FOREX weekly review

The dollar weakened versus the euro as traders reassessed Federal Reserve Chairman Ben S. Bernanke’s statement to Congress.

Federal Reserve Chairman Ben S. Bernanke said the pace of the Federal Reserve's bond purchases is not 'on a preset course', as it depends on the current economic and financial situation.

The Fed head assured that signs of recovery are visible in the US labor market, but that “the jobs situation is far from satisfactory, as the unemployment rate remains well above its longer-run normal level.” He also pointed out that inflation is still below the Fed's 2% target. That is why “a highly accommodative monetary policy will remain appropriate for the foreseeable future.”

Bernanke stressed that the decision on when the tapering should begin depends on the Fed's assessment of the US economic outlook. Should economic data improve earlier than forecasted and inflation rise towards the objective, a reduction could be carried out sooner. Otherwise, “the current pace of purchases could be maintained for longer.”

The dollar shortly gained versus most major peers as better-than-forecast reports on jobless claims and regional manufacturing added to speculation the Federal Reserve will reduce monetary stimulus as the economy improves.

In US June consumer prices rose 0.5%, which was above the 0.3% uptick that had been expected. This followed the prior month's increase of 0.1%. The jump in prices was mostly a result of a 6.3% increase in the gasoline index. In addition, core prices rose 0.2%, in line with the consensus.

Industrial production increased 0.3% in June, which was in-line with the consensus estimate. That followed on the heels of an unchanged reading for May and was driven by a 0.3% increase in manufacturing production and a 0.8% jump in the output at mines. The output of utilities decreased 0.1%.

Lastly, the May net long-term TIC flows report indicated a $27.2 billion outflow of foreign capital from U.S. denominated assets. This followed the prior month's $37.3 billion outflow.

EURO

The euro advanced toward a six-week high versus the yen after Greek lawmakers approved austerity measures that clear the way for the next batch of bailout loans.

In Europe, Greek lawmakers passed a bill that puts thousands of state workers on notice for possible dismissal, a victory for Prime Minister Antonis Samaras that clears the way for the country’s next bailout installment. The vote came hours before German Finance Minister Wolfgang Schaeuble arrives in Athens for a one-day visit.

“Greece’s passage of the austerity bill may halt a decline in the euro in the near term,” said Kengo Suzuki, the chief currency strategist at Mizuho Securities Co.

Data released this week showed Eurozone Trade surplus n.s.a widened to €15.2 billion in May from €14.1 billion in April, according to data released today by Eurostat. Analysts expected the surplus to narrow to €11.8 billion.

Trade surplus s.a. narrowed to €14.6 billion in May, from €15.2 billion in April and against forecasts of widening to €16.2 billion.

ZEW report were dissapinting.

POUND

Positive results from UK retailers during June boosted the sterling. National Statistics informed on Thursday that year-over-year UK Retail Sales increased 2.2% in June, compared with the 2.1% rise in May and above forecasts of +1.7%. 

Data released in UK showed positive developements on the jobs market and the minutes of the Bank of England’s July meeting showed the Monetary Policy Committee voted 9-0 to keep its bond-purchase target at 375 billion pounds.

Previously 6-3 in favour Carney was widely expected to be voting in favour of further easing.

IMF said the UK remains a long way from sustainable recovery:

-monetary policy needs to remain accommodative, expectations of effectiveness should be tempered;

-in addition to more bond buying, the BOE could show interest rates to stay low until recovery is in full momentum.

YEN

The yen retreated on bets Group-of-20 finance ministers and central bankers will endorse Bank of Japan monetary easing designed to stoke inflation to 2 percent. Fed Chairman Ben S. Bernanke told a Senate panel the central bank’s bond buying may be halted around mid-2014.

The Bank of Japan doubled monthly purchases of JGBs to more than 7 trillion yen in April after Prime Minister Shinzo Abe urged the central bank to take steps to overcome deflation.

Abe’s Liberal Democratic Party and its coalition partner New Komeito are on track to win more than 65 of the 121 upper house seats being contested, according to a poll published in the Nikkei newspaper on July 17. A victory in the vote will give the parties control of both chambers of parliament, strengthening the prime minister’s ability to carry out a three-pronged plan of monetary easing, fiscal stimulus and deregulation known as Abenomics.

A positive outcome for Abe will help him push through further easing that contrasts with “a stronger U.S. economy and tapering of their quantitative policy measures.

COMMODITY CURRENCIES

LOONIE: The Canadian dollar rallied over the week. As expected, the Bank of Canada kept the target for the overnight rate unchanged at 1% in July. 

According to the official release “economic growth is expected to be choppy in the near term, owing to unusual temporary factors” but it should nevertheless be supported by a projected pickup in exports and consumer spending.

Meanwhile, inflation is expected to remain subdued in the nearest future and rise to the 2% target by mid-2015.

Therefore, the BoC will maintain the current monetary stimulus in place “as long as there is significant slack in the Canadian economy, the inflation outlook remains muted.”

AUSSIE: Australia’s dollar strengthened after China’s data showed the GDP in China expanded 1.7% inter-quarter and 7.5% on a yearly basis during the second quarter, down from 1.6% and 7.7% in the previous period, respectively. Further data showed that Industrial Production rose at an annual pace of 8.9%, missing the median at 9.1%. Other economic data released Monday also eased worries, with June retail sales, in particular, rising a better-than-expected 13.3%.

Also China’s Xinhua news service — which had late last week cited Finance Minister Lou Jiwei as tipping 7% growth for 2013 — corrected its story over the weekend. The report said the minister had actually indicated the economy would expand 7.5% this year, in line with the government’s official target.

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