NBK Weekly Money Market Report dated 20-06-2010
Greenback Losing Ground The US Dollar’s weakening against other major currencies continued last week as risk appetite mounted and investors traded the safety of the greenback for other riskier assets. The Euro opened on Monday around 1.2100 and strengthened throughout the week. Greece’s credit downgrade by Moody’s had little effect on the currency’s momentum, and the currency was able to break above 1.2400. The Euro ended the week at 1.2387. The Sterling Pound also had a bullish week, starting at 1.4552 and reaching a high of 1.4856 on Wednesday. This strengthening was interrupted on Thursday after weaker-than-expected inflation data in the United Kingdom, but the currency was able to resume the hike, reached a high of 1.4886 and closed at 1.4824. The Swiss Franc moved in tandem with the Euro, reaching a low of 1.1082 and ending sessions at 1.1085. The Japanese Yen reached a low of 90.44 and closed at 90.71. The Australian Dollar’s steep hike continued last week. The commodity currency reached a high of 0.8713. Consumer and Producer Prices The Consumer Price Index (CPI) fell by 0.2% in May as shown by data from the Bureau of Labor Statistics (BLS). Over the last 12 months, the index increased 2.0% year-on-year, down from a 2.2% reading in April. This drop was explained primarily by a drop in energy and commodities prices. Excluding the volatile components that are the food and energy prices, the Core-CPI was unchanged at 0.9%. Wholesale prices in the United States fell in May for the third time in the past four months, pulled down by lower costs for energy and food as European default concerns threatened to drag a global expansion. The Producer Price Index (PPI) declined by 0.3% following a 0.1% drop in April ,and less than the expected 0.5% drop. Excluding food and fuel prices which represent the volatile components of the index, the so-called Core PPI climbed 0.2% for a second month. Other Economic Data Housing Starts fell 10% in May, the biggest decline since March 2009. The number of new houses being built fell from 672,000 to 593,000, well below the expected 648,000. This figure shows that the housing market is retreating after the expiration of a government tax credit. Initial jobless claims increased by 12,000 to 472,000, indicating that firings are still elevated even as the economy grows. Some companies are trimming payrolls to boost or maintain profits at the same time overall employment has been growing steadily this year. Economists are worried that since the labor market is not improving, a sustainable recovery cannot be possible. Europe Greece Receives Junk Status A new cut in credit ratings has brought into focus recent Greek bond issues, which have been cut last week by Moody’s from A3 to Ba1. This downgrade shifted the country’s credit from investment grade to junk grade. It is worth noting that Fitch currently rates Greece at BBB-, the lowest investment-grade level, with a negative outlook. While other highly indebted countries like Portugal, Spain, Ireland and Italy have been swept along with market fears about surging deficit levels, they are in a different position since they have taken tough policy decisions in response to their economic crises. Euro area politicians are now starting to blame credit rating agencies for contributing to the overall sovereign crisis, downgrading countries as they work hard to bring finances back into line. Furthermore, there is belief that this downgrade did not take into account Greek commitments to reduce debt or the massive bailout from the European Union and the IMF. Europe Inflation Accelerates European inflation accelerated to the fastest pace in more than a year in May, as surging energy costs and a weaker Euro made imported goods more expensive across the 16-nation region. The Consumer Price Index (CPI) rose 1.6% in May from a year earlier after increasing 1.5% in April. The Euro’s big drop against the US Dollar this year is pushing the inflation higher, just as rising energy prices are hurting consumers’ purchasing power. The ECB president, Mr. Jean-Claude Trichet, said that inflation might further accelerate even with the region’s economy seen expanding at only a moderate pace this year. The region’s core inflation rate held at 0.8% in May. United Kingdom Inflation Still High Inflation in the United Kingdom slowed in May for the first time in three months as lower costs of items from food to transport eased price pressures in the economy. The Consumer Price Index (CPI) rose 3.4% from year earlier, compared with 3.7% in April. Inflation has now exceeded the Bank of England’s 3.0% upper limit for three months. Core inflation, which excludes the cost of food, tobacco, alcohol and energy prices, slowed to 2.9% from 3.1% the previous month. Better Unemployment Numbers The Number of unemployed in the United Kingdom jumped by 23,000 to settle at 2.47 million during the quarter to May, though the number of Britons claiming jobless benefits slipped more than expected in May to a 14-month low. Labor market seems to be stabilizing for the first time as the unemployment rate is now 7.9%, down from 8.0% in April. Retail Sales Boosted by the World Cup U.K. Retail Sales increased more than anticipated in May, climbing 0.6% on the month and 2.2% compared to last year. Apart from food, the biggest gain last month was in electrical goods, with evidence of spending on items such as televisions and other electrical appliances in order to watch the World Cup soccer tournament. Excluding fuel, retail sales increased 0.5% in May after a 0.1% drop in April. Japan Bank of Japan Meeting The Bank of Japan held their monetary policy meeting last week, and kept their key interest rate at their current level of 0.10%. Their Bond Purchase program was also unchanged at that last meeting by a unanimous vote by all the central bank’s members. The monthly report published by the Bank of Japan stated that Japan’s economy is showing further signs of a moderate recovery induced by improvement in overseas economic conditions. Policymakers are worried that the worsening conditions in Europe can hinder Japan’s efforts to come out of deflation, through a stronger Japanese Yen and a weaker stock market. Kuwait Dinar at 0.29085 The USDKWD opened at 0.29085 on Sunday morning.