- Lower, CPI posts an unexpected decline, core rate unchanged, rumor of Fed intervention
- Higher, tracking risk sentiment, risk aversion rises as stocks slide, industrial production revised higher
- Higher, rumor of ECB/SNB/Fed intervention
- Higher, dovish BOE policy minutes, rumor the Fed intervened to buy the EUR
- AUD & CAD lower, Australia's consumer confidence drops, Canada's wholesale sales jump
Overview
EUR traded 1% lower in reaction to report that Germany announced a ban on short selling of stocks, bonds and CD's. The goal of the short selling ban is to discourage speculative assaults in the European financial markets. Financial markets were roiled by the news of the German short selling ban and equity markets and commodities tumbled. USD rallied to a fresh four-year high versus the EUR, a 14 month high versus the GBP and eight month high versus the AUD as the German ban on naked short selling sparks a spike in risk aversion. EUR/CHF traded at a record low falling below 1.40 with CHF supported by safe haven demand. JPY trades higher supported by safe haven demand and sharp gains in cross trade to Europe. Declining confidence in Europe and the EUR is the main driver of FX trade. EUR stabilized into the US open supported by a statement from the IMF that the EUR is nearing equilibrium as weaker EUR will boost EU exports. EUR turned sharply higher in the US session supported by rumors that the ECB may announce a Euro Zone wide ban on naked short selling and central banks may be preparing to intervene in the Forex markets. A Euro Zone wide ban on naked short selling would send a signal of greater unity among EU nations to address the EU debt crisis. There were also rumors that the Fed has joined the ECB intervening to support the EUR in Wednesday's trade. The SNB was reported intervening to support the EUR/CHF cross. ECB/Fed intervention would likely have limited short-term impact on the EUR as intervention would do little to help solve the EU debt crisis. US economic data was mixed with CPI reported slightly weaker than expected and the core inflation rate unchanged. This marked the first decline for US CPI in a year .The CPI report confirms that US inflation remains subdued. Rumors that Greece may be considering leaving the EU were denied by the Greek government.
Today's US data:
April CPI declined by 0.1%, a reading of 0.1% was expected. Core CPI rate was unchanged.
Upcoming US data:
On May 20th initial jobless claims for week ending 05/15 will be released expected at 440k compared to 444k last week. Leading indicators for April and May Philly Fed will be released on May 20th. Leading indicators are expected to rise by 0.2% compared to 1.4% last month. The Philly Fed survey is expected 22 compared to 20.2 last month.
JPY
JPY traded sharply higher supported by a spike in risk aversion as equity markets tumble in reaction to report that Germany has announced a ban on naked short selling of some bonds, debt instruments and financial stocks. The German ban on naked short selling was a unilateral move. The fact that Germany so far is acting alone to try to prevent speculative attacks on European financial markets raises new questions about European unity. JPY surged in cross trade versus European and commodity currencies supported by safe haven demand. AUD/JPY traded as much as 3% lower. JPY gains were limited as the EUR stages a sharp recovery sparked by rumors that that the German ban on naked short selling me be extended to all of the Euro Zone and in reaction to rumors of central bank intervention. Today's Japanese economic data confirms that Japan's economy continues to improve. Japan's March industrial production was revised up to 1.2% from preliminary report of a 0.3% rise. The revision of Japan's industrial production follows yesterday's release of sharp improvement in the Reuters Tankan manufacturing index and report that Japan's consumer confidence rose to a two-year high. Improvement in Japan's domestic economy and rising export sales point to stronger Japanese GDP. Japan's GDP for Q1 will be released Thursday and is expected at 1.3% with an annualized growth rate of 5.9%. JPY price direction remains closely linked to risk appetite and developments in regard to EU sovereign debt risk.
On the 20th Q1 GDP will be released expected at 1.3%m/m. 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 90.01 the May 7th low with resistance at 93.64 the May 13th high.
EUR
After trading at a fresh four-year low in overseas trade (1.2143) versus the USD pressured by report that Germany has announced a ban on naked short selling of a number of German bonds and financial stocks, the EUR staged a sharp short covering rally during the US session. The EUR rebound was attributed to report that the ECB is planning a special meeting and that the ECB may announce a Euro Zone wide ban on naked short selling. Part of the recent weakness in the EUR was attributed to concern that EU officials and nations are not unified in their efforts to combat you debt crisis. The initial response to the unilateral act by Germany to ban naked short selling sparked heavy selling of the EUR and equities. If the ECB announces a Euro Zone ban on naked short selling it could signal greater cohesion for European Monetary Union. This could help alleviate some of the short-term speculative pressures in the European financial markets. There are also rumors circulating that the ECB may be preparing to intervene in the Forex markets. After declining to a record low EUR/CHF posted a sharp rebound in the US session. The rebound in the EUR/CHF cross was likely in response to SNB intervention. SNB intervention contributes to today's rebound in the EUR. Additionally IMF officials state that the EUR is approaching equilibrium and weaker EUR will help boost the EU economy and export sales. German and EU officials are becoming more serious in trying to deal with the EU debt crisis. German Chancellor Merkel says that failure of the EUR would mean failure for Europe and she warned that the Euro is at risk. It is not clear whether German efforts to curb speculative attacks in the German financial markets will be successful. ECB's Stark said that the recent announcement of rescue package for the EU will help to buy time to address the debt crisis but won't solve the fundamental problems facing Southern Europe. EU construction output for March rose at its fastest pace in 14 years reported up 7.2%. Skepticism about the EU rescue package and the ban on naked short selling suggests that EUR remains vulnerable. EUR traded to the days high supported by rumors that the Fed joined the ECB intervening to support the EUR.
On May 20th German April CPI will be released expected at 0.8% compared to 0.7% last month. 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.
GBP
GBP traded at a 14 month low versus the USD in overseas trade pressured by spillover from weaker EUR and in reaction to report of dovish BOE policy minutes for the May meeting. The announcement of the German ban on naked short selling sparked a sharp selloff in European equities and a spike in risk aversion. GBP traded lower tracking the spike in risk aversion and weaker equities. 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. GBP traded higher in the US session supported by spillover from a sharp short covering rally in the EUR. The short covering rally in the EUR was attributed to growing threat of ECB intervention and rumors that the ECB may announce a Euro Zone wide ban on naked short selling. GBP traded to the days high supported by a rumor that the Fed was intervening buying the EUR.
On May 20th April retail sales will be released expected at 0.6% compared to 0.4% last month. On May 21st April money supply and public-sector borrowing 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 1.4239 the May 19th low with resistance at 1.4522 the May 18th high.
CAD
CAD traded lower pressured by weaker equities and a spike in risk aversion sparked by ongoing concerns about the EU debt crisis. CAD downside was limited by report of a sharp rise in Canadian wholesale sales. Canada's March wholesale prices rose by 1.4%, a 0.7% rise was expected. The rise in wholesale sales reflects demand for machinery, equipment and building materials. The sharp rise in Canada's wholesale sales should contribute to improved outlook for Canada's GDP and increase the risk that the BOC will hike interest rates in June. 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. The EU debt crisis is less likely to prevent the BOC from tightening policy. The BOC is expected to raise interest rates midyear. Yield and growth differential is moving in favor of the CAD as investors look for alternatives to the EUR and, Western economies are expected to grow faster than Europe. This week's main focus will be Friday's release of Canada's CPI and retail sales. A strong CPI rise will likely tip the scales in favor of a June BOC rate hike.
On May 20th April leading indicators will be released expected at 1.1% and 1% last month. 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 mixed as USD/CAD trades above 1.0400. Look for near-term support at 1.0386 the May 19th low with resistance at 1.0572 the May 7th high.
AUD
AUD traded at an eight month low versus the USD pressured by a spike in risk aversion sparked by weaker equity markets and declining commodity prices. Germany's announcement of a ban on naked short selling roiled the financial markets and discouraged demand for riskier assets like the AUD. AUD was also pressured by report that 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 today's report of weaker Australian consumer confidence contribute to speculation that the RBA will pause its tightening cycle. There was limited reaction to report that Australia's Q1 wage price index rose by 0.9%, a 0.85 rise was expected. Uncertainty about the strength of the global recovery sparked by fears of tightening in China and new austerity measures in Europe dampen demand for the AUD. Some analysts also suggest that today's sharp selloff in the AUD reflects concern about increased regulation as Europe tries to regulate its financial markets and the U.S. Congress is on the verge of passing financial reform. Increased regulation of financial markets discourages risk appetite. Additionally Australia announced early in the month a plan to raise taxes on resources by 40%. Some investors fear this could hurt the Australian recovery. AUD remains vulnerable to diminish RBA rate hike speculation.
On May 20th April new car sales will be released expected to rise by 2%.
The technical outlook for the AUD is negative as the AUD trades below 8500. Expect AUD support at 8393 the May 19th low with resistance at 8640.
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