Markets were volatile, with equities lower, bond yields lower, market volume higher and the USD broadly weaker. In terms of central banks, South Korea, the Philippines and the RBNZ left rates on hold as expected; however surprising was the decision by Indonesia to raise interest rates. Yesterday the pattern shifted to a broader USD weakness trend, with the majors as well as THB, SGD, MXN, AUD and NZD all gaining ground. Traders are tempted to argue that this reflects a shift from previous sessions; potentially a shift from the fears of Fed tapering towards the realization that market pricing will create limits to what the Fed can do. Weak equity markets with the S&P is down 5% since May 22nd weighs on the wealth effect; higher mortgage rates up 60bpts since the beginning of May risks dampening the housing market recovery. The US dollar is trading at 80.94 this morning gaining 5 pips in the Asian session.
U.S. consumers demonstrated a renewed willingness to open their wallets for retailers in May, easing worries about a slowing economy heading into the summer. Overall retail sales increased 0.6% last month, putting those 4.3% higher over the past year, the Commerce Department said Thursday. The strong gain after two sluggish months returned consumer spending to a pace that has helped power much of the four-year-old recovery.
Traders shifted to the euro pushing it to trade at 1.3375 at the close. Data from the world’s largest economy have been in the spotlight after Fed Chairman Ben Bernanke in May said the central bank could start tapering its bond purchases in coming months if data continue to improve. The policy-setting committee meets next week, but is widely expected to keep its easing program on hold. If the selloff continues, speculators might get some soothing comments out of the Fed about QE and might get comments from Bernanke that ‘I did say sustainable improvement and we haven’t seen that yet. The prime focus for the euro has been the German Constitutional Court hearing which will open its last day of hearing later this morning. Yesterday the top judge at Germany’s constitutional court questioned on Wednesday whether the strings attached to any bond purchases by the European Central Bank would be strict enough to protect German taxpayers.On the final day of hearings into the legality of the ECB’s main measure for dealing with the euro-zone debt crisis, Andreas Vosskuhle, president of the court, said there were certain promises that can’t always be kept.
The pound hit a four-month high against a faltering dollar, with firmer UK economic indicators reining in foreign exchange players’ expectations of further easing of monetary policy by the Bank of England. The pound rose as high as $1.5734 during yesterday’s session – its strongest level against the greenback since February. Sterling’s strength against the dollar has also been attributed by market players to growing doubts the US Federal Reserve will pare back its monetary stimulus for the world’s largest economy in the short term. The pound gained ground against the euro yesterday. In spite of the recent improvement in UK economic indicators, some commentators continue to highlight the scale of the challenges facing the country as it struggles to mount a convincing recovery five years after the onset of the Great Recession of 2008/09 amid severe fiscal austerity.