Appreciating Dollar Threatening Recovery

* Although falling versus its counterparts on Friday, the dollar gained against all except the yen for the week. Commodities, stocks and interest rates pared weekly losses. The S&P 500 rose 16.10 to 1,087.69. The USD/JPY’s gain for the first time in four days boosted the oversold stock market. The euro rose for a third consecutive day and for the first week in six. Germany’s lower house approved the EU aid package. The oversold sterling gained despite the record April UK budget deficit. The Australian dollar rose for the first day in six. The Canadian dollar was supported by strong Canadian retail sales and core consumer-price inflation near the Bank of Canada’s 2% limit.

* This week the dollar index touched its highest level since March 2009. Europe’s sovereign debt problem has increased deflation risks. The appreciating US dollar is also increasing deflation pressures in the US and dollar linked Chinese economy. An appreciating currency increases deflationary pressures and is worrisome in an economy struggling with high debt and leverage levels. In 2008 the Federal Reserve ignored the rising dollar demand and let the dollar appreciate, which led to the collapse in the stock and commodity markets as the sharply appreciating dollar overvalued asset prices. The peak in the dollar index in early-March coincided with the bottom in stocks. The stock-market recovery was accompanied by a falling dollar that eased the debt deflation. The dollar began to appreciate in December 2009 and except for a little stockmarket correction in the beginning of 2010 the dollar and stock market seemed to have decoupled. However, since late-April when stocks reached a 19-month high, the rising dollar has been pressuring stocks. The appreciating dollar can be viewed as a tightening monetary stance that is threatening the economic recovery as well as the recent stock bull market. The dollar index has important resistances in the 87 and 89 areas, while the stock market has significant support in the 1050 area. If this support is broken, the outlook for the US economy will deteriorate.

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Financial and Economic News and Comments

US & Canada

* Canada’s consumer prices grew 0.3% m/m in April, the third increase in four months, after remaining unchanged m/m in March, according to CPI data from Statistics Canada. The consumer-price inflation rate accelerated to 1.8% y/y from March’s 1.4% y/y. The Bank of Canada core CPI was up 0.3% m/m in April, also the third increase in four months, after a 0.2% m/m decline the prior month. The BOC core CPI rate rose to 1.9% y/y from March’s 1.7% y/y; thus, approaching the Bank of Canada’s 2.0% inflation target and increasing the possibility of a BOC interest-rate increase next month.

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* Canadian retail sales grew a more-than-anticipated 2.1% m/m to C$37.0 billion ($35.0 billion) in March, a fourth consecutive monthly rise and the most since February 2005, after an upwardly revised 0.8% m/m advance in February, figures released by Statistics Canada showed, led by a 3.6% m/m gain to C$8.1 billion at motor vehicle and parts dealers. Retail sales excluding car and parts dealers were up 1.7% m/m to C$29.0 billion in March after unchanged m/m the prior month. Retail sales climbed 9.1% y/y in March, a fifth straight year-on-year gain; retail sales excluding car and parts dealers rose 7.5% y/y.

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Europe

* The euro-area working day and seasonally adjusted current account recorded a ?1.7 billion ($2.1 billion) surplus in March (corresponding to a ?1.3 billion surplus nsa), the first current-account surplus since July 2009, compared with a revised ?4.5 billion deficit in February (corresponding to a revised ?6.2 billion deficit nsa), the European Central Bank reported.

* The eurozone composite PMI declined to 56.2 in May from 57.3 in April, indicating euro-area manufacturing and service industries continued to expand but at the slowest pace in two months, according to flash May PMI data from Markit Economics. The manufacturing PMI fell to 55.9 from April’s 57.6, suggesting manufacturing activity expanded at the slowest pace in three months. The services PMI increased to 56.0 in May from 55.6 the prior month, showing service activity expanded to a 33-month high.

* Germany’s seasonally adjusted GDP was up 0.2% q/q in Q1 2010, a fourth consecutive quarterly expansion, after a 0.2% q/q increase in Q4 2009, the Federal Statistical Office reported, confirming its May 12 estimates. The Q1 GDP rose 1.6% y/y wda and 1.7% y/y nsa, the first year-on-year gain since Q3 2008, following Q4’s contraction of 2.2% y/y wda and 1.5% y/y nsa.

* The Ifo German business climate index unexpectedly slipped to 101.5 in May from 101.6 in April, suggesting Germany’s business confidence declined marginally amid concern over Europe’s debt crisis but improved significantly from May 2009’s 84.3 level, data from the Ifo Institute showed. The current conditions index edged up to 99.4 in May from 99.3 in April, but the business expectations index declined to 103.7 from April’s 3-year high of 104.0.

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* UK business investment unexpectedly rose 6.0% q/q to £28.97 billion ($41.93 billion) in Q1 2010, the first gain since Q2 2008, after a 4.3% q/q decline in Q4 2009, preliminary Q1 data from the Office for National Statistics showed. Business investment fell 11.0% y/y in Q1, a sixth consecutive year-on-year fall but easing from a 23.5% y/y Q4 drop.

* The UK posted a £10.0 billion ($14.5 billion) budget deficit in April, the largest April budget gap since records began in 1993, compared with a £8.8 billion shortfall a year earlier, the Office for National Statistics said. The public sector net cash requirement showed a £8.8 billion deficit in April. Net debt rose to £893.4 billion, or 62.1% of GDP, from April 2009’s £755.4 billion.

* M4, the broadest measure of money supply, was unchanged m/m in April after a 0.1 m/m increase in March, according to data from the Bank of England. M4 growth slowed to 3.3% y/y, its weakest since September 1999, from March’s 3.5% y/y.

* UK mortgage approvals unexpectedly declined to 47,000 in April, the lowest since May 2009, from a downwardly revised 51,000 in March, BOE figures showed. Gross mortgage lending fell 12% m/m to £10.2 billion ($14.8 billion) in April, the lowest April total since 2000, from £11.6 billion the prior month, compared with £10.3 billion in April 2009, according to a separate report from the Council of Mortgage Lenders.

Asia-Pacific

* The Japanese leading economic indicators index, a measure of future economic activity, rose to 102.7 (vs. preliminarily reported 102.8) in March, a 13th straight monthly rise, from 98.5 in February, final March LEI data from the Cabinet Office showed, suggesting Japan’s economy will continue to grow despite prolonged deflation. The coincident index, measuring current economic activity, increased to 101.5 (vs. preliminarily reported 101.1), a 12th consecutive monthly advance and the highest since July 2008, from February’s 100.0.

Source: Hans Nilsson

21.05.2010