- Higher, optimism about the US recovery, construction spending and ISM beat expectation
- Lower, China hikes its bank reserve ratio dampening Yuan revaluation speculation, yield gap
- Lower, skepticism about the Greek aid plan, manufacturing PMI at a 46 month high
- Lower, Swiss PMI rises above expectation, ongoing threat of intervention
- Lower, election uncertainty, UK markets closed for holiday
- AUD lower & CAD higher, Australian swap rates rise to an eight-month high, new mining tax
Overview
higher to start the week as the EUR was pressured by skepticism about the EU/IMF aid plan for Greece and in reaction to strong US ISM. The EU/IMF pledged ¥110bln aid package for Greece in return for Greek pledge to adopt austerity measures. The EU/IMF aid plan will help Greece avoid near-term debt default but there are concerns about the possible need for additional bailouts of other peripheral European nations facing sovereign debt risk. It remains unclear whether the new Greek aid package will receive support from all EU members. Additionally there is skepticism about whether Greece can or will deliver on the austerity measures. EUR downside was partly limited by report that EU manufacturing PMI rose to 46 month high in April. GBP traded lower despite polls which suggest that the Conservatives are ahead pressured by UK election uncertainty. The UK election will be held on Thursday, May 6th and the election may result in a hung parliament. CHF traded lower despite report of stronger than expected Swiss PMI. Commodity currencies traded mixed to higher with the AUD experiencing volatile price action. AUD was initially pressured by report that China raised its bank reserve ratio by 50bps for the third time this year and in reaction to report that Australia plans to levy a sharp tax increase on mining companies. AUD downside was limited by strong Australian housing and inflation data and a rise in Australian swap rates to an eight-month high. The rise in Australian swap rates increases the likelihood of an RBA rate hike at Tuesday's policy meeting. Japanese markets were closed for holiday and the JPY drifted lower. The JPY decline was attributed to firmer US equity market trade and diminished Yuan speculation sparked by China's decision to hike its bank reserve ratio. Today's US economic data was mixed with personal income and consumption reported in line with expectation. Construction spending and manufacturing ISM came in above expectation and USD and stocks rallied to the days highs. Focus turns Tuesday's RBA policy meeting and Friday's release of US unemployment and nonfarm payrolls for April. The RBA policy decision is a close call but majority consensus is the RBA will hike rates 25bps to 4.5%. The US April unemployment rate is expected unchanged at 9.7% with nonfarm payroll rising close to 200k.
Today's US data:
March personal income came in at 0.3% expected. March personal consumption came in at 0.6% as expected. March construction spending rose 0.2%, a 0.6% drop was expected. April ISM came in at 60.4, a reading of 59.6 was expected.
Upcoming US data:
On May 4th March factory orders, pending home sales and April auto sales will be released. Factory orders are expected to rise by 0.3% compared to 0.6% last month and pending home sales are expected at 100.8 compared to 97.6 last month. On May 5th April ADP employment and ISM non-manufacturing Index will be released. ADP employment is expected at 25k compared to -23k last month. The non-manufacturing ISM is expected to improve the 56 from 55.4 last month. On May 6th initial jobless claims for week ending 05/01 will be released along with Q1 productivity and unit labor costs. Jobless claims are expected to fall to 442k from 448k last week. Q1 productivity is expected at 2.7% compared to 6.9% last quarter and unit labor costs are expected at -1.1% compared to -5.9% last quarter. On May 7th April nonfarm payrolls and unemployment will be released. Nonfarm payrolls are expected to rise by 175k compared to 162k last week with the unemployment rate unchanged at 9.7%. March consumer credit will also be released on May 7th expected at -2.35bln compared to -11.51bln last.
JPY
Japanese markets were closed for holiday Monday. JPY traded lower pressured by a modest uptick in risk appetite sparked by the announcement of the EU/IMF Greek aid package and firmer US equity market trade. Although the EUR was pressured by skepticism about the Greek aid package the plan will likely reduce the near-term risk of a Greek debt default and this has eased investor fears. US equity market rally may partly reflect news of a significant merger in the US airlines industry between United Airlines and Continental and stronger than expected US construction and manufacturing ISM.T he strong US manufacturing data may encourage speculation of an earlier Fed rate hike and yield gap moves in favor of USD as the BOJ will remain on hold for the foreseeable future. JPY may also have been pressured by report that China raised its bank reserve ratio by 50bps for the third time this year. The reserve ratio hike may reduce the likelihood of an imminent Yuan revaluation. A Yuan revaluation would contribute to additional tightening of monetary conditions in China. The Chinese government may not want to take such aggressive action on top of the hike in the bank reserve ratio. This is Golden week holiday in Japan so trading conditions are likely to remain thin. There were no major Japanese economic reports released in today's trade. JPY direction is expected to trade inversely to equities and risk sentiment.
Japanese markets will be closed on May 4th for Greenery Day and May 5th for Children's day. On May 6th Japan's April vehicle sales will be released.
Key technical levels to watch in USD/JPY include support at 92.99 the April 28th low with resistance at 94.78 April 5th high and 9530.
EUR
EUR experienced a short lived rally in reaction to news that the EU/IMF have agreed to a €110bln aid plan for Greece in return for a Greek pledge to take austerity measures. The aid package should help reduce fear of the near-term Greek debt default and the Greek/German 10 year bond yield spread known to 616bps from 662. The New York Times reports that there are doubts about the fiscal outlook in southern Europe. EUR traded lower pressured by skepticism about the Greek aid plan. Investors expressed concern that Greece may not follow through on austerity measures, there is uncertainty about whether all the EU nations will approve of the plan and there is increased fear that other nations like Portugal, Spain and Ireland may also need a bailout. The EU vote on the aid package is expected May 7th. Therefore the Greek aid package is not yet a done deal. EUR traded lower despite report that EU manufacturing PMI rose to 46 month high with EU April final manufacturing PMI reported at 57.6. The EU PMI report confirms that the EU recovery is gaining momentum and follows last weeks report of improving EU business sentiment and declining German jobless claims. The EU also reported last week that inflation rose by 1.5% to the highest level since December 2008. The combination of rising EU inflation and improving growth coupled with uncertainty about sovereign debt risk in peripheral European nations complicates the outlook for ECB monetary policy. The ECB is widely expected to err on the side of caution because of concern about the potential drag to the EU recovery from expected austerity measures in Greece and other southern European nations. Negative sentiment towards the euro continues to grow. The CFTC commitment of traders for the IMM released on Friday shows that hedge funds and speculators increased their net short EUR positions by 25%.EUR remains vulnerable to fear of the risk of contagion of sovereign debt risk in Europe.
On May 4th EU March PPI will be released expected 0.3% compared to 0.1% last month. On May 5th EU April services PMI will be released expected at 54.4. On May 6th March factory orders will be released expected to rise by 0.5% compared to flat last month.
The technical outlook for the EUR is negative as EUR breaks 1.3200. Expect EUR support at 1.3184 the April 29th 2009 low with resistance at 1.3313 the May 3rd high.
CHF
CHF traded lower despite report of above expectation Swiss manufacturing PMI. Swiss April PMI rose to 65.9 from 65.5 last month, the reading of 64.4 was expected. The PMI rise confirms improving Swiss economic outlook and the data may increase speculation that the SNB will raise interest rates in the second half of 2010. Last week switching reported that the KOF leading indicator rose to its highest level since November of 2007. The KOF indicator coupled with today's release of above expectation and PMI confirms the Swiss economic recovery is gaining momentum. Improving Swiss economic outlook is offset by the threat of intervention. SND Pres. Hildebrand warned of the negative impact of CHF appreciation to its safe haven role. Investors have been flocking to the CHF because of the Greek fiscal crisis. Hildebrand said that the SNB will continue to act decisively to prevent excessive CHF appreciation versus the EUR. EU debt woes cloud the outlook for Swiss policy and could drive CHF higher on safe haven demand. EUR/CHF cross continues to hold above 1.4300. Hildebrand went on to say that Switzerland was well-placed for recovery and deflation risks are lower. He warned that although the SNB has leeway to keep rates low they cannot stay low forever. Deflationary pressures have been abating in Switzerland. Inflation rose by 1.4% in March in the economy grew at its fastest pace last quarter since December of 2007. On May 4th Swiss April CPI will be released expected 0.3% compared to 0.1% last month. On May 7th Swiss April unemployment rate will be released expected unchanged at 4.2%. Expect USD/CHF support at 1.0664 the April 22nd low with resistance at 1.0935 the July 30th high.
GBP
UK markets were closed for holiday Monday. GBP traded lower pressured by UK election uncertainty. The UK held its last pre-election debate last Thursday and the UK press reports that the opposition party leader Cameron won the debate. Cameron's victory may foreshadow a likelihood of the Conservative party emerging as the clear election winner in Thursday's UK election. The latest UK election polls showed the Conservatives pulling ahead. Investors however remain concerned that the election could end in a hung parliament with no clear winner. A hung parliament would make it less likely that the UK will take quick action to reduce its deficit. If the UK does not take quick action to reduce the deficit the UK may lose its AAA sovereign debt rating. It's hard to see how the threat of a hung parliament has not been discounted by recent weakness in the GBP and what will matter most to investors is what transpires after the election and how the new parliament approaches the need for deficit reduction. Former UK Exchequer Lawson said that failure to take decisive action on the UK budget deficit after the election could cause major problems for the UK financial markets and GBP. GBP continues in a sideways pattern as investor's debate the potential impact of the UK election, the UK budget outlook and uncertainty about BOE monetary policy.
This week's UK economic calendar includes the May 4th release of March money supply, mortgage approvals, consumer lending and April PMI construction. The money supply is expected to rise by 0.3%, mortgage approvals are expected at 49k, net lending his expected 9.3bln and the construction PMI is expected at 53.4 compared to 53.1 last month. On May 5th April PMI will be released expected at 56.7 and 56.5 last month. UK national election will be held on May 6th. On May 7th April PPI will be released expected at 3.8% compared to 3.6% last month. The BOE policy meeting will be delayed until May 10th because of the UK election.
The technical outlook for GBP is mixed as GBP struggles to hold above 1.5400. Expect near-term support at 1.5126 the April 28h low with resistance at 1.5487 the April 27th high.
CAD
CAD edged higher supported by a modest uptick in risk appetite fueled by firmer US equity market trade and announcement of an EU/IMF bailout for Greece. CAD gains were limited as crude prices drift lower and 50bps preserve racial hike on China's banks pressured Asian equities and may limit optimism about global recovery as China tries to slow its economy. There were no major Canadian economic reports released in today's trade. Last Friday candidate reported that GDP by industry grew by 0.3% in February, industrial products price index declined by 0.4% and the raw materials price index rose by 0.8%. These data are unlikely to increase a sense of urgency by the BOC on the need for an earlier rate hike. CAD gains may also limited by statements from BOC Governor Carney before the Canadian Parliament last Thursday. Carney said that strong CAD may impact inflation and monetary policy and he expressed concern about possible risks from Greece and rising global debt. Carney's comments may dampen speculation of an earlier BOC rate hike as strong CAD helps to limit inflationary pressures and the BOC may consider global sovereign debt risk as reason to delay a rate hike. Carney also suggested that the BOC is prepared to intervene against excessive CAD strength because strong CAD hurts Canadian exports and may be a drag on Canadian economic growth. CAD price direction will continue to track risk sentiment with gains possibly limited by threat of intervention and BOC policy uncertainty. Focus turns to Friday's release of US and Canadian employment data. Investors will be looking closely at the employment growth component of the Canadian report for clues to the strength of the recovery and to gauge the possible risk of an earlier BOC rate hike.
This week's Canadian economic calendar includes the May 6th release of March building permits expected at 0.7% compared to-0.5% last month. On May 7th April unemployment and employment growth will be released. The unemployment rate is expected at 8.1% compared to 8.2% last month with employment growth at 25k compared to 17.9k last month.
The technical outlook for CAD is mixed as USD/CAD trades above 1.0100. Look for near-term support at 1.0015 the April 30th low with resistance at 1.0302 the March 26th high.
AUD
AUD traded marginally higher after experiencing volatile trade sparked by a number of factors which include stronger Australian housing and inflation data, report that China raised its bank reserve ratio, report that Australia will increase its tax on mining companies and RBA rate hike speculation as Australian swap rates rise to eight month high. Australia' Q1 house price index rose by 4.8% in the April TD- MI inflation gauge rose by 0.4%. The RBA policy statement mentioned specific concern about possible housing bubble in Australia and today's Australian housing data likely increase pressure on the RBA to hike rates at Tuesday's policy meeting. In addition Australia is swap rates are rising with each will increase pressure on the RBA to hike interest rates. The impact of RBA rate hike speculation was offset by report that Australia is considering a 40% hike mining companies and China raised its reserve ratio in banks by 50 basis points for the third time this year. The new mining tasks and higher reserve ratio in China could be a drag on the Australian and Chinese economy. Focus turns to Tuesday's RBA policy meeting. The RBA hiked rates by 25bps to 4.25% at the start of April. Last Thursday Australia reported higher than expected CPI. Australia's Q1 CPI rose by 0.9%. The rise in CPI will increase pressure for the RBA to hike rates next week. The CPI report follows last Wednesday's report of higher than expected Q1 PPI rise. Q1 PPI rose by 1%, a 0.6% rise was expected. The higher than expected Australian inflation may increase the chance of an RBA rate hike at the May 4th policy meeting. Focus turns to the Tuesday's RBA policy meeting. Majority consensus is the RBA will hike rates 25bps to 4.5%. Futures markets are pricing better than 70% chance of an RBA rate hike tomorrow. If the RBA hikes rates Tuesday, the impact of the rate hike will depend on the RBA policy statement and whether the RBA leaves the door open for more rate hikes or signals a pause its rate hike cycle.
On May 4th the RBA will hold a policy meeting and are expected to raise rates 25bps to 4.50%. On May 5th March building approvals will be released expected -1% compared -3.3% last month. On May 6th March retail sales will be released expected at 1.4% compared to -1.4% last month along with March trade balance expected -1.62bln compared to -1.92bln last month.
The technical outlook for the AUD is mixed as the AUD struggles to hold above 9300. Expect AUD support at 9152 the April 28th low with resistance at 9339 the April 21st high.
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