The Mexican currency (peso) dropped on concerns that demand for Mexican exports will drop, the fall in the peso came after Federal Reserve Chairman Ben Bernanke announced a deteriorating U.S. economy.

The fall in the Mexican currency wiped out early gains that were fueled by the expectation that the Mexican central bank will maintain its benchmark interest rate at 7.5% tomorrow.

Investors expect the Peso to bounce back due to the widening gap in the difference between the U.S. and Mexican interest rates, with Mexican assets looking increasingly attractive.
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The Mexican currency (peso) saw gains today after the Federal Reserve cut the U.S. interest rate by 50 basis points. The move by the Fed has made yields in emerging market assets more attractive.

The Fed has lowered the benchmark interest rate to 3% in an attempt to prevent the U.S. economy from falling into a recession. The benchmark interest rate in Mexico is currently 7.5%.
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Gold has slipped a little lower as market players anticipate the Fed’s upcoming interest rate decision. Yesterday’s rally above $930 USD has no doubt caused some profit taking, with other investors positioning themselves in case the anticipated 50 basis point cut from the Fed does not eventuate. Investors remain uncertain as to how much assistance the US central bank will offer the struggling stock market.

Forex investors have already priced in a 50 basis point cut to the value of the USD. Investors expect a 50 basis point cut will see an increase in the value of gold, while a lesser rate cut could see a correction in the price of precious metals.
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The Euro has been pushed upwards by chart driven Forex investors following the upward trend and also by Forex investors re-evaluating their interest rate expectations for the region and buying more Euro’s to invest in European assets.

In other news the Bank of England’s (BoE) inflation report contributed to pressure on the GBP as the Forex market reduced its interest rate expectations. The BoE expects inflation to drop below the desired 2% annual CPI over the next 12 months. The GBP fell briefly as the inflation report was released, but quickly recovered to stabilize about 1.95.
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Expectations continue to build that the Federal Reserve will pause its rates tightening cycle in August, this will result in Forex traders cutting their long USD positions.

The latest release of minutes from the Federal Open Market Committee meeting (FOMC) revealed that Fed officials are uncertain about the future interest rate direction and are concerned about short term inflation.

Forex Investors reacted to the release of minutes from the FOMC by continuing to reduce their USD holdings, this saw the Euro rise to a high of 1.2650 USD overnight from 1.2590.
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The Swedish central bank has said it had decided to hike its leading interest rate by 0.25 percentage points, taking the repo rate to 2.25 percent to help keep a lid on inflationary pressures.

The Riksbank’s goal is to hold inflation to less than 2.0 percent. Inflation has risen over the past year and stood at 1.6 percent in May, but was projected to rise further over the next two years, the bank noted.

“To ensure an inflation rate close to target and contribute to a balanced development of the real economy, monetary policy should become gradually less expansionary,” the bank said Tuesday, motivating its decision.
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The USD extended losses on Wednesday after a higher-than-expected reading of U.S. inflation for May did little to dispel uncertainty about interest rate increases beyond an expected hike in late June.

After seven consecutive sessions of gains in the dollar against the Euro, traders trimmed their positions after the Consumer Price Index data cemented the chances of a June Fed rate hike but shed little light on policy moves beyond that.
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South Korea’s central bank has raised its key interest rate in a bid to head off mounting inflationary pressure amid high oil prices and an ongoing economic expansion.
The Bank of Korea raised the June target for the inter-bank overnight call rate by 0.25 percentage points to 4.25 percent after keeping the rate unchanged for three consecutive months.
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New Zealand’s central bank has kept its official interest rate steady at 7.25 percent despite slowing economic growth, citing a worse-than-expected outlook for inflation.

Rising oil prices and a declining New Zealand dollar (NZD) is expected to see inflation rise to 3.9 percent this quarter, Reserve Bank governor Alan Bollard said. Earlier forecasts had seen inflation peaking at 3.4 percent.
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To the surprise of us and almost everybody in the financial markets, the Central Bank (CB) raised its main policy interest rate by 175 bps to 15%. The average expectation for the rate increase in the market was around 50-75 bps, while we were not expecting anything more than 50bps.

In the accompanying short note, the CB said that the annual inflation shifted above the path that is compatible with the year-end inflation target of 5%, following very high inflation readings in April and May. The CB also acknowledged that the increases in the Forex rates due to the turmoil in the financial markets could temporarily push the annual inflation rates higher than its current levels.
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The South African Reserve Bank’s monetary policy committee (MPC) decided to hike the key interest rate by 50bp to 7.50% at today’s monetary committee meeting - the decision was a bolt from the blue.

The decision likely came as a reaction to increasing inflationary pressures in the economy as a result of strong domestic demand and high oil prices. Adding to South Africa’s woes of late have been the recent slide in the rand, which has been following commodity prices south, increased global aversion to risky emerging markets and last but not least the worsening current account deficit.
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The USD extended a recovery on Tuesday from one-year lows against the Euro after Federal Reserve Chairman Ben Bernanke’s pledge to stay vigilant against inflation left the door open for another interest rate rise later in June.
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The prevailing explanation for the sudden, precipitous fall by the USD is that the Fed is nearing the end of its current monetary tightening cycle, at which point interest rate differentials between the US and the rest of the world will begin to narrow. In this vein, Ben Bernanke’s hint that the Fed might end its cycle earlier than expected probably hastened the dollar’s decline.

Forex traders will admittedly be watching economic indicators closely for insight into the Fed’s likely course of action. Read the rest of this entry »