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 across the board initially but ended little changed last week. USD traded lower due to the possible demise of Fannie Mae and Freddie Mac, while the Federal Reserve and the US Treasury quickly offered solutions to rescue these two mortgage giants. Looking at the stock market recovery from Tuesday’s intra-day low, market participants reacted positively to the new rescue plan. USD was pressured after Bernanke said that unemployment is rising, credit is tightening, and inflation expectations are climbing in the US, during his testimony. USD later found support from the better-than-expected earnings of JPMorgan, Citigroup and Merrill Lynch. Then, the CPI released last week climbed to a new high since September in 2005, also prompting investors to worry about tightening interest rates by the Fed. Besides, crude oil prices fell sharply, making the biggest weekly decline in more than three years, as the Bush administration’s decision to participate in nuclear talks with Iran eased concerns of a possible military conflict. Falling crude oil prices acted as another boost to the USD.
 
The Euro (EUR) strengthened at the beginning of the week. ECB governor Trichet said that the best way to maintain Euro zone growth is to keep inflation below the 2 percent target, even though short-term growth might need to suffer. Then, another official, Dutch central bank governor Nout Wellink commented that it is wrong to assume slowing economy would drag down inflation expectations, and he said that to fight against inflation is in the central bank interests. However, the rally in EUR started to lose momentum, amid the US bullish data such as the housing starts, building permits, and jobless claims. Meantime, the business sentiments were very pessimistic in Euro zone. The German ZEW survey collapsed to record lows and showed that business confidence has deteriorated materially over the past month. The interest rate tightening policy from the ECB proved to lower Euro zone growth. The exports, factory orders and the industrial production were all plummeted which confirms that the business activity dropped significantly. Then, news reported that the housing market in Spain slowed sharply due to over-supply and the biggest mortgage bank in Spain was in trouble of collecting mortgage payments from its borrowers. This week, market focuses are the German July IFO, the French and Italy business confidence data, as they should give hints on the business condition in the Euro zone.
 
Sterling (GBP) strengthened along with other major currencies. It rose to the highest level around 2.0150, after the release of June CPI. It rose to 3.8 percent from 3.3 percent in May, prompting inflation concerns across the nation. Other inflation related data released earlier such as the PPI and output prices were all pointing towards the upside, and the unexpected strong M4 Sterling lending suggested that the inflation rose to the limit of the Bank of England.  However, GBP failed to extend gains further and hover around the 2.0000 level, as the labour and housing markets remained weak. The June Claimant count rose to new highs again, proving that the labour market continued to shrink. RIC housing price balance was still weak, as it was well below the long term average. 
 
USD/Japanese yen (JPY) was little changed originally when the USD started to fall against other European currencies. And it later fell below the 104.00 level on the renewed worries over the credit market in the US. The slide in equity markets prompted investors to off load their positions for JPY against other high-yield currencies such as the Australian dollar (AUD) and the New Zealand dollar (NZD). The Bank of Japan held interest rates unchanged at 0.5 percent, and the central bank lowered its economic forecast and showed the worries on raising inflation.  However, the USD/JPY then rose along with the rebound in the USD. Meantime, Bank of Japan governor Shirakawa mentioned that the downside risks to the world economy are high but the Japanese economy is more resilient to external shocks than before. 
 
The Australian dollar AUD boosted by the renewed weakness in the USD initially, it then retreated later in the week after finding a new high against USD.

The New Zeland dollar NZD was erratic over last week. However, it fell sharply when the USD started to recover. Dovish comments from officials continued to pressure the NZD. The Canadian dollar (CAD) was little changed despite all the ups and downs in USD.  Besides, the CAD showed no reaction despite of the sharp fall in oil prices and the central bank announcement of holding its rate unchanged. 
 
Sliding oil prices last week helped stabilise Asian currencies. However, this did not stop Bank of Thailand from lifting interest rates by 25bp to 3.5 percent to curb rising inflation as annual inflation soared to 8.9 percent in June. Hence, the Thai baht (THB) closed firm at 33.34. The Philippine peso (PHP) also led gains among the Asian currencies after the central bank raised its benchmark rate by 50bp to 5.75 percent to temper inflation. The PHP gained 2.6 percent to 44.455.  Despite moderate slowdown in economic growth fuelled speculation that the government might slow the pace of the Chinese yuan (CNY) appreciation, CNY finished higher at 6.8230 after posting new high at 6.8103 in mid-week. Foreign stock sales pushed the South Korean won (KRW) lower to close at 1,014 despite falling oil prices and central bank intervention. This was much due to global credit crisis and certainty over the financial market. The Malaysian ringitt (MYR) weakened on concerns over leadership struggle, closing at 3.2413 as this distract the government to take measures in tackling inflation and spur economic growth. However, the Indian rupee (INR) erased earlier losses after its local currency outlook was downgraded by Fitch Ratings. INR fell to 43.23 on the report but ended the week at 42.80 on lower oil prices. Elsewhere, the Taiwan dollar (TWD) strengthened slightly to 30.36 while the Indonesian rupiah (IDR) finished at 9.152, the Singaporean dollar SGD rose 0.4 percent to 1.3530 despite weaker than expected Q2 growth as market expect the Monetary Authority of Singapore to maintain a tight policy.