- Higher, EU debt crisis, tumbling equities, consumer confidence beats expectation, house prices rise
- Higher, EU debt contagion risk/escalating Korean tensions
- Lower, fear of contagion risk from Spain's bank troubles, industrial orders rise fastest in 10 years
- Lower, Q1 GDP revised higher, UK government announces new legislative plans
- AUD & CAD lower, tracking risk aversion, weaker commodities, Korean tensions
Overview
USD and JPY traded sharply higher Tuesday in reaction to tanking global equity markets sparked by fear that the EU debt crisis may be spreading. Escalating tensions between North and South Korea add to uncertainty dampening risk appetite. The latest fears about the EU debt crisis are fueled the Spanish governments takeover of a small ailing Spanish bank last weekend. In addition, IMF officials warn that Spain must do more to overhaul its ailing banks and said that bank consolidation has been too slow. US Treasury Secretary Geithner said that Europe has the capacity to manage its debt troubles and he is confident Europe will. His comments failed to calm the global financial markets. EUR/JPY cross traded at a nine-year low with JPY supported by safe haven demand. The EUR is approaching recent four year low. There is fear that the EU debt crisis is a risk to the US and global recovery. GBP outperformed supported by report of slight improvement in UK Q1 GDP and the announcement of the UK government plans to address the UK deficit. Commodity currencies traded sharply lower with AUD trading at a 10 month low versus the USD pressured by rising risk aversion and falling commodity prices. Today's US economic data was mixed to positive with consumer confidence rising above expectation and the Case Shiller house price index reported in line with market expectation. Risk aversion is the main market driver for the Forex trade.
Today's US data:
March Case Shiller Home Price Index came in at 2.3, a reading of 2.4 was expected. May consumer confidence came in at 63.3, a reading of 59 was expected.
Upcoming US data:
On May 26th April durable goods will be released along with April new home sales. Durable goods are expected to rise by 0.9% compared to -0.6% last month. New home sales are expected at 420k compared to 411k last month. On May 27th preliminary Q1 GDP will be released expected at 3.4% along with initial jobless claims for the week ending 05/22 expected as 450k compared for 471 last week. On May 28th April personal income and consumption will be released expected at 0.4% and 0.3% respectively along with April core PCE deflator, final May University of Michigan sentiment and May Chicago PMI. The PCE deflator is expected unchanged at 1.3%. Michigan sentiment is expected at 73.5 compared to 73.3 last month and Chicago PMI is expected at 63 compared to 63.8 last month.
JPY
JPY traded higher supported by rising risk aversion as global equity markets traded sharply lower on fear that the EU debt crisis may be spreading and in reaction to escalating Korean tensions. Asian equity markets traded sharply lower and European equity markets traded at their lowest level since last September. JPY surged in cross trade to European and commodity currencies with the EUR/JPY cross trading at a nine-year low. The EUR/JPY is often looked to as a proxy for risk appetite and carry trades. Today's decline in the EUR/JPY confirms additional investor unwind of carry trades and the deleveraging of high-risk assets. Rumors that he ECB/Fed may soon announce a joint liquidity measure helped to slow the JPY rally. Additionally there is report that Germany may be considering a ban of the use of EUR currency derivatives not used for hedging. JPY price direction remains closely linked to risk appetite and developments in regard to EU sovereign debt risk.
On May 27th April trade balance will be released expected at ¥610bln compared to ¥949bln last month. On May 28th April CPI will be released expected at 0.2% compared to 0.3% last month along with April household spending and unemployment and retail sales. Household spending is expected to fall by 0.6% compared to 4.4% last month, the unemployment rate is expected unchanged at 5% and retail sales are expected to fall by 0.5% compared to a 0.8% rise last month.
Key technical levels to watch in USD/JPY include support at 88.95 the May 6th low with resistance at 90.75 the May 24th high.
EUR
EUR traded sharply lower pressured by concern that Spanish bank troubles signal that the EU debt crisis may be spreading. The Bank of Spain's takeover of a regional lender, CajaSur Saturday revives worries about EU debt crisis and shines a negative light on Spanish banks. Pimco's El-Erian says that the Spanish banking stress increases the concern about EU debt contagion. The IMF warns that Spain has more to do to overhaul its ailing banks and that consolidation has been too slow. The IMF comments about Spain helped fuel to today's spike in risk aversion. There was no reaction to report that EU March industrial orders rose at the fastest pace in 10 years reported up 5.2%. Investors fear that the EU debt crisis will curb the EU recovery. Bloomberg reports that analysts at Tokai Tokyo say that the EUR could fall to 1.17 pressured by speculation the EU debt crisis will send the EU economy into recession. Markets found little comfort in the fact that Italy announced it is joining Greece and taking austerity measures announcing that the budget will be cut by €26 billion over the next two years. The trade will be watching to see if the ECB and other G7 central banks provide additional support measures for the global financial markets. Rumors are circulating that the ECB/Fed may join forces and add liquidity to the financial system. There are also rumors circulating that the German government may be considering additional regulatory measures on top of last week's announcement prohibiting naked short selling. The new government regulations may include restrictions on use of EUR derivatives for non-hedge related purposes.
On May 26th German GFK index for June will be released expected at 3.9 compared to 3.8 last month. French May business climate and April consumer spending and housing will be released on May 26th. The business climate is expected at 96 compared to 97 last month, consumer spending is expected at 0.8% compared to1.2% last month and housing starts are expected to decline by 2% compared to 3.3% last month. On May 27th German May CPI will be released expected at 0.2% compared to -0.1% last month.
The technical outlook for the EUR is negative as EUR trades below 1.2300. Expect EUR support at 1.2143 the May 21st low with resistance at 1.2351 to May 25th high.
GBP
GBP traded lower pressured by spillover from weaker EUR and a spike in risk aversion. GBP outperformed supported by report of better than expected UK Q1 GDP growth and in reaction to the new UK government's announcement of its legislative program. UK Q1 GDP was revised up to 0.3% with manufacturing sector rising by 1.2%. The manufacturing sector posted its biggest jump in four years. The manufacturing sector benefits from weaker GBP which makes UK exports cheaper. BOE's Posen said that the UK is nearing the end of its fiscal stimulus and the BOE knows of the risk of waiting too long to reduce stimulus. Posen specifically expressed concern about the recent 3.7% rise UK April inflation. Posen went on to say that the UK and US economies are at low risk of following Japan into a lost decade of stagnation. The new UK government's legislative program set as its top priority reducing the deficit and restoring economic growth. The new UK budget will be released on June 22nd and the budget is expected set a goal of eliminating the UK structural deficit over the next five years. Last week, the UK reported a record monthly rise in net public-sector borrowing. The continued rise in UK government borrowing illustrates the difficult fiscal outlook facing the new UK government. Additionally the legislative plan includes revamping of the tax system to make it more fair plus immigration reform.
On May 27th May CBI distributive retail trade will be released expected at 14 compared to 13 last month.
The technical outlook for GBP is negative as GBP trades below 1.4500. Expect near-term support at 1.4228 the May 19th low with resistance at 1.4545 the May 17th high.
CAD
CAD traded sharply lower pressured by weaker equity and commodity markets and a spike in risk aversion fueled by fear of EU debt contagion and rising Korean tensions. Crude oil traded below $68 a barrel and commodity prices were pressured by concern that the EU debt crisis could slow the global recovery and demand for commodities. There is a significant debate emerging in regard to the outlook for BOC policy in light of the current turmoil in global markets and uncertainty about global growth outlook. The next BOC meeting will be held on June 1st. Some analysts have argued that the EU debt crisis fallout will force the BOC to delay its rate hike cycle. Bloomberg carried an article today that says that BOC Governor Carney is prepared to hike rates in June in reaction to strong Canadian domestic growth and the recent boom in commodity demand from Asia. Canada reported its fastest growth in a decade with strong gains in employment and accelerating inflationary pressures. The BOC has not raised rates since July of 2007.Reuters reported Friday that despite EU debt crisis and Chinese growth worries all the Canadian dealers expect the BOC to hike rates 25bps in June. If global equity markets and commodities continue to implode we suspect the BOC will be forced to hold off on a rate hike next week.
This week's Canadian economic calendar includes the May 28th release of Q1 current account expected at - 8.6bln compared to -9.7bln last month.
The technical outlook for CAD is negative as USD/CAD trades above 1.0800. Look for near-term support at 1.0630 the May 24th low with resistance at 1.1039 the September 4th 2009 high.
AUD
AUD traded sharply lower as Asian equity markets tanked in reaction to escalating Korean tensions. The Korean Won dropped sharply in reaction to report that the leader of North Korea has put his troops on combat alert. (In the US session CNBC reported that the North Korean military is not on alert status.) The Bank of Korea was reported intervening heavily in support of the Won. AUD was also pressured by rising risk aversion as European and US equity markets follow Asian equity markets lower. The main catalysts for today's price action include fear that the EU debt crisis may be spreading and concern about tensions between North and South Korea. There were no major Australian economic reports released today. AUD traded higher Monday supported by report of strong Australian vehicle sales. The vehicle sales report contrasts with last weeks report that Australian consumer confidence declined to a seven month low. AUD/JPY cross traded 2% lower. Late last week there were rumors that the RBA intervened in the AUD/JPY cross. The cross had fallen as much as 8% earlier in the week pressured by massive deleveraging by investors from high yield and growth related currencies. RBA officials would neither confirm nor deny whether the central bank intervened. The combination of slower growth in China and uncertainty about the fallout from the EU debt crisis generates fear about the risk of a global slowdown. A significant deleveraging of commodities coupled with a sharp selloff in equities forced recent liquidation of long AUD positions. Additionally, the current fears gripping the financial markets will likely force the RBA to delay plans for another rate hike.
This week's Australian economic calendar includes the May 27th release of Q1 capital expenditure expected at 4.8% compared to 5.5% last quarter and March leading index expected at -0.1% compared to -0.3% last month. On May 31st April retail sales will be released expected to rise by 0.8% along with Q1 current account, Q1 company profits and April private sector credit.
The technical outlook for the AUD is negative as the AUD struggles to hold above 8300. Expect AUD support at 8066 the May 25th low with resistance at 8373 the May 20th high.
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