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

The US dollar (USD) traded within a narrow range, mainly tracking movements in the US stock markets. The rallies in stock prices have reduced USD’s safe-haven status as risk appetite has improved. The World Bank and OECD remain worried about global growth, and both organisations have cut their forecasts for most global economies. Meanwhile, the Fed left rates unchanged at zero percent, not yet ready to change current measures to revive borrowing and stimulate the economy. US data releases were mixed, suggesting that conditions in the biggest economy remain fragile.

The EUR/USD was little changed as the ECB’s first ever tenor one-year refinancing allotment beat market expectations. A record 1,121 banks took up the ECB’s offer of unlimited funds at a fixed rate of 1 percent for the next 12 months. In the Euro-zone, surveys showed that the worst of the recession has passed, but a recovery may take time. Against the Swiss franc (CHF), the euro (EUR) hit as high as 1.5380 on talks of SNB and BIS buying. With the SNB specifically defending the downside of the EUR/CHF, any downward movement below the 1.5000 levels is not expected.

The GBP/USD held its gains, supported by a rise in the UK stock market. Investors shrugged off comments by BoE Governor Mervyn King that the economic recovery could still be a ‘long, hard slog’ despite encouraging data. Also, a weak domestic currency might help the UK economy to recover faster than other countries. His comments suggested that they are in no hurry to tighten their monetary policy.

Markets had widely expected Japan to face a second bout of deflation after reports showed the biggest decline in Japan’s core consumer prices on record. The OECD expects the Japanese economy to contract by 6.8 percent in 2009, and the BoJ will need to keep interest rates at 0.1 percent beyond 2010. USD/JPY traded within its recent range of 94 to 99 with interest on both sides. Market focus is on the upcoming economic data, which includes industrial output, retail sales, and the Q2 Tankan Survey for clues on the yen's direction.

Commodity bloc currencies continue to out-perform, benefiting from higher commodity and oil prices. A steady Asian stock market has also helped boost investors’ risk appetite. AUD/USD stayed firm at above 0.8000, supported by the IMF raising Australia’s growth forecast while NZD/USD continued to gain on expectation that the recession is easing. Gold traded within $910 to $950, supported by comments from the research office in China that they should buy more gold and land in the US than treasuries.

Most Asian currencies ended higher as risk appetite increased after the Fed signalled it would keep interest rates low. Stock gains also helped regional currencies, as the Indonesian rupiah jumped over 1 percent to 10,130 per dollar. The Korean won rose to 1,284.60 after the central bank agreed with the Fed to expand a USD 30 billion currency swap deal. Taiwan central bank kept rates steady at a record low of 1.25 percent. Meanwhile, China’s central bank renewed its call for a new global currency.