In forex trading this week, increased evidence of the global economic slowdown reaching the Eurozone, coupled with renewed confidence in U.S. resilience, led to more firmness for USD despite still rising commodities prices, including crude oil, which set new record highs for five consecutive days before peaking above $126 on Friday 9 May. Losses and writedowns of assets amongst major financial institutions currently total greater than $323B.

As expected, the RBA left interest rates unchanged at 7.25% and signalled an ongoing neutral stance in their accompanying statement, although inflation remained at a seven-year high in 1Q2008. Unemployment edged up slightly in April although job growth also increased, and export growth outpaced import growth by four-to-one to narrow the trade deficit by a greater margin than economists anticipated. AUD/USD again assaulted the 0.9500 level only to fall away, and continues to range trade between roughly that level and 0.9275.

The growing confidence in the resiliency of the U.S. economy is based upon accumulating evidence of stagnation rather than outright recession, with GDP growth for 1Q2008 at 0.6% q/q rather than a negative number. The ISM non-manufacturing index surprisingly climbed above the 50 demarcation line to 52.0 in April; other better-than-expected indicators included rising non farm business productivity in the first quarter, lowering unemployment claims, and a shrinking trade deficit. However, pending home sales declined further in March as the housing correction continues.

Also as expected, the ECB maintained interest rates at 4.0% and an emphasis on price stability rather than downside risks to growth dominated the accompanying statement, with PPI surging to 5.7% y/y and headline consumer inflation expected to show another increase in next week’s release. However, credit conditions tightened and demand for credit amongst consumers and businesses weakened, while retail sales declined in March and industrial production slowed. 1Q2008 GDP growth, also slated for release next week, is expected to slow to 0.5% q/q and 1.9% y/y. EUR/USD consolidated mildly lower during the forex trading week and dropped briefly below 1.5300 before closing at 1.5481.

The BoE also left rates on hold at 5.0%; however, weakening economic data including mounting home foreclosures, declining consumer confidence, and contracting industrial and manufacturing production, all combined to increase speculation amongst traders that the BoE will resume lowering interest rates at the June meeting, pulling GBP down against both EUR and USD. In particular, GBP/USD broke through resistance at the 1.9600 level which had held since 25 February 2008, to close the week at 1.9522.

New Zealand employment slid dramatically in 1Q2008, increasing speculation amongst traders that the RBNZ will be obliged to cut rates before autumn and ending much support for the “decoupling” theory. This anticipated change in monetary policy, which could lead to substantial rate cuts over time, and a declining but still significant current account deficit, paint a bearish picture for NZD against most currencies. NZD/USD is trending lower, falling from a high of 0.8213 on 14 March 2008 to close the forex trading week at 0.7686, with further downside anticipated.

The change in AUD/NZD was just as dramatic, opening on Monday at 1.1974 and climbing rather steadily through the week for 300 pips, closing Friday at 1.2266 with no indication of a change in forex trading trend.