May 21, 7:00 AM: EUR/$..0.8745 $/JPY..123.26 GBP/$..1.4361 $/CHF..1.7487
Euro Falls on MSCI Reweighting by Jes Black
At 10:00:00 AM US April Phil Forecasters Survey (exp n/f, prev 2.2%) Event: At 9:00 AM Cleveland Fed President Jordan (nv) to speak in Clevland. At 11:30 AM Fed Governor Meyer to speak about the Fed's accountability in Washington, DC.
The single currency fell across the board in European trade as investors reacted to the reweighting of global equity indices over the weekend by Morgan Stanley. Despite the fact that markets had discounted the reshuffling in advance, dealers took the opportunity to sell the euro on the basis that more money will continue to flow into the US and England, therefore benefiting the dollar and pound the most. The US weighting rose to 55.3% from 49.1%, while the UK's rose to 10.4% from 9.3%. Therefore, the euro/dollar fell over a half-cent to a one-week low of $0.8740, while the pound rose to a new five-month high of 60.90 pence versus the single currency. Failure to maintain above last Monday's one-month lows around $0.8730 could exacerbat the euro's five-month downward trend.
The Japanese yen, however, evaded the MCSI report and actually rose due to short-covering after the changes proved not as damaging to Japanese equities as many had feared. Dollar/yen fell to a day's low of 123 while euro/yen fell to a one-week low of 107.69. Also helping the yen was the Nikkei, which closed up 299 points, or 2.15%, driving the index above the key 14,000 level. Dollar/yen fell to a day's low 123.03 but found strong support at that level. Resistance is seen at 123.20 followed by 123.40 and 123.60.
Markets shrugged off data showing Italian industrial orders fell an unadjusted 5.4% in the year to March, but euro investors will watch tomorrow's key German Ifo business sentiment index for signs that growth continues to slow in the euro area's largest economy. The survey is expected to show a decline in April to 92.5 from 93.9 in March, which would be the twelfth consecutive decline, if the slight increase in February 2001 is ignored.
Further evidence of weakness in Germany will likely cause problems for the ECB if inflation persists, and forecasting the Bank's next move has now become even more cryptic. However, following their surprise rate cut on May 10, the implication is that rates will likely drop to 4% by this Fall. Klaus Liebscher, the Austrian Central Bank Governor said on Thursday that the upward risks for price stability have declined in the near-term and that the rate cut should be seen as "an adjustment of interest rates to a slight lessening in medium term inflation pressure in the euro area." The ECB meets again this Wednesday, and is expected to keep rates on hold.
Britain suffered a global goods trade deficit of 7.7 billion pounds in the first quarter of this year, the worst figure since records began in 1697. National Statistics reported that the global trade deficit came in at 2.9 bln pounds, in line with expectations, but up significantly from February's 2.3 bln. NS again warned that the monthly goods deficit is widening. Sterling was steady around $1.4360 after the announcement and kept the euro is trading near a five-month low of 61.90 pence.
Meanwhile, markets will watch for the six Fed members scheduled to lecture this week. Greenspan speaks on Thursday, and when the Fed Chairman speaks, Wall Street listens. Therefore, markets will wait to see what he says about the economic and inflation outlook in the US and if the Fed sees room to lower rates again at their next meeting.
Also of importance is the second estimate of US first-quarter GDP figures which is due on Friday. Analysts note that with the decline in our trade balance, along with the negative impact from inventories and consumption, first-quarter GDP is likely to show a downward revision from the first estimate of 2% to about 1.6%, economists say.
The US March Trade deficit widened by 16% to -$31.17 bln versus the revised -$26.86 bln in February, posting the biggest month-on-month increase in nine years. The rise was attributed to the growth in imports while exports dropped slightly in the same period. However, analysts also note that Q1 GDP did not slide into negative growth, and are therefore showing more interest in a possibly bumpy second-quarter ride. |
