- Higher, EU debt risks, slowing growth in China, factory orders and home sales beat expectations
- Higher, risk aversion, S&P to review Japan's debt rating after next month's budget announcement
- Lower, fear of Greek contagion risk, cost of financing debt rises in Greece, Portugal and Spain
- Lower, election uncertainty, risk of a hung parliament, consumer credit and mortgage lending slows
- AUD & CAD lower, RBA hikes rates signals pause, China's economy slows
Overview
The USD traded higher Tuesday supported by a spike in risk aversion as equity markets decline in reaction to report Chinese economy is slowing and by worries about possible contagion risk from the Greek fiscal debt crisis. China's manufacturing PMI for April slowed to 55.4 from 57 in March. The decline in China's manufacturing activity generates concern that recent tightening of monetary policy in China is beginning to slow Chinese growth. EUR traded at a one year low versus the USD pressured by doubts that the EU/IMF Greek bailout will contain the risk that the sovereign debt crisis in Greece may spread to other peripheral EU nations. The cost of funding debt was higher Tuesday in Portugal, Spain and Greece as investors fear sovereign debt risk maybe spreading in Europe. GBP traded lower pressured by report of weaker UK consumer credit and mortgage lending. Commodity currencies traded lower pressured by weaker equities and a drop in commodity prices. Commodity prices were pressured by concern about weaker demand from China. The RBA hiked rates 25 bps to 4.25% as expected. AUD traded sharply lower as the RBA policy statement suggests that interest rates are near average. The RBA may soon pause in its rate hike cycle. JPY edged higher supported by safe haven demand as equity markets decline with gains limited by concern about Japan's sovereign debt rating. S&P says that it will review Japan's new budget announcement next month to determine whether the rating agency will consider a downgrade of Japan's sovereign debt rating. Today's US economic data was strong with factory orders far exceeding expectation and pending home sales rose by 5.3%.The pending home sales rise partly reflects buying ahead of the expiration of the home buyer's tax credit. Investors will continue to monitor developments on EU sovereign debt risk and US economic data looking for further confirmation that the US recovery is gaining momentum. A 25% jump in the VIX index today suggests that investors are becoming more risk averse as sovereign debt troubles overshadow positive US economic data. Either way the USD wins.
Today's US data:
March factory orders rose by 1.3%, a 0.3% rise was expected. March Pending home sales rose to102.9, a reading of 101.5 was expected.
Upcoming US data:
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 Tuesday. JPY traded higher supported by safe haven demand sparked by declining global equity markets. Equity markets traded lower pressured by ongoing worries about the fallout from the Greek debt crisis and in reaction to report that the Chinese manufacturing sector is slowing. Over the weekend the EU/IMF announced a bailout plan for Greece. There are doubts about whether the bailout plan will contain the risk of contagion from the Greek debt crisis. China raised its reserve ratio on banks for the third time by 50bps Sunday. China is concerned about the risk of the creation of asset bubbles and has been tightening of lending conditions. The tightening of lending conditions may be starting to slow the Chinese economy. JPY gains were limited by concern about the outlook for Japan's sovereign debt rating. Bloomberg reports that S&P will look to Japan's new budget announcement next month to determine whether a downgrade of Japan's debt rating is warranted. No major Japanese economic data was released in today's trade. This is Golden week holiday in Japan so trading conditions are likely to remain thin. JPY direction is expected to trade inversely to equities and risk sentiment.
Japanese markets will be closed on 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 94.00 with resistance at 95.10 August 24th high.
EUR
EUR traded at a one year low versus the USD pressured by doubts that the Greek bailout package will contain contagion sovereign debt risk in peripheral European nations. Investors are concerned that Greek debt problems may spread to other EU peripheral nations. The cost of financing debt in Greece, Portugal and Spain rose Tuesday suggesting that investors are concerned about the potential spread of the Greek debt crisis to other vulnerable EU nations. The Financial Times reports that slowing of China's economy could add to worries about global sovereign debt risk. German officials indicated that the EUIMF Greek aid package does not cover Greece's entire financial needs over the next three years. Investors will continue to monitor the credit default swap spreads in Greece and peripheral European nations for clues to whether the EU sovereign debt crisis is expected to spread or begins to show signs of stabilization. The only EU economic data released today was March PPI which was reported up 0.6% compared to 0.1% rise last month. The higher than expected EU PPI follows last week's report that EU inflation rose by 1.5% to its highest level since December 2008. Improving EU economic growth and rising inflation pressures coupled with uncertainty about the contagion sovereign debt risk in the EU 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. Recent US economic data suggest that the US recovery is gaining momentum and this could increase pressure on the Fed to move its timeframe for tightening of monetary policy forward. EUR remains vulnerable to fear of contagion debt risk in Europe and widening of yield and growth differentials. Some analysts warn that the ECB may be forced to monetize EU sovereign debt.
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 1.3100. Expect EUR support at 1.2885 the April 2009 low with resistance at 1.3214 the May 4th high.
GBP
GBP traded lower pressured by UK election uncertainty and weaker then expected UK consumer credit and lending data. The UK election will be held on Thursday, May 6th. The latest polls suggest that the UK election result is too close to call however some polls indicate that the Conservative party could win a majority control of parliament. Investors are concerned that if no clear winner emerges from the election that the election will result in a hung parliament. A hung parliament is thought to make it less likely that the new UK government will take quick action to reduce UK deficit. Failure by the UK government to take quick action on deficit reduction could lead to a downgrade of the UK 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. 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. Today's UK economic data was mixed with April PMI reported higher than expected rising to 58 from 57.3, a reading of 57.4 was expected. This was the highest level for the UK manufacturing sector PMI in 16 years. The improvement in the April PMI was offset by weaker consumer credit and mortgage lending. UK March consumer credit rose by 0.3bln compared 0.5bln last month, mortgage lending declined to 0.3bln from 1.8bln last month and mortgage approvals for March rose to 48,901, a reading of 49,000 was expected. Today's UK economic data is a mixed bag for BOE policy outlook but the slowing of consumer demand and mortgage lending may generate questions about the sustainability of the UK recovery. The Sunday Times carried an article that says that BOE rates will stay low for four years. 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.
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 1.5200. Expect near-term support at 1.5043 the March 31st low with resistance at 1.5345 the April May 3rd high.
CAD
CAD traded sharply lower pressured by a spike in risk aversion, weaker equity markets and the sharp drop in the price of crude. Today's spike in risk aversion and weaker equity and commodity markets is attributed to report of slowing growth in China and fear that the Greek debt crisis may spread to other peripheral nations in Europe. Slowing growth in China sparked selling of commodities and speculation that slower growth will hurt demand for commodities from China. Canada is a major exporter of commodities. Sunday China raised its bank reserve requirements by 50bps for the third time this year. The Chinese reserve ratio hike may hurt 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, Canada 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 be 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. There was limited impact from the IMF report which says that the Canadian economy is improving despite the fact that strong CAD has slowed Canadian exports. 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 negative as USD/CAD trades above 1.0200. Look for near-term support at 1.0108 the May 3rd low with resistance at 1.0323 the March 11th high.
AUD
AUD traded sharply lower pressured by slowing growth in China and in reaction to statements from RBA Governor Stevens. China reported that manufacturing growth slowed in March. The Shanghai index declined 2.1% in reaction to the news that China's manufacturing sector is slowing and the index is traded at it lowest level since last September. China is a major export destination for Australia and slowing growth in China could hurt the Australian recovery. The RBA hiked interest rates 25bps to 4.25% as expected. In a statement following the RBA rate hike, RBA Governor Stevens suggests that Australian interest rates were near the average. This statement by Stevens suggests that the RBA is considering a pause in its rate hike cycle. RBA pause speculation sparked additional selling pressure of the AUD. Stevens also indicated that inflationary pressures are building. He said that Australian inflation may not slow as much as earlier forecast and appears to be in the upper half of the central bank's target range. Upcoming Australian CPI data will be key to RBA policy outlook. AUD was also pressured by Monday's report that Australia is considering a 40% tax on mining profits. The tax on profits coupled with higher interest rates will add additional risk to the Australian economic outlook.
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 negative as the AUD breaks below 9200. Expect AUD support at 9035 the March 29th low with resistance at 9268 the May 4th high.
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