- Higher, durable goods rise, new home sales jumped by 14.8%, Spanish bank funding worries
- Higher, corporate goods prices continue to fall, gains in cross trade to EUR
- Lower, German consumer confidence declines, weak demand for German five year bond
- Lower, mortgage lending slows the most since 2001
- AUD & CAD higher, global equities and commodity markets rebound
Overview
USD traded mixed Wednesday as a rebound in equity markets sparked demand for commodity currencies. USD continued to gain versus Europe with the EUR pressured by report of weak demand for today's German five year bond auction and GBP pressured by report of weaker UK mortgage lending. EUR traded to the day's Lows in reaction to rumors that Spanish Bank may be unable to meet short-term funding requirements. European currencies continued to drop after the release of stronger than expected US new home sales. JPY drifted lower in reaction to today's rebound and equity and commodity markets and a slight improvement in risk appetite. The recovery in global equity markets is attributed to report that the OECD has raised its global growth forecast for 2010 to 2.7% from 1.9%. The trade is trying to digest a Wall Street Journal report which says that the Fed could lower the rate on ECB USD swaps and a statement from Fed Chairman Bernanke at the Fed is not looking to provide USD swaps permanently. There was surprisingly little reaction to a report that Moody's warns that the US AAA debt rating may come under pressure if the US does not take action to reduce its budget deficit. Today's US economic data was mixed with durable goods rising to the highest level since September 2008. Durable goods declined by 1% ex-transports. Most of the gain in durable goods was due to demand for aircraft. New home sales soared by 14.8%. US equity markets rallied to the day's highs after the release of the new home sales report. The rise in equity markets failed to boost demand for European currencies. Today's improvement in risk sentiment primarily benefited the growth led currencies.
Today's US data:
April durable goods rose by 2.9%, a 0.9% rise was expected. April new home sales rose to 504k, a reading a 420k was expected.
Upcoming US data:
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 drifted lower as equity markets rebound in reaction to reports that the OECD raised its 2010 global growth forecast and a jump in US new home sales. The Nikkei closed 62 points higher. European and US equity markets traded higher as well. There was limited reaction to report that Japan's April corporate service prices fell by 0.4%. The decline in Japan's corporate service prices confirms continued deflationary pressure in Japan. BOJ governor Shirakawa said that price stability is a primary mandate for the BOJ but it should not be the sole factor in determining monetary policy. The BOJ minutes for the April policy meeting were released today and the minutes state that the BOJ is monitoring the impact of the BOJ ease in March and that BOJ sees the optimum Inflation rate between 0.5 -2%. The BOJ minutes did not state how the BOJ plans to boost Japan's the inflation rate to achieve this target range. Just stating a target range for Japan's inflation may not be enough to steer Japan's inflation rate higher. JPY price direction remains closely linked to risk appetite and developments in regard to EU sovereign debt risk .EUR/JPY cross traded lower with the EUR pressured by report of weak demand for the German five year bond auction and ongoing uncertainty about EU debt crisis.
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
Today's rebound in global equity markets gave the EUR a temporary boost in overseas trade. The recovery in the EUR was short-lived and the EUR turned lower in reaction to report of weak demand for today's five-year German bond auction and report of weaker German consumer confidence. The weak demand for the German bond auction generates concern that the Greek debt crisis is dampening demand for German debt. German June GFK consumer sentiment declined to 3.5 from 3.7 last month. There was limited reaction to an OECD report which states that the OECD does not see a double dip recession for the EU. The OECD went on to say that short-term weakness of the EUR is a positive for the EU economy. There was also limited reaction to a statement from German Chancellor Merkel that she will do everything she can to defend the EUR. The trade will be monitoring today's meetings between U.S. Treasury Secretary Geithner and European leaders to discuss the EU crisis. Part of today's EUR weakness was attributed to uncertainty about USD funding pressures as Fed Chairman Bernanke says that USD swap facilities are not permanent. The cost of funding for EU banks to borrow USD rose to a 10 month high today. EUR remains vulnerable to EU debt, bank and growth concern. EUR traded to the lows for the day in reaction to the rumor that a Spanish bank is having funding problems and in reaction to report that Belgian business confidence fell for the first time since March of 2009.
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 drifted lower pressured by report that UK April net mortgage lending declined to its lowest level since February 2001 reported at 1.825bln compared to 2.292bln last month. GBP downside was limited by a report that April mortgage approvals posted a modest rise and in reaction to an OECD report which suggests that the BOE should raise interest rates by the end of 2010. The OECD said that the BOE faces credibility issues because of recent rise in UK inflation. According to the OECD the BOE should begin to normalize rate policy in the second half of the year and start to reduce its emergency funding program. GBP was also supported by gains in cross trade to the EUR with EUR pressured by report of weak demand for today's German five year bond auction. GBP is trading in a relatively narrow range supported by Tuesday's release of an upward revision in UK one GDP and in reaction to the announcement of the new UK government's legislative program which says a top priority reducing the UK budget deficit and restoring economic growth. 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. 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.
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 1.4530 the May 24th high.
CAD
CAD traded higher supported by a rebound in global equity and commodity markets. Crude oil prices rallied above $70 a barrel and equity markets traded higher in Asia, Europe and the US. The rebound in global equity markets and commodities helped to boost risk appetite. The rebound in the equity in commodity markets is attributed to report that the OECD has raised its 2010 global growth forecast and spillover from yesterday's report of a bigger than expected rise in US consumer confidence. Strong US housing market data adds to the equity market rebound. The OECD report helps to offset recent fears that the EU debt crisis and slowing growth in China increase the risk of a double dip recession. The OECD sees the risk of a double dip recession low. It's not clear how much mileage the markets will get out of the OECD report and today's CAD rebound was limited by BOC policy uncertainty and fresh selling pressure of the EUR sparked by rumors of funding problems at Spanish bank. 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 Tuesday 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. Canada reported today that weekly earnings rose at an annual rate of 2.9%. The rise in earnings is additional evidence of improving growth outlook in Canada
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 1.0854 the May 25th high.
AUD
AUD traded higher supported by firmer equity markets and in reaction to positive Australian economic data. As noted above global equity markets and commodities staged a rebound Wednesday in reaction to the OECD upgrade of its 2010 global growth forecast and in reaction to yesterday's report of a surprise jump in US consumer confidence. The rise in US consumer confidence generates hope that the US consumer is willing to spend looking beyond the recent sharp correction in equity markets and growing fears about the fallout from the EU debt crisis. Australia's Q1 construction work done rose by 1.9%. The March Westpac leading index rose by 0.9% with the annual growth rate rising at the fastest pace in 13 years. AUD traded higher Monday supported by report of strong Australian vehicle sales. AUD traded sharply lower Tuesday as equity markets tanked. Until the global equity and financial markets exhibit signs of stability the AUD remains vulnerable to speculation that the current market turmoil will encourage the RBA to delay plans for another rate hike. AUD is also vulnerable to speculation the debt crisis is a threat the global recovery.
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 mixed as the AUD rallies back above 8300. Expect AUD support at 8199 the May 26th low with resistance at 8373 the May 20th high.
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