The dollar fell versus most key currencies Wednesday as oil prices surged to a new all-time high increasing inflation concerns. Minutes from the April 29-30 Federal Open Market Committee meeting showed most FOMC members were concerned about inflation as they 'viewed the decision to reduce interest rates at this meeting as a close call.' However, the minutes did not boost the greenback. Inflation concerns are the key driver of the FX market. The oil-price surge is an indication of the Fed's too easy monetary policy as well as a major driver of the dollar's decline. Although the Fed's easy monetary stance increases not only the US inflation rate but also the worldwide inflation rate, investors prefer currencies where inflation targeting has been used, like the euro and dollar block currencies, as they are less prone to inflation. The AUD/USD rose on surging commodity prices and international interests in Australia's commodity companies. The USD/CAD fell to the lowest in more than two months on record oil prices and speculation the Bank of Canada will be less likely to cut rates after a report showed Canadian inflation accelerated in April. The GBP/USD was little changed ahead of tomorrow's UK retail sales data. The risk-sensitive yen and Swiss franc rose as US equities sold off.
The EUR/USD had its biggest two-day gain since March on an unexpected rise in German business confidence, reducing bets the European Central Bank will cut rates anytime soon. The pair is also highly correlated with crude oil that rose above $133/barrel. The EUR/USD looks poised to test the 1.59 resistance or even the all-time high at 1.60. First support is now at 1.57 and second at 1.54.
Financial and Economic News and Comments
US & Canada
- The Federal Reserve signaled no more interest-rate cuts and raised its expectations for unemployment and inflation this year. The minutes from the April 29-30 Federal Open Market Committee meeting showed 'several members noted that it was unlikely to be appropriate to ease policy in response to information suggesting that the economy was slowing further or even contracting slightly in the near term.' The Fed also released updated quarterly economic forecasts with the minutes. The Fed forecast the US GDP to rise between 0.3% and 1.2% this year, down from the last forecast of growth between 1.3% and 2%.
- Canada's consumer-price inflation rose to 1.7% y/y and 0.8% m/m in April, Statistics Canada reported. The rise in the annual inflation rate to 1.7% y/y from March's 1.4% y/y is the first inflation-rate increase since November 2007 driven by an 11.6% y/y rise in gasoline prices. The Bank of Canada's core CPI, which the BOC uses to monitor the inflation target, increased 0.3% m/m, and rose 1.5% y/y in April from March's 1.3% y/y
- Canada's leading economic index rose 0.1% m/m in April, the first increase since January. Six of the index's 10 components rose, led by the stock market and sales of durable goods, Statistics Canada said.
- German business confidence unexpectedly rose to 103.5 in May from 102.4 in April, the Ifo institute said. The business conditions index rose to 110.1 in May from 108.4 in April, and the business expectations index climbed to 97.3 from 96.7. Although unexpectedly rising, the indicators are mostly below 2007's readings indicating economic momentum is gradually losing speed.
- The Bank of England voted 8-1 to keep its benchmark interest rate unchanged at 5.0%. The majority of BOE policy makers argued that a rate cut risked letting inflation get out of control
- The Australian consumer sentiment index rose to 89.8 in May, the first increase this year, from 87.4 in April, Westpac Banking Corp. and Melbourne Institute reported. The sentiment index recorded its fourth straight reading below 100, indicating pessimists outnumber optimists
FX Strategy Update
Capital Market Services, L.L.C.