The week opened with a large gap against the US Dollar and from the very first minutes of trading the U.S. currency has recorded a liability in respect of all its main “opponents”. The reason for this devaluation of the U.S. currency was the statement of China's authorities in their intention to conduct a more flexible currency policy with respect to the yuan. This triggered a demand for the higher-yielding currencies and the surge of optimism on the stock market in Europe, which led to pressure on the Bucks in the first half of the day on Monday. Nevertheless, such a mood was transient and in the second half the dollar started gaining back the lost positions. China's currency has not consolidated at the levels that had been expected and this was the first disappointment. Further, the yield growth of the U.S. treasury bonds and price rise of the stock shares helped the dollar to fully restore the position and even record a positive result on the day against the euro, the pound and the yen. Not a small addition for returning of the U.S. dollar happened to be the fears about the sovereign debt of the Euro area after becoming aware of the French bank BNP Paribas downgraded by the agency Fitch. The news on the U.S. economy has not been published; the data on sales in the secondary housing market and the Fed record of Richmond will be presented today. It is assumed that housing sales on the secondary market rose in May, which may be due to the completion of deals signed earlier in April, expecting 6.23 million after 5.77 million.  In respect of business activity in Richmond the prognosis is much less rosy, there is probably fall of the business activity index in the manufacturing sector in June to 20 from 26 previously recorded. This information is likely not to indicate revitalization of the market and trading temporarily remains in the ranges. It is possible that the speech of the U.S. Finance Minister, Geithner, will give ground for reflection, though, most likely, it will contain the appeal theses related to the G-20 summit.

   A reminder that the problems of the sovereign debt in the Euro area has not resolved and the situation in the banking sector is the major concern, made by the Fitch agency, which downgraded the French BNP Paribas, quickly discouraged investors to buy the single currency in exchange for the dollar on Monday. The active growth of the euro in early trading, as already stated, was associated with news from China about the measures that could lead to a revaluation of the Chinese currency. The result of the day was a decrease in the euro. The news background on the Euro area’s economy was poor, there was a bit more optimistic forecast of the German Ministry of Finance about economic recovery and it is expected that in the 2nd quarter the GDP growth will be 0.2% higher than in the 1st quarter. Nevertheless, the private consumption is not encouraging for the Germans and all hope is associated with an increase in exports. The political component may be noted as the speech of the ECB Head, Jean-Claude Trichet, who called on the European leaders to strengthen the independent oversight of the fiscal policy by the European Commission with the help of greater powers in monitoring and shaping the fiscal sphere in the region. Today’s news will not bring good information for the single currency - the balance of payments for April can be represented with reduced surplus to 1.3 billion from 1.7 billion euro, while the indices in the IFO Institute report with a decrease in June – the mood index among the business community - 101.2 from 101.5, the index of economic expectations - 102.7 from 103.7.  The data on consumer confidence in June is expected to decrease -19 after - 18 previously.  In short, the macro statistics may add pressure on the single currency.

   The English pound, as usual, was no exception and has also grown up on information about the decision of the Central Bank of China to stop anchoring its currency to the dollar and increase the flexibility of the yuan. However, the sterling was supported by the data on its own economy, the Rightmove company’s report showed another increase in prices in the housing market. According to the report of the company, the housing prices grew by 0.3% m / m and 5.0% y / y by mid-June. The dynamics observed a slowdown in the rise and is associated with a large number of proposals on the market. Perhaps, the increase in the housing supply is due to higher taxes, forcing some property owners to decide on its sale. The prospects for the UK housing market seen in the growth proposals for the sale of houses, because the new government has to continue to “tighten the screws” for the normalization of the budget. Against this background, the Rightmove company’s comment indicated the expectation of the house price decrease in the second quarter of this year. Today, the main news from the UK will be publishing the state budget so that this information is expected on the market, as it can show how tough the new government has approached the task of reducing the budget deficit. Analysts disagree on how the publication could affect the market, and therefore, this event should be treated with extreme care.

   The yen movement was keeping with the general mood of the market and at the time of the optimism growth the currency of Japan was under pressure against the European currencies and with the appearance of information on another rise of concerns about Europe's problems, it is again considered as a safe haven currency. As for the confrontation against the dollar, the investor sentiment appeared to be on the side of the American currency and on the stock market the day ended in favour of the dollar. The intentions of the Chinese authorities regarding the yuan could seriously affect Japan's economy because with a more expensive Chinese currency the export of “Land of the Rising Sun” may experience increased interest. Nevertheless, the positions of the yen will depend on the level of the risk appetites in the market - in this situation it may continue to strengthen against the Europeans and resume growth against the dollar.

Analysis prepared by:

Arkady Nagiev
Forex4you analyst