US Dollar strength and EU pressure on Swiss banking secrecy

EUR:
The euro was under pressure in the second half of the week against the greenback and fell below important technical support at 1.2850 on Friday. Apart from the weakness against the USD the single currency was higher against all major currencies, especially against commodity currencies such as the Canadian and the Australian dollar which suffered because metal prices were under pressure thanks to increasing fears of a global economic slowdown. Economic data had no impact on the outperformance of the euro as GDP data for the first quarter from Germany and France as well as the euro-zone area disappointed by a large measure.

USD:

One of the major stories throughout the last week in the currency market was the prevailing strength of the US Dollar. The greenback is evolving at a multi-year high against a basket of major currencies despite global equity markets trading at or near record highs.

Market commentators state, that a potential shift in risk sentiment with regard to equities could lead to further buying of the greenback.

Another factor which would contribute to the appeal of the greenback in the upcoming weeks is a potential downshift in the quantitative easing program of the US central bank. The camp of those voting members of the Fed who demand a curbing of QE3 is growing. Investors will therefore closely follow this week's testimony of Ben Bernanke on the state of the American economy.

CHF:

Elsewhere, the Swiss franc got under increasing pressure with EUR/CHF trading back again near the 1.25 level amid developments, that could see Switzerland lose its banking secrecy and the status as a tax haven. EU finance ministers last week agreed to start negotiations with Liechtenstein and Switzerland regarding their bank secrecy laws. So far these negotiations were opposed by the two EU members Luxembourg and Austria but this opposition was given up last week. In order to fight tax evasion the EU hopes to push for the same rules to be applied in Switzerland as are valid within the EU countries. As the Swiss government seems willing to cooperate the days of Switzerland as a tax haven could come to an end in the not too distant future. These developments should spur further selling in the Swiss Franc. With the latest dollar strength USD/CHF was one of the strongest pairs last week closing roughly 150 pips higher.

AUD:

Commodity currencies such as the Australian dollar or the Canadian dollar were losing across the board last week. The sell-off in these currencies was spurred by weaker metal prices, with the price of Gold re-testing the 2013 low's from mid-April. The Aussie dollar has dropped almost 600 pips within the last two weeks - a rather spectacular move for an otherwise steady trading pair. The New Zealand dollar and the Canadian dollar experienced similar losses.

JPY:

The Japanese yen was weaker against most of its peers and USD/JPY was rallying for the third-straight trading week in a row after follow-through buying kicked in with the jump above the widely watched 100 level. The week before USD/JPY closed above 100 for the first time since April 2009. With the yen now down more than 30% and Japanese shares up roughly 70% since last November when speculation about a BoJ policy shift started. It is increasingly likely that we will see some kind of correction in Japanese shares as well as the yen with both trends looking increasingly mature. The Bank of Japan's interest rate decision on Wednesday this week could provide to be the catalyst for such a corrective move. It is highly likely nevertheless that investors will consider any setback a buying opportunity as USD/JPY might drift back down to 100 again. The first leg of this move could have been spurred on Sunday when Japanese economy minister Amari stated that the Japanese yen's strength has now been mostly corrected and excessive losses could be damaging.

GOLD:
The yellow metal did not manage to surpass the resistance at 1500 $ an ounce we mentioned two weeks ago and drifted lower again as expected. Gold fell for 7 days in a row and was down roughly 90 $ per ounce or more than 6% last week, this was the largest decline since the 10% crash seen in April. The metal was under pressure because of expectations that the US Federal Reserve might start to cut back on quantitative easing in June. With latest inflation data from the major economies showing no signs of increasing consumer or producer prices, many investors are beginning to ask themselves why they hold large amounts of gold as an inflation hedge causing them to unwind their long positions. We expect this trend to continue during the upcoming weeks and expect further weakness in the price of gold.