With U.S. traders out celebrating the July 4 th holiday, recovery and consolidation was the theme in the currency markets today. The euro and commodity currencies rebounded against the U.S. dollar while the British pound and Japanese Yen edged modestly lower. The EUR/USD 
had a slightly wider than expected July 4 th holiday trading range of 100 pips but the trading range for USD/JPY was less than 50 pips.
G8 Summit vs. Economic Data
In the week ahead, the U.S. economic calendar is extremely light. The only pieces of potentially market moving data will be the service sector ISM index on Monday and the U.S. trade balance on Friday. However there will be interest rate decisions from Australia and the U.K. along with the G8 Summit in Italy beginning on Wednesday. In light of that, the lack of U.S. economic data next week could lead to a further rally in the dollar as bears take profits on short positions. After Thursday’s weak non-farm payrolls report, traders need a very good reason to buy stocks and sell dollars. Unfortunately there may not be many reasons for investors to turn optimistic in the coming week. The only hope is for strong earnings from Alcoa or an escalation of reserve diversification talk around the G8 meeting. However in all likelihood, China’s flip flopping threats about the dollar will amount to more bark than bite. G8 leaders have no interest in talking down the dollar at this point and at best it may only be mentioned in their outreach talks with the emerging economies. This is not the time or place to be talking about reserve diversification as European leaders may adamantly oppose any measures that could further strengthen their currencies. Therefore China’s request won’t amount to anything and instead the G8 leaders will focus on discussing the state of the global economy, the need for greater financial regulation, climate change, trade and development. The markets also rarely react to the outcome of the G8 Summit as specific financial announcements are usually left to the Finance Ministers meeting.
Using Currencies to Forecast Earnings
Meanwhile when traders return on Monday, their focus will shift to earnings season. Many equity analysts believe that Q2 earnings will be stronger for the nonfinancial sectors because of cost cutting, the rally in equity markets, the improvement in consumer confidence, government stimulus programs and the slower pace of contraction in manufacturing indices. However, we believe that the weakness of the U.S. dollar has also played a large role in corporate profitability between April and June just as the dollar’s strength in the first 3 months of the year bit into earnings. In the second quarter, the U.S. dollar weakened across the board. This will benefit the companies that export abroad, have foreign operations or large account receivables denominated in foreign currencies. In general, the industries with the greatest foreign sales exposure are energy, technology and consumer staples. Google for example reported in the first quarter that foreign currency fluctuations shaved 7.8 percent off from their revenues. Considering that the dollar only strengthened 5.16 percent against the euro and 1.85 percent against the British pound in the first 3 months of the year, we can only imagine the positive impact that a 14 percent appreciation of the British pound and close to 6 percent appreciation of the euro will do to earnings in the second quarter. Some analysts estimate that Google, who makes more than 50 percent of their money internationally, will see a 20 cent contribution to earnings purely from FX flows. Companies that produce commodities could also benefit as the weaker dollar drives commodity prices higher. Therefore equity traders may find it useful
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