Broker's Notes: Yen rises broadly and Euro edges up slightly

US economic data:

Just a couple of months ago, the world was busy writing daily obituaries to the euro and were projecting even a potential disintegration of the euro-zone, unaware that the real problem laid elsewhere – America. Friday saw the   release of the US retail sales for the previous month. The details of the report show that retailers are still struggling as consumers cut back spending at department stores. With a weak labour market, retailers have had to lure in shoppers with deep discounts and promotions. The need to discount to move inventory explains why consumer price growth has been extremely muted.

Consumer Price Index rose by 0.3 percent in July but excluding food and energy prices, it increased only 0.1 percent. In no way did Friday’s economic reports show strength in the US economy. This week (from US) we have the Empire State and Philadelphia Fed manufacturing surveys, the Treasury International Capital flow report, Housing Starts, Building Permits, Producer Prices, Industrial Production and Leading Indicators. None of these reports are important enough to change the Federal Reserve’s focus on stimulating the economy. If the data is weak, it will only exacerbate the Fed’s desire to keep monetary policy easy for as long as possible.

Yen:

The yen rose broadly on Monday as high-yielding currencies and Asian equities faltered, with talk of possible demand from Japanese exporters and investor fund repatriation lending the yen additional support. Data showing that Japan's economic growth slowed markedly in April-June helped drag Tokyo shares lower and supported the low-yielding yen. The yen is a funding currency for carry trades and tends to rise in times of market stress. The yen was also supported by talk of yen-buying by Japanese exporters and market speculation about possible fund repatriation by Japanese investors related to coupon payments on U.S. Treasuries due around this time of August.

Euro:

The euro edged up 0.2 percent against the dollar to $1.2781 having pared its losses after dipping to $1.2734 earlier on Monday, which  was the currency’s lowest against the dollar in almost a month. Last week, the yield spreads of bonds issued by periphery euro zone countries over the core widened due to concerns over the cost of supporting the Irish banking sector and a lacklustre debt auction in Italy. Gains in euro seems to be ebbing from the data on Friday that revealed that the German economy expanded by 2.2 percent, the fastest pace in 20 years while growth in France accelerated by 0.6 percent. For the Euro zone in general, this drove growth up 1.0 percent between April and June compared to a paltry 0.2 percent improvement in the previous quarter.

UK Sterling:

UK’s sterling faced another round of sell on Friday, but seems to be holding on to the supports this morning. The Quarterly Inflation Report that was released on Friday suggested that policymakers remain divided and confused on where the economy and inflationary pressures are headed. They revised down their growth forecasts and warned that it would be costly to reverse above target inflation. However, they stuck their guns and remained committed to their belief that inflation will move back below their target by 2012.

Indian Rupee:

The Indian rupee recouped most of its early losses by mid-morning on Monday as the domestic stock market edged up after a weak open, but losses in regional peers continued to exert downward pressure on the local unit. Indian shares were little changed in choppy trade on Monday as investors turned choosy on subdued Asian markets, while Reliance Communications fell more than 4 percent after an 85 percent plunge in quarterly profit.  Foreign funds have poured $11.4 billion into Indian equities so far this year, helping the market outperform its peers in other emerging economies such as China, Brazil and Russia.

Source: Richcomm Global, Dubai, www.richcommglobal.com