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Forex outlook:
The dollar slid against the Euro on Friday after an unexpectedly strong U.S. jobs report failed to change views that U.S. interest rates will stay on hold this year while overseas rates rise. "The jobs data, combined with other strong reports earlier this week, show support to the dollar in the long run, but rates are still higher in Europe and will remain so for the time being," said Jason Schenker, an economist at Wachovia Bank in Charlotte, North Carolina.
Federal Reserve Chairman Ben Bernanke will be speaking about inflation and the risks are clearly skewed to the upside. When oil prices were above $70 exactly one year ago, inflation shot up globally. There is no reason for pricing pressures to be different this time around. Strong and tough words by Bernanke could drive further dollar strength, especially against the Japanese Yen. Aside from Bernanke’s comments, we are also expecting the trade balance and retail sales at the end of next week. The trade balance and retail sales are predicted to be particularly weak.
The Euro rose to a record high against the yen after the European Central Bank suggested it will increase borrowing costs in September. “The ECB will raise the interest rate at least once this year,'' said Dixon Fung, a currency trader at MG Financial Group in New York. “The interest-rate differential between Europe and Japan is tremendous. It's very profitable for carry trades'' in which investors borrow in low-yielding countries to buy high- yielding assets overseas.
The yen fell against all 16 most-actively traded currencies this week as investors in Japan, where its 0.5 percent borrowing costs are the lowest among developed countries, bought overseas assets to obtain higher returns. The Bank of Japan will keep its benchmark interest rate unchanged when it meets July 11-12. “Japanese investors are still looking for better yields overseas,'' said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto. “A rate hike in Japan in the context of rising global yields is not going to alter the argument for the carry trade''.
The biggest winner was the Canadian dollar, supported by firm commodity prices and solid economic data, which has supported expectations that the Bank of Canada will raise interest rates this week from 4.25% to 4.5%. The Canadian dollar hit a new 30 year high thanks to the combination of strong economic data and higher oil prices. After two months of weak hiring, Canadian companies added 34.8k jobs onto their payrolls in the month of June. The country continues to enjoy the tightest labor market in years. Despite a strong currency, the economy remains strong which is why the Bank of Canada is widely expected to lift interest rates this week from 4.25% to 4.5%.
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