- Higher, stocks extend losses after report of a surge in jobless claims and a dip in LEI
- Higher, tracking risk sentiment, Q1 GDP outpaces the US and EU, deflationary pressures continue
- Lower, EU nations divided over how to combat the debt crisis, Juncker sees no immediate intervention
- Lower, retail sales rise for third month in a row, pressured by risk aversion /global risk fears
- AUD & CAD lower, deleveraging of stocks and commodities, RBA/BOC rate hike doubts
Overview
USD and JPY surged in Thursday's trade supported by a spike in risk aversion as equity markets tumble in reaction to speculation that the EU lacks a unified response to the sovereign debt crisis and central banks refrained from coordinated intervention to support the EUR. There are reports that the German ban on naked short selling caught some of the EU members by surprise. This surprise sparked speculation that the EU lacks unity to try and combat the sovereign debt crisis and to restore confidence in the EUR. EU's Juncker sees no immediate currency intervention to support the EUR. Equity markets and the EUR were also pressured by widening of EU credit spreads and more strikes in Greece protesting Greek austerity plans. GBP traded lower despite report of improving UK retail sales pressured by spillover from the EUR. Commodity currencies traded sharply lower in reaction to a spike in risk aversion and weaker equity markets. Asian equity markets traded at an eight-month low. JPY surged supported by safe haven demand and gains in cross trade versus Europe and commodity currencies. Investors continue to deleverage from higher risk assets seeking safety in the USD, JPY and CHF. Today's US economic data was disappointing with jobless claims posting a surprise rise, leading indicators posting an unexpected dip and the Philly Fed rose by slightly less than expected. Stocks tumbled after today's US economic reports and USD and JPY extended early gains.
Today's US data:
Initial jobless claims for week ending 05/15 rose by 25k, to 471k, a reading of 440k was expected. April LEI declined by 0.1%, a reading of 0.2% was expected. May Philly Fed came in at 21.4, a reading of 22 was expected.
Upcoming US data:
There are no major US economic reports scheduled for release Friday.
JPY
JPY traded sharply higher supported by a spike in risk aversion as equity markets tumble. Asian markets traded at an eight-month low, European equity markets were 2% lower and US equity markets extended early losses in reaction to report of a surprise jump in US jobless claims. Investors fear the fallout from the EU debt crisis will contribute to slower global growth in the second half of the year and are deleveraging dumping higher risk assets. Investors are also concerned about the potential negative impact of new financial regulations that are being proposed in Europe and the US. JPY gained over 3% versus the AUD and EUR and 2% versus the GBP as investors seek safe haven in the USD and JPY. The Nikkei closed 156 points lower. Japan's Q1 GDP came in below market expectations but confirmed that Japan's first-quarter growth was stronger than in the US and the EU. Japan's Q1 GDP rose by 1.2% and 4.9%y/y. Japans annual GDP growth rate was expected at 5.5%. CAPEX spending rose by 1% and the deflator declined by a record 3%. Japan's Q1 GDP confirms that the recovery is gaining momentum but deflationary pressures continue. JPY price direction remains closely linked to risk appetite and developments in regard to EU sovereign debt risk.
On May 21st March revised leading indicators will be released expected 4.5% compared to 1.2% last month.
Key technical levels to watch in USD/JPY include support at 87.95 the May 6th low with resistance at 91.88 the May 20th high.
EUR
EUR traded sharply lower Thursday failing to hold yesterday's rebound. The latest wave of selling in the EUR is attributed to speculation that there is no unity among the EU nations to combat the debt crisis or a plan to intervene in support of the EUR. In order to restore confidence in the EU financial markets and EUR the EU nations will have adopt reform that consolidates EU monetary and political union. Yesterday's unilateral announcement that Germany was banning naked short selling on some stocks, bonds and credit default instruments appeared to catch other members of the EU by surprise. The unilateral nature of the German regulatory actions coupled with the fact that thus far other EU nations have not followed Germany in regard to naked short selling ban suggests to investors that the EU lacks unity. EUR was also pressured by the rising cost of funding EU debt as credits default swap yields rise and in reaction to new strikes in Greece protesting Greek austerity measures. The Greek strikes put investors on edge and contribute to a sharp selloff in European equity markets. Part of yesterday's rebound in the EUR was attributed to rumors that the ECB and possibly the Fed were planning intervention in support of the EUR. Intervention has yet to emerge and the EU's Juncker said that although he is concerned about the pace of the EUR decline he sees no immediate currency intervention to support the EUR. Negative sentiment towards the EUR is growing as a number of bank forecasters lower their year end EUR targets. UBS says that the European crisis will result in the new normal for the EUR of 1.10.Analysts at Merrill and B of A say the EUR could hit 116 by year end. Nomura lowered its EUR year-end forecast to 115. In addition, the Korean central bank says that the EU debt crisis makes the EUR less attractive as an alternative reserve currency. EUR posted a modest rebound from the days lows supported by a statement from ECB President Trichet that the ECB has not adopted quantitative ease and he defended the ECB's independence. The ECB's decision to buy bond generates concern about price stability and ECB's independence.
On May 21st EU flash May manufacturing and services PMI and German May IFO index will be released. Manufacturing PMI is expected at 57.9 compared to 57.3 last month and the services PMI is expected at 55.7 compared to 55.6 last month. German IFO is expected at 101 compared to 101.6 last month. EU March current account will also be released on May 21st expected at - 6.1bln compared to -5.2 million last.
The technical outlook for the EUR is mixed as EUR struggles to hold above 1.2300. Expect EUR support at 1.2143 the May 19th low with resistance at 1.2577 to May 14th high. Trade will monitor the 50% retracement level of 0.8225-1.6038 range at 1.2135.
GBP
GBP traded at a 14 month low versus the USD pressured by spillover from weaker EUR and in reaction diminished risk appetite as global equity markets tumble. GBP was pressured in Wednesday trade by dovish BOE policy minutes for the May policy meeting and in reaction to the announcement of the German ban on naked short selling. The May BOE policy minutes state that the BOE voted unanimously to maintain the current level of interest rates and asset purchases. The BOE minutes also state that there is substantial spare capacity in the UK economy and this should bring down inflation in the months ahead. The BOE minutes noted that UK inflation has been rising lately and the rise was likely a result of weak GDP and rising energy prices. The BOE minutes also noted uncertainty about the impact of UK deficit reduction for the EU economy and inflation. Tuesday, the UK reported that UK inflation rate rose 3.7%. This is well above the BOE's 2% inflation target. BOE Governor King said that the rise in UK CPI was likely temporary reflecting higher energy prices. King expects the UK inflation rate to fall below 2% within the coming year. King's comments suggest that rising UK inflation will not encourage the BOE to consider earlier normalization of monetary policy or restrict the BOE from consideration of additional quantitative ease if necessary. There was little reaction to report that UK retail sales rose 0.3% m/m and 1.8%y/y. The UK retail sales rise was overshadowed by uncertainty about the UK budget outlook as he EU debt crisis shines a light on UK fiscal woes. Focus turns to Friday's release of UK public sector borrowing.
On May 21st April money supply and will be released. Money supply is expected to rise by 0.4% compared to 0.2% last month. That public-sector borrowing is expected to expand by 24.3bln compared to 23.4bln last month.
The technical outlook for GBP is negative as GBP trades below 1.4500. Expect near-term support at 1.4110' the March 30th low with resistance at 1.4522 the May 18th high.
CAD
CAD traded sharply lower pressured by weaker equities and a spike in risk aversion sparked by ongoing concerns about the EU debt crisis. EU nations appear to be divided over how to combat the debt crisis and this division contributes to risk aversion and dumping the higher risk and growth led currencies like the CAD. Commodity currencies have been hit hard by deleveraging from investors with crude oil trading below $69 a barrel in Thursday's trade. Report of an unexpected spike in US jobless claims adds to negative market sentiment. The trade ignored a report of slightly better than expected Canadian leading index. Canada's leading indicators for April rose 0.9%, a 0.8% rise was expected. The rise in Canada's leading index confirms that the Canadian economy continues to improve but there are worries that the recent slowdown in the Chinese economy and the fallout from the EU debt crisis will curb global growth in the second half of 2010.Recent Canadian economic data confirms that the domestic economy is strengthening. Canadian officials said they do not expect fallout for the Canadian markets from the EU debt crisis. It is becoming less clear whether the EU debt crisis and tumbling equity markets will prevent the BOC from tightening monetary policy. CAD is pressured by doubts about a BOC rate hike. Focus turns to Friday's released Canada's CPI and retail sales. A strong CPI rise will likely tip the scales in favor of a June BOC rate hike this will have to be balanced against the impact of the EU debt crisis.
On May 21st April CPI will be released expected at 0.1% compared to -0.2% last month with the annual inflation rate expected at 1.5%. March retail sales will also be released on May 21st expected at 0.2% compared to 0.5 % last month.
The technical outlook for CAD is negative as USD/CAD trades above 1.0600. Look for near-term support at 1.0431 the May 20th low with resistance at 1.0780 the February 9th high.
AUD
AUD traded sharply lower pressured by what appeared to be panic liquidation of the currency sparked by rising risk aversion and tumbling equity and commodity markets. The continued rise in risk aversion sparked by the EU debt crisis has prompted deleveraging of high risk assets like the AUD. The AUD has also been weakening in reaction to concern that a proposed 40% tax on resources may cripple the resource industry in Australia and drive commodity prices low lower. The AUD may also have been pressured by growing political uncertainty in Australia as pre-election polls suggest the risk of a hung parliament in Australia. The Australian elections are six months away but the polls seem to contribute to additional selling pressure of the AUD. Recent Australian economic data points to a slowdown in Australia's domestic economy. Australia's May Westpac consumer confidence index declined by 7%. The decline in consumer confidence may diminish the risk of additional RBA rate hikes and contribute to speculation that the RBA is likely to hold monetary policy steady in the months ahead. Tuesday the RBA released its minutes for the May 4th policy meeting. The RBA minutes state that recent rate hikes leave policy well placed for now and that the inflationary effects of resource price gains is outweighed by EUR concerns. The minutes suggest that the RBA plans a pause in its tightening cycle and is likely to hold rate policy steady for the next few months. Fear of EU contagion and recent tightening of credit conditions in China may have encouraged the RBA to consider a pause in its rate hike cycle. Last week Australia reported an unexpected drop in March housing finance, and a decline in business conditions and weekly job ads. Weaker business conditions, the drop in job ads and weaker housing finance may reflect recent tightening of monetary policy by the RBA. These reports coupled with Wednesday's report of weaker Australian consumer confidence contribute to speculation that the RBA will pause its tightening cycle.
The technical outlook for the AUD is negative as the AUD trades below 8300. Expect AUD support at 8393 the May 19th low with resistance at 8640.
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