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Although the U.S. Dollar was more or less neutral versus the Euro on the week, the British Pound Sterling was up 1.6% as the market reacted favorably to the new Conservative/Lib Dem government’s Emergency Budget.

The Greenback sold off even further last week against the Aussie, Kiwi and Yen in the wake of an important announcement of greater flexibility in the exchange rate policy followed by the People’s Bank of China. NZDUSD was up 1.4% and USDJPY was down -1.6% on the week, but the Aussie only gained 0.6% since it was hurt somewhat by the forced resignation of the country’s Prime Minister Kevin Rudd.

On the other hand, the Canadian Dollar gave back some of its gains made the previous week, as USDCAD rose 1.4% last week. Also, the G8 and G20 met in Toronto over the weekend.

The following sections cover some of the main news items that moved the forex market last week in greater detail.

The G20 Summit in Toronto

What was to touted as a focusing point to end the world financial crisis, turned out to be just business as usual for the leaders of the G8 and G20 nations meeting at their respective summits that were both held in Toronto, Canada this past weekend.

The international meetings took place against a backdrop of popular protest and police action against the protestors, with more than 500 people arrested as Canada reportedly spent roughly US$1.1 billion on security during the events, according to Canada’s Finance Minister Jim Flaherty. The police used tear gas for the first time against civilians in Toronto, mainly to disperse suspicious and violent protestors such as black attired youths who rampaged by breaking windows and torching patrol cars.

For his part, U.S. President Obama pledged he would rein in the massive U.S. budget deficit and that he would be presenting Americans with “some very difficult choices” next year. Furthermore, in a statement made after the summit, Obama said “My expectation is that they are going to be serious about the policy they themselves have announced,” in reference to the Chinese central bank relaxing the Yuan’s peg to the U.S. Dollar. He went on to say that, “We do expect that as more market forces come to bear, given the enormous surplus China has, the (Yuan) will appreciate significantly.”

Nevertheless, the big news from the G20 meeting was that the G20 economies agreed to cut budget deficits in half in three years in order to stabilize debt to GDP ratios and while banks were given more time, eventually, capital requirements for banks will be raised.

Another item of note that emerged from the G20 summit was that G20 leaders ended up giving the banks a break with more time to adopt stricter rules in order to safeguard the recovery and strengthen their balance sheets. The banks got more time to meet capital requirements and the global tax levy previously proposed for the banks was also abandoned.

Apparently, the delay was considered to be better than diluting the new rules, according to the Financial Stability Board or FSB which is overseeing the reform. FSB Chairman Mario Draghi stated to reporters in Toronto after the summit, “We’ll make sure that this new regulation and the pace of implementation is not going to cause either market disruption or hamper the recovery in any way,”

Global equity markets reacted favorably to the results of the G20 summit, and were already rising moderately on Monday. Will the results of the summit have a favorable impact on the global economy? Perhaps, but the huge banks and their shareholders will certainly be happy with the results.

The U.K.’s Emergency Budget and the MPC Rate Vote

On Tuesday, June 22nd, the U.K. annual budget was released which Chancellor of the Exchequer George Osborne called “the emergency budget and unavoidable”. What Osborne was referring to of course, was the so-called Emergency Budget which represents the new U.K. government’s attempt to bring down the country’s out of control budget deficit and maintain its AAA credit rating.

The emergency budget released on Tuesday aims to bring down the U.K.’s current budget deficit of £156 billion, which amounts to 11% of GDP and 102% of Income Tax collected, to a sharply lower £92 billion over the course of three years.

The cuts proposed in the Emergency Budget include £20 billion in additional planned government spending cuts, added on to the £16 billion of cuts made in May of 2009. The new budget also incorporates a rise in the Value Added Tax to 20%, which is projected to raise £13 billion from U.K. taxpayers.

The aggressive plan would reduce the U.K.’s budget to four to six percent of GDP, in the £55 billion to £83 billion range, if implemented successfully. Nevertheless, the fact remains that once the results of the VAT tax hike starts showing up in inflation numbers, this may well propel inflation in the U.K. up to 4% or higher.

It was precisely this type of inflationary concerns which made up the mind of the single dissenting vote on raising U.K. interest rates at the MPC committee meeting held in June. Minutes for the meeting revealed last week that the single dissenting vote was from Andrew Sentance, an external member of the Monetary Policy Committee.

Mr. Sentance voted against all the other members of the MPC to raise the BOE’s benchmark Official Bank Rate to 0.75% versus leaving the rate unchanged, which was the eventual policy adopted by the central bank for that decision period.

The dissenting vote in the June meeting is of considerable importance to the Pound because it could begin a trend for raising rates in the U.K. which would be strengthened in future by rising inflation reports. This would signal a complete change in the BOE’s monetary policy and could affect Sterling’s value considerably over time. GBPUSD was up 1.6% last week on the news.

Australian Prime Minister Kevin Rudd Resigns

Australian Prime Minister Kevin Rudd tendered his resignation on Thursday, June 24th after being severely criticized for a controversial proposed mining tax which he announced on May 2nd. If passed, the tax would have cut into mining company profits by 40% after their costs and after 6% of their remaining revenues are subtracted.

Rudd stepped down as Australia’s Prime Minister shortly before a Labor Party leadership caucus amid severe criticism for his “super mining tax” proposal. The once highly popular PM stepped aside for the caucus vote because of the prospect of being ousted by the party ballot in a surprise coup.

The Labor party named Rudd’s successor as Julia Gillard, his former deputy Prime Minister and Australia’s first female Prime Minister. After her appointment, Gillard stated, “I will lead a strong and responsible government that will take control of our future.”

The reaction in the markets was immediate, with the Australian Dollar trading off of its weekly low of 0.8595 to close higher at 0.8750 after the news. Mining and other resource company stocks in Australia also gained considerably as the prospects for the implementation of the mining tax dimmed substantially.

Weekly Recap and Outlook for the U.S. Financial Markets and Dollar – 6/28/2010 The U.S. Dollar resumed its decline last week, falling against most of the major world currencies, with the exception of the Canadian Dollar. The week started on an ominous note for the Dollar as the People’s Bank of China, the Chinese central bank, announced over the weekend that it was taking steps to loosen the Yuan’s peg to the USD. The peg has kept the Yuan at 6.83 to the Dollar for 23 months, and the rate was allowed to hit new highs on Monday without the usual Chinese central bank’s intervention being seen. Read full report

Weekly Recap and Outlook for EURUSD – 6/28/2010 EURUSD began trading higher early in the week, coming off of its weekly high of 1.2467 made Monday. EUR/USD opened higher after the People’s Bank of China or PBOC committed to monetary reform and loosening the Chinese currency’s peg to the U.S. Dollar. The Yuan or Remnimbi, as the Chinese currency is also known, has been pegged to the U.S. Dollar at 6.83 Yuan to the Dollar for 23 months. Read full report

Weekly Recap and Outlook for GBPUSD – 6/28/2010 GBPUSD again continued its corrective rally last week as the U.S. Dollar came under notable pressure last week. The pair began the week by trading lower as the Chancellor of the Exchequer George Osborne said that the emergency budget cuts would come from U.K. budget spending cuts and tax increases in an 80% to 20% respective ratio, “as a rule of thumb”.

On Tuesday, the annual budget for the U.K. was released which Osborne referred to as “the emergency budget and unavoidable”. The austerity measures include in the budget got an overall vote of approval from the currency market which saw Cable rally sharply after making its weekly low of 1.4684. Read full report

Weekly Recap and Outlook for AUDUSD – 6/28/2010 AUDUSD started the week out by gapping higher after the People’s Bank of China made their announcement last Saturday that the central bank would loosen the Yuan’s peg to the U.S. Dollar and reform their monetary policy. The rate then traded lower the rest of the week after making a five week high of 0.8858 on Monday.

In terms of economic data, the week started out with Australian New Motor Sales, which declined -3.2% month on month versus a previous reading of an 8.4 % increase revised upward to 9.0%. The rate continued declining on Tuesday despite U.S. Existing Home Sales coming out at a disappointing 5.66M versus 6.17M expected. Read full report

Weekly Recap and Outlook for NZDUSD – 6/28/2010 NZD/USD traded higher last week, gapping up on the Monday opening after the Chinese announced their decision for monetary reform that would loosen the Yuan’s peg to the USD. The Kiwi then headed south, despite New Zealand Visitor Arrivals which showed a -1.0% decline versus a previous reading of a decline of -1.8%. In addition, N.Z. Credit Card Spending increased 3.4% year on year; however, the previous number was revised downward to 0.7% from 1.9%. Read full report

Weekly Recap and Outlook for USDJPY – 6/28/2010 USDJPY continued selling off last week as the Japanese Yen was favored over the USD as a haven for the risk-averse. The pair began the week trading off of its weekly high of 91.47 made after the Chinese central bank announced it would loosen the Yuan’s nearly two year old peg to the U.S. Dollar. The Chinese central bank did not intervene as the Yuan rallied on the news. Read full report

Weekly Recap and Outlook for USDCAD – 6/28/2010 USDCAD traded higher last week on a combination of weaker Canadian economic numbers and softer commodities prices. The week began with the rate trading off of its weekly low of 1.0137 made on Monday after the Chinese announced they were loosening the Yuan’s peg to the Greenback.

The pair continued higher on Tuesday as Canadian Core CPI came out at 0.3% month on month as widely expected however, headline CPI came out with an increase of 0.3% month on month versus a 0.1% expected. On Wednesday, the rate began trading sharply higher as Canadian Core Retail Sales fell -1.2% month on month, versus a flat number expected, and Retail Sales declined -2.0% month on month, versus a consensus of a -0.4% decrease. Read full report

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