USD Rises Against EUR And JPY But Falls To Commodity Currencies

The dollar traded mixed on Monday, rising against the euro and the yen but falling to the commodity currencies: the Australian dollar, the kiwi and Canada. The meeting of the G8 over the weekend did not produce the coordinated action on the euro-zone crisis which had been hoped, although China's Wen Jibao hinted at more easing to stimulate growth; which immediately led to an increase in commodity prices from heightened expectations of increased demand. Global risk appetite remained stable overall – limiting safe-haven demand.

On the data front, it was a thin day but the Chicago Fed National Activity Index, a weighted average of 85 indicators, showed improvement in April, reaching 0.11 from -0.44 in the previous month. The dollar rose briefly after the above-zero reading signalled growth, decreasing expectations of quantitative easing (QE). The outlook for the dollar remains stable as economic indicators continue to support a recovery outlook.

EUR

The euro consolidated its gains and continued to rise on Monday. Traders had closed bets before the weekend in anticipation of the possibility of coordinated action by the G8 to solve the euro-zone crisis but in the end no concrete measures were agreed. China's President Wen announced a campaign of stimulus to help provide growth – for China - which led to a rise in commodities. News from the bond markets revealed a rise in short-term yields, ominously flattenening the yield curve normally might have been expected to weigh on the single currency, but not on Monday. The euro may have been bolstered by better-than-expected Construction Output figures which showed a rise of 12.4% MoM in March from a previous reading of -10.4% , and a less steep decline YoY of -3.8% compared to -16.3% previously. Overall the outlook remains precarious – could this be the quiet before the storm?

GBP

The pound rose against most counterparts on Monday after euro-zone fears eased slightly and riskier currencies extended recovery rallies from oversold extremes. Sterling rose despite poor housing data from Rightmove showing House Prices failed to rise in May compared to the previous month, whilst the rise of 2.0% YoY was lower than the 3.4% rise a year ago. Tuesday could be a volatile day for sterling as both CPI and Public Borrowing are scheduled for release.

CPI is expected to fall, which would enhance the likelihood of more monetary easing and lead to a fall in the pound. Analysts are now talking about sterling trading in the 1.53s when previously it was the 1.56s. The pound is supported by demands for safe Gilts – British treasuries – however its exposure and risk to Europe outweighs demands for Gilts and if the Greek problem intensifies then sterling will be vulnerable to selling. Currently a range-bound outlook is a possibility.

JPY

The yen weakened on Monday after the recovery rally in riskier assets continued, cutting off safety-demand. President Wen Jibao's hints at more monetary easing to stimulate the Chinese economy triggered a rise in commodity prices which probably also weighed on the yen given Japan's increased reliance on imported fuel after it shut down its nuclear reactors following the Fukushima disaster.

On the data front, the Japanese All Activity Index in March (MoM) showed a greater-than-expected fall of -0.3% compared to the -0.1% expected and this may also have weighed. Other data was mixed with the Coincident Index rising to 96.7 from 96.5 and the Leading Index falling to 96.4 from 96.6; Japan Convenience Store Sales meanwhile rose by 6.1% in April and 0.4% previously. Tomorrow evening sees the release of the Merchandise Trade Balance, and the Bank of Japan Rate Decision, with the potential for the announcement of more QE putting a bearish brake on the yen.