The Euro will gain some support if underlying global risk appetite remains higher, especially if there is further evidence of global economic recovery. There are still important vulnerabilities and structural uncertainties which will limit the potential for currency gains. The situation within the Baltic states will continue to be watched very closely and any substantial devaluations would tend to be a significant negative Euro factor on renewed fears over the banking sector.
The Euro registered another mixed performance over the week. There was a generally firm tone, but it struggled to make much headway with some downward pressure on individual crosses, notably against Sterling.
The currency gained initial support from comments from Russian official comments that it would buy IMF bonds and diversify away from dollar. French officials also stated that is was unlikely that exchange rates would be discussed at the weekend G8 meetings which dampened expectations of official resistance to Euro gains and this pushed the currency higher.
In contrast, there was downward pressure on the currency following a second downgrading of the Irish credit rating by Standard & Poor’s which reinforced unease over the Euro-zone debt situation and risk of further internal stresses.
The Euro-zone data recorded an improvement in business confidence and no change for German factory orders which did not have a major impact. German exports declined in the latest data while industrial production fell by a much sharper than expected 1.9% for April.
The immediate fears surrounding a currency devaluation in Latvia eased following remarks from the government that a devaluation was out of the question. This, in turn, eased fears over the European banking sector and helped support the Euro, but there was still a high degree of uncertainty which limited any positive impact.
Yen:
The Japanese currency moves will continue to be influenced strongly by degrees of risk appetite and the yen will lose ground if there is a sustained improvement in confidence with net capital outflows into higher-yielding assets. There will be unease over the US and Euro-zone fundamentals which will tend to provide some important yen protection. Japanese funds are still liable to be generally cautious over risk, especially given the underlying debt fears.
The dollar and yen were confined to generally narrow ranges during the week with both currencies tending to lose support in tandem as international risk appetite improved. The dollar struggled to move much above the 98 region.
The Nikkei index was able to reach an 8-month high on firm international sentiment and the yen remained vulnerable to some underlying capital outflows. The latest capital account data continued to record net outflows from Japan as domestic investors looked to push funds into high-yield assets, especially with the Australian employment data was stronger than expected.
Domestically, the revised GDP data recorded a 3.8% contraction for the first quarter compared with the 4.0% original estimate which maintained the mood of cautious optimism over domestic and international trends.
The other economic data was weaker than expected with a 5.4% decline in core machinery orders for April while wholesale prices declined by 5.4%. The Bank of Japan maintained a generally optimistic tone in comments with expectations of a recovery during the second half of the year. The data will, however, reinforced expectations that any improvement in the industrial sector will be slow at best. |