This report was produced by the Investment Advisory Group, HSBC Private Bank Hong Kong. For more information, please contact us.

The US dollar (USD) weakened broadly last week due to a combination of fading expectations of an imminent rate hike, record-high oil prices, battered US stocks and lower bond yields.  Worsening consumer confidence, declining home prices and continuing deterioration in credit markets are also weighing on the US economy. While the US Fed will continue to remain concerned about inflation, the slowing US economy will keep the Fed from hiking in the near future. The absence of an imminent rate hike will keep USD under pressure in the near term.  Focus of this week will be Chicago PMI, ISM manufacturing and non-manufacturing data, and most important the non-farm payroll report.
 
The euro (EUR) strengthened against USD despite data showing that Eurozone business and consumer sentiment had deteriorated. While inflation remains the ECB’s main concern, the central bank will not halt the rate hike for just one month of unfavourable data. A 25bp rate hike this week should preserve the appeal of EUR over USD. However, EUR’s strength will be hindered by a potentially weak Eurozone growth. Focus of this week will be the European Central Bank (ECB) rate decision on Thursday and the ECB President Trichet’s press conference.
 
Sterling (GBP) rose on the back of the broad USD weakness despite a downward revision of the UK Q1 growth and the Bank of England’s indication that rates would not be rising soon. Governor Mervyn King testified to the Treasury Select Committee on the May Inflation Report, saying slower growth this year will eventually bring inflation down to target, which lowered short-term market interest rate expectations.  Nonetheless, data continued to show the UK housing market is worsening and the Confederation of British Industry (CBI) survey reported a third consecutive monthly fall in consumer sales. Most economists expect economic outlook for the UK remains gloomy. 

In Switzerland, the Swiss franc (CHF) hit a three-week high against USD on dampened investors risk appetite and the Russian central bank’s reserve comment. The Russian central bank said it plans to increase the holding of CHF in its US$558.7 billion gold and foreign exchange reserves.
 
The Japaneseyen (JPY) strengthened against USD last week as investors pared risk exposure amid record high oil prices, slumping stocks and worries about US economic growth. A slew of Japanese data last week showed that core consumer inflation hit a decade-high in May while household spending fell. Meanwhile, Japan’s trade surplus has declined for the third consecutive month due to weakening export growth, which is a clear indication that the global economy is weakening. Bank of Japan policy board member Nakamura warned that risks to the Japanese economy have heightened in June from May. He acknowledged inflation risks but deteriorating macro data continues to weigh on policymaking. 

The Australian dollar (AUD) rebounded from its low last week on the back of USD weakness and strong commodity prices. The Reserve Bank of Australia (RBA) will announce its rate decision on Tuesday. As recent economic data showed, an easing in the labour market and weakness in the housing sector are likely to lead to a moderation in growth, which in turn is likely to dampen inflation. In New Zealand, consumer confidence fell to the lowest level since the 1991 recession. In addition, New Zealand’s economy contracted for the first time in over two years in Q1.
 
Rising inflation from higher oil prices coupled with a decline in stocks continued to threaten Asian currencies. This has prompted the central banks to intervene to support their currencies. For the week, inflation worries sent the Chinese yuan (CNY) to a post-revaluation high at 6.8612 before ending at 6.8653 after the Chinese Premier pledged to take steps to keep inflation in check. Despite active intervention by the central bank, estimated to have sold up to US$1 billion USD, the South Korean won (KRW) declined 1.3 percent to 1,041.80 on foreign investment selling and inflation concerns. The Indian rupee (INR) finished steady at below 43.00 after the Reserve Bank of India (RBI) stepped up its effort to fight inflation by raising the repo rate and cash reserve ratio to 8.5 percent and 8.75 percent, respectively. Despite suspected BOT intervention, the Thai baht (THB) lost 0.7 percent to 33.60 due to lingering concerns over political stability. PHP fell 1 percent this week to 44.75 due to surging oil prices, sharp fall in stocks on rekindled risk aversion and growth concerns over widening trade deficit. The Indonesian rupee (IDR) ended steady at 9,200 on speculation that the BNI will raise rates for the third time this year on 3 July. The Malaysian ringgit (MYR) lost ground to close at 3.2620 on rising oil prices, stocks decline and risk version. Meanwhile the Singapore dollar (SGD) ended the week with little changed at 1.3655 after range trading for most of the sessions though inflation worries remain a concern for the government to tackle. Elsewhere, the Vietnamese dong (VND) fell 1.4 percent after the central bank allowed the currency to weaken by widening the daily trading band to 2 percent.