months slid to 23, the lowest level since March 2009, from 27.

Europe

* In non-seasonally adjusted terms, the eurozone trade surplus narrowed more than expected to ?1.8 billion ($2.2 billion) in April from ?4.5 billion in March, compared with a ?2.6 billion surplus in April 2009, according to figures from Eurostat. In seasonally adjusted terms, the trade surplus widened to a ?1.4 billion in April from a downwardly revised ?0.0 billion the prior month. Seasonally adjusted exports slipped 2.4% m/m to ?122.0 billion in April, the first decline in three months, after an upwardly revised 9.8% m/m gain in March. Seasonally imports fell 3.5% m/m to ?120.6 billion, following March’s upwardly revised 12.2% m/m rise.

* Eurozone employment held at 144.3 million in Q1 2010, the first time in seven quarters that it did not fall, after a 0.2% q/q decline in Q4 2009, Eurostat reported. Employment fell 1.2% y/y, a sixth straight year-on-year slide, following Q4’s 2.0% y/y decrease.

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* The ZEW German economic expectations index fell to a lower-than-anticipated 28.7 in June from 45.8 in May, indicating German investor sentiment dropped the most since October 2008 on “the uncertainty about the future developments of the debt crisis and the perspective of necessary cuts in public expenditure in EUmember countries,” according to a report released by the ZEW Centre for European Economic Research. The current economic situation index increased -7.9 from May’s -21.6, showing the current economic situation in Germany improved considerably this month. Meanwhile, the ZEW euro-area economic expectations index unexpectedly dropped to 18.8 in June from 37.6 in May, but the current economic situation index improved to - 40.8 from May’s -48.5.

* The UK consumer-price inflation rate decelerated to a marginally lower-than-expected 3.4% y/y in May from 3.7% y/y in April, CPI data from the Office for National Statistics showed; however, having exceeded the government’s 3.0% upper limit for three consecutive months. May CPI and RPI increased 0.2% m/m and 0.4% m/m, respectively. The retail-price inflation rate slowed to 5.1% y/y from April’s 5.3% y/y. Excluding mortgageinterest payments, the RPI rate decelerated to 5.1% y/y in May from 5.4% y/y the prior month.

Asia-Pacific

* The Bank of Japan maintained its benchmark interest rate at 0.10%, as expected. BOJ Governor Masaaki Shirakawa, although saying “we are seeing signs that the increase of exports and output is starting to spread to private domestic demand,” widened efforts to boost Japanese economic growth with a ¥3 trillion ($33 billion) program aimed at encouraging lending to businesses.

Source: Hans Nilsson

15.06.2010