- Lower, retail sales beat expectations, inflation remains subdued, inventories rise
- Higher, improving risk sentiment, BOJ to maintain easy policy as the economy improves
- Higher, industrial output rises, Moody's warns of a possible downgrade of Greek debt
- Higher, campaign promises to reduce the UK budget deficit
- AUD & CAD higher, equity and commodity markets rally, revaluation of the SGD
Overview
The USD traded lower Wednesday pressured by improving risk appetite and in reaction to report that Singapore has revalued the SGD. Improvement in risk appetite is attributed to firmer equity market trade sparked by report of better than expected earnings at Intel and J.P. Morgan Chase and strong US retail sales data. The revaluation of the SGD confirms improving economic outlook in Asia and that the impact of the global financial crisis has passed. EUR underperformed with gains limited by a statement from Moody's that there is greater than 50% chance of a Greek rating cut in the next 12 to 18 months. GBP traded higher supported campaign promises to reduce the UK deficit. Commodity currencies traded higher supported by firmer equity markets and in reaction to spillover from revaluation of the SGD. USD traded lower despite speculation that the Fed may be moving closer to changing its policy guidance and dropping the "extended period" language from its policy statement. The Medley group suggests that the Fed may soon change its policy guidance and the Fed's discount minutes suggest that some members seek 25bps hike in the discount rate. In his prepared statement before the Congressional Economic Committee Fed chairman Bernanke made no reference to the "extended period" language. The USD traded to the days lows after Bernanke's testimony as he gave no indication the Fed is planning a change in it "extended period" language. Bernanke said that US growth is still restrained. US economic data was mixed with retail sales rising much more than expected and core CPI flat. Business inventories rose to the highest level since July as business' restock to meet improving demand. Today's US economic data is a mixed bag for Fed policy outlook. The strengthening of the retail sales and inventory demand may encourage Fed rate hike speculation but with inflationary pressures subdued the Fed can maintain low yields for long time. Focus turns to Thursday's release of US jobless claims and manufacturing and industrial activity.
Today's US data:
March CPI came in as expected at 0.1% .The core inflation rate was unchanged at 0.0%. March retail sales rose by 1.6%, a rise of 1.2% was expected. Ex. autos retail sales rose by 0.6%. Business inventories for February came in at 0.5%, a rise of 0.3% was expected.
Upcoming US data:
On April 15th April Empire Manufacturing Index will be released expected at 23.75 compared to 22.78 last month along with initial jobless claims for the week ending 04/10 expected and 451k compared to 460k last week. March industrial production, capacity utilization and the April Philly Fed will also be released on April 15th. Industrial production is expected to rise by 0.4% compared to 0.1% last month. Capacity utilization is expected at 73.1 compared to 72.7 last month and the Philly Fed is expected at 19 compared 18 in March. On April 16th March housing starts, building permits, and April University of Michigan consumer sentiment will be released. March housing starts are expected at 590k compared to 575k last month with building permits expected at 620k compared to 612k last month. Michigan consumer sentiment is expected at 74 compared to 73.6 last month.
JPY
JPY initially traded lower pressured by improving risk appetite as equity markets rally and by dovish comments from BOJ Governor Shirakawa. JPY turned higher for the day as Bernanke made no reference to "extended period" language in hiss testimony before Congress today Equity markets rallied in reaction strong earnings reports at a number of major US companies including Intel and J.P. Morgan Chase and better than expected US retail sales. Shirakawa says that the BOJ will maintain easy policy as the economy improves. Shirakawa says that the Japanese economy is improving due to the recovery in global trade. There are reports that the BOJ may revise up its CPI forecast for 2011/ 2012 in April 30th BOJ economic outlook release. Today's report of better than expected US earnings and retail sales fuels speculation that the Fed may soon change its policy guidance. A change in the Fed's policy guidance could set the stage for an earlier Fed rate hike. With the BOJ committed to maintaining easy monetary policy yield differential is moving in favor of the USD. Bloomberg carried a report which says that analysts at SBI Liquidity Market see the possibility the USD may rise to 105 JPY as the Fed increases interest rates. JPY downside was limited by report that Singapore revalued the SGD. The SGD revaluation may encourage speculation that China may soon revalue the Yuan. In theory revaluation of Asian currencies will make Japanese exports more competitive and may increase demand for the JPY.
On April 15th revised February industrial output will be released expected to fall by 0.9% compared to a 2.7% rise in the original report.
Key technical levels to watch in USD/JPY include support at 92.57 the April 13th low with resistance at 94.27 the April 7th high.
EUR
EUR traded higher but underperformed despite report of improving EU industrial output and risk appetite. EU February industrial output rose by 0.9%, a 0.1% rise was expected. EUR gains were limited by ongoing concern about sovereign debt risks in southern Europe. Moody's says there is a greater than 50% chance of a Greek sovereign debt rating cut in the next 12 to 18 months. Focus is shifting to fiscal risks in Portugal. EU officials said that there is a risk that Portugal's deficit could reach 90% of GDP by 2013 and that Portugal must take additional actions to bring its deficit back in line with the EU stability pact. In addition, German press reports that a number of German professors plan to protest against the Greek rescue package in the constitutional court. Despite today's report of stronger EU industrial output the ECB is expected to maintain accommodative policy to offset the risk to the EU recovery from reduced deficit spending in peripheral European nations. Yield differential is moving in favor of the USD as the ECB is seen on hold for the remainder of 2010 and the Fed may be considering dropping its extended period language and shifting its policy giant guidance in preparation for an earlier rate hike. In his testimony before Congress Bernanke made no reference to a change in the Fed policy statement and the EUR rallied to the days high.
On April 14th EU industrial production will be released expected flat compared to a 1.7% rise last month. On April 16th EU March CPI will be released expected at 0.9% compared to 0.3% last month along with the February trade balance expected at -1bln compared to -8.9bln in January.
The technical outlook for the EUR is mixed as EUR holds above 1.3600. Expect EUR support at 1.3545 the April 13th low with resistance at 1.3692 the April 12th high.
GBP
GBP traded higher supported by improving risk appetite and campaign promises to reduce the UK deficit. Stronger earnings at Intel and J.P. Morgan, strong US retail sales and firmer equity markets helped to boost risk appetite. Bloomberg reports that promises by UK labor leader Brown and the conservative challenger Cameron to take action to reduce the record UK budget deficit may help to limit selling pressure of the GBP. The Bloomberg report however notes that neither party has detailed how they plan to tackle the UK budget deficit. The latest UK election polls suggest that the election will result in a hung parliament with neither party winning a majority. The UK election will be held on May 6th and the UK sovereign debt rating is at risk for a downgrade if the election results in a hung parliament and a hung parliament fail to take action to reduce the UK budget deficit. The head of the conservative party Cameron made reference to the speculative attacks against the Greek markets because of Greek fiscal troubles and he stated that his party will start earlier and go faster and further than the Labor Party to make needed budget cuts. In addition some analysts indicate that even if the election ends in hung parliament it may not necessarily derail budget cuts as coalition of parties could work together to reduce UK spending. UK election uncertainty contributes to uncertainty about the outlook for BOE policy. If the UK election results in more aggressive action to reduce spending the BOE may increase accommodation to offset the economic drag of reduced government spending. Recent UK economic data suggest that the UK economy is improving and inflation rising. Tuesday the UK reported a 9.5% jump in exports and 0.9% rise in house prices. Earlier in the week the UK reported a sharp jump in input prices. The improvement in the UK economic outlook and rising inflation may encourage the BOE to end its asset purchases and move towards normalization of monetary policy.
The technical outlook for GBP is positive as GBP holds above 1.5400. Expect near-term support at 1.5335 the April 13th low with resistance at 1.5575 the February 23rd high.
CAD
CAD traded higher supported by improving risk appetite, firmer equity markets and spillover from the revaluation of the SGD. The improvement in risk appetite is attributed to better US earnings reports and strong US retail sales data. Firmer equity market trade is fueled by optimism about the global recovery and encourages demand for growth led currencies like the CAD. The revaluation of the Singapore dollar reflects an upgrade of growth estimates in Singapore. The upgrade of growth estimates in Singapore point to stronger Asian growth. Stronger Asian growth is positive for commodity demand and Canadian exports. CAD was also supported by gains in cross trade to the EUR with EUR pressured by concern about a possible downgrade of the Greek debt rating and fear that strikes in Greece may derail the Greek government's effort to reduce its deficit. There were no major Canadian economic reports released in today's trade. Tuesday Canada reported a surge in its trade surplus as imports and export sales rise. The trade balance report confirms improving outlook for the Canadian economy. Monday Canada reported improvement in housing starts. The improvement in Canada's trade surplus and housing data may increase speculation that the BOC may move the time table forward for tightening of monetary policy. Last month BOC Governor Carney said that he was open to consideration of a rate hike as early as June 1st. The BOC pledged to maintain record low yields until June as long as inflation remains in check.
On April 16th February manufacturing shipments will be released expected at 1.6% compared to 2.4% last month.
The technical outlook for CAD is mixed as USD/CAD holds above1.0000. Look for near-term support at 0.9870 the May 30th low with resistance at 1.0105 the April 8th high.
AUD
AUD traded higher supported by SGD revaluation and improving risk appetite as equity markets firm. The revaluation of the SGD reflects stronger growth outlook in Singapore and the revaluation points to stronger Asian growth. Australia is a major exporter to Asia and improved outlook for Asian growth is a positive for the Australian economy. Stronger than expected US retail sales and better than expected earnings at Intel and J.P. Morgan contributed to improving risk appetite fueling demand for growth led currencies like the AUD. AUD was also supported by a surge in metals prices. There was little reaction to report that Australia's April Westpac consumer confidence index declined by 1% to 116.1 or speculation that the Fed may soon change its policy guidance. Tuesday Australia reported that its business conditions index rose to the highest level since January 2008. Despite the improvement in Australia's business conditions index recent Australian economic data as been mixed. Monday Australia reported that housing finance came in weaker than expected. AUD is trading a 19 month high versus the USD despite uncertainty about RBA policy outlook. The RBA's Debelle said interest rates are close to normal levels. Debelle's comments may dampen RBA rate hike speculation. Recent AUD strength has been partly a reflection of RBA rate hikes and RBA rate hike speculation. Last week the RBA raised interest rates 25bps to 4.25% and left the door open for future rate hikes. Debelle's comments and mixed Australian economic data suggest that the RBA may elect to pause in its rate hike cycle. RBA policy uncertainty has been offset by optimism about the global recovery and improving risk sentiment.
The technical outlook for the AUD is positive as the AUD rallies above 9300. Expect AUD support at 9273 the April 14h low with resistance at 9389 the April 12th high.
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