- Lower, equity markets rise and risk appetite improves as BOA raises $13 Billion in new capital
- Higher, GDP and CAPEX spending falls at a record pace, inverse JPY/equity market correlation breaks
- Higher, German producer prices fall the most in 22 years, follows equities higher
- Higher, trades at new high for 2009, Chancellor Darling says UK recession will end by Christmas
- AUD & CAD higher, tracking equities and the price of crude, Canada's core CPI rises
Overview
USD traded at a four and a half month low pressured by improving risk sentiment and optimism that the worst of the financial crisis has passed. Rising energy prices, rising equity markets, narrowing credit spreads, declining LIBOR rates and the drop in the VIX index below 30 fuels the current rise in risk appetite. JPY traded higher despite report that Japan's Q1 GDP and CAPEX declined at a record pace. The inverse JPY/equity market correlation was broken in today's trade with the JPY rallying along with equities. The breakdown of this correlation may be a sign that the USD is on the verge of a broader-based decline. The trade appears to be anticipating reflation and a global recovery. EUR traded higher ignoring report a sharp fall in German April producer prices. GBP was supported by the release of Bank of England minutes which showed that the MPC voted unanimously to hold monetary policy steady in May and by comments from the UK Chancellor Darling that the UK recession will be over by Christmas. CHF traded higher supported by report that the Swiss May ZEW Index rose to its highest level in two years. Commodities currencies traded higher despite report of weaker Australian consumer confidence and a drop in Canada's inflation rate to a 14 year low. Gains in global equity markets and rising crude prices fuel optimism that the global recession is ending. This optimism continues despite reports of record low in US housing starts and record drop in Japan's Q1 GDP. USD extended its decline as US equity markets rally on news that bank of America raised $13 Billion in new capital and US mortgage applications rose 2.3% last week. The BOA news fuels hope that the banking crisis is ending. The mortgage applications rise helps offset Tuesday's report of record low US housing starts. USD decline reflects unwind of safe haven positions and improving investor confidence. Whether the USD decline continues will depend on investor confidence.
Today's US data:
US mortgage applications rose 2.3% last week.
Upcoming USD data:
On May 21st, jobless claims will be released for week ending in 05/16 expected at 610K compared to 637K last week. Leading economic indicators for April and May Philly Fed survey will also be released on May 21st. The April LEI is expected at 0.2% compared to -0.3% last month. Philly Fed survey is expected at -19 compared to -24.4 in April.
JPY
JPY traded higher shrugging off report that Japan's Q1 GDP falls 4% and CAPEX spending falls 10.4%. The decline in Japan's Q1 GDP and CAPEX spending was the biggest on record. Exports declined 26% in the first quarter. Japan's PM Aso says the GDP decline reflects severe economic conditions in Japan. However, Japan's Finance Minister Yasano indicated that there are some signs of improvement with exports and output bottoming globally. JPY was supported by gains in cross trade to Europe and Australia. EUR/JPY drifted lower with EUR pressured by report of a sharp drop in German producer prices. GBP/JPY weakened despite comments from the UK Chancellor that the UK recession will be over by Christmas. AUD/JPY was pressured by report of a drop in Australia's consumer confidence. Today's JPY price action is hard to explain. It appears that JPY has decoupled from the direction of equities and negative economic fundamentals.
On May 21st. April trade balance is due for release expected at ¥-110 bln compared to ¥-234 bln last month. Also on May 21st. March tertiary activity is due for release expected unchanged at -0.8% along with his March leading index expected at 2.4%.
Key technical levels to watch in USD/JPY include 94.55 the May 18th low and 94.15 the March 20th low with resistance at 96.70 the May 19th high and 9740.
EUR
EUR traded above 1.3700 supported by improving risk appetite as global credit market spreads narrow and the VIX volatility index falls below 30 for the first time since last September. The narrowing of credit spreads and the decline in volatility encourages risk sentiment and speculation that the worst of the financial crisis has passed. EUR rallied despite report that German April producer prices declined 2.7%. This marked the biggest decline in German producer prices in 22 years. ECB officials continue to state that they are not concerned about deflation risk. The main risk to the EUR rally is a possible shift in risk sentiment, should upcoming US economic data disappoint and the global equity market rally stalls. The EUR may weaken pressured by concern about the EU economy. Tuesday, Germany reported better than expected business sentiment but the current conditions index declined. Today's data suggest it's too early to conclude that the economic crisis in the EU has ended. Despite weak EU economic data the trade is beginning to look for the possibility of the test of 1.4000. The EUR rally accelerated on break of key technical resistance at 1.3735 the March 19th high. Today's break of 1.3735 could spark a rally to 1.4000. Focus turns to Thursday's release of EU manufacturing and services PMI.
On May 21st, EU May manufacturing and services PMI will be released. The manufacturing PMI is expected at 38 compared to 36.8 last month and the services PMI is expected at 44.5 compared to 43 last month.
The technical outlook for the EUR is improving as the EUR breaks back above 1.3735. Expect EUR support at 1.3584 the May 20th low with resistance at 1.3852.
GBP
GBP traded at a new high for 2009 supported by BOE policy minutes and comments from UK Chancellor Darling. The BOE minutes for the May meeting show that the BOE voted unanimously to keep rates on hold at 0.5% and to extend quantitative ease. The minutes also indicate that because of weakness in the UK economy expansion of quantitative ease was warranted. The BOE sees a high probability that inflation will under shoot the 2% target but the Bank of England is also on alert for possible resurgence of inflation. UK Chancellor Darling said that he expects the UK recession to end by Christmas. Optimism about the UK recession ending supports the GBP. The IMF says that aggressive actions by the Bank of England and UK government have contained the crisis and there are some tentative signs of confidence improving in the UK. The IMF warned that UK economy is continuing to contract and the recovery will be slow with potential shocks because of increased UK government borrowing and fragile financial sector. GBP gains were limited by report of weaker than expected CBI manufacturing trends. The May CBI manufacturing trends showed that exports declined to -46 from -34 in April. GBP direction will continue to focus on the direction of equity markets and risk sentiment. GBP traded above the 200 day moving average at 1.5570. This may encourage technical buying of the GBP.
On May 21st, April public-sector borrowing will be released, along with April retail sales. The public-sector borrowing is expected at 20 bln compared to 19.087 bln last month. April retail sales are expected at 0.1% compared to 0.3% last month. On May 22nd, GDP will be released expected at - 2% compared to -1.9% last quarter.
The technical outlook for GBP has improved as GBP trades above the 200 day moving average at 1.5570. Expect near-term support at 1.5450 the May 20th low with resistance at 1.5725 the December 17th high.
CAD
CAD traded at its highest level since last October supported by rising equity markets, higher crude prices and speculation that today's report of slight increase in Canada's core CPI will reduce the need for the Bank of Canada to adopt quantitative ease. US equity markets firmed supported by report that US mortgage applications rose last week and that the Bank of America raised $13 Billion in new equity. Crude prices topped $61 a barrel. Crude prices are supported by improving investor sentiment, rising equities and weaker USD. April CPI declined 0.1% and the core rate rose 0.1%. The headline inflation rate was below expectations and the core rate was slightly above expectations. Canada's inflation rate is at its lowest level in fourteen years. Bank of Canada officials have indicated that there is less need to consider quantitative ease. The higher core CPI rise will dampen speculation that the BOC will need to adopt quantitative ease. The BOC's decision to hold off on quantitative ease partly reflects expectation that the Canadian economy will recover more quickly as the global economy recovers and the BOC does not see imminent risk of deflation. Canada's April leading indicators fall 1.1%. The trade was looking for a 1% decline. CAD was also supported by technical buying as USD/CAD breaks key technical support at 1.1465 the November 5th low.
On May 21st, March wholesale sales will be released along with March net foreign investment. Wholesale sales are expected at-0.2% compared to -0.6% last month. Net foreign investment is expected at 5.33 bln compared to 6.11 bln last month. On May 22nd, March retail sales will be released expected at 0.4% compared to 0.2% in February.
The technical outlook for CAD is positive as USD/CAD breaks major support at 1.1465. Look for near-term support at 1.1305 the October 14th low with resistance at 1.1620.
AUD
AUD traded at a new high for 2009 breaking above 7800 supported by improving risk sentiment and hawkish comments from the RBA's McCrann. A surge in US equities material prices sparked demand for AUD. McCrann said that he expects no near-term rate cut by the RBA and that the next RBA move could be to raise rates depending on inflation. Tuesday, RBA Governor Stevens said that the Australian economy would benefit from the global recovery. Australia's economic data was mixed with May Westpac consumer confidence falling 4.3%, April merchandise imports rising $A16.2 Billion and Q1 wage price index up 0.8%. These reports don't seem to justify today's AUD rally. AUD started the week at 7450 and is trading above 7800 today. Some may begin to wonder if the AUD rally was too far too quickly. Last night a major investment house recommended reducing exposure to high-risk assets but the AUD continues to rally. There's an interesting article in the Financial Times which argues that crude prices should be closer to $40 a barrel that $60 barrel based on fundamentals. The debate continues whether the recent green shoots of global economic growth warrant the current rally in equity markets and optimism about the global economy. AUD price direction will hinge on equity markets, risk sentiment and speculation about the global recovery.
This week's Australian economic calendar includes the May 20th release of Q1 labor prices expected at 0.8% compared to 1.2% last quarter. On May 21st, April new car sales will be released expected at 2% compared to -3.2% last month.
The technical outlook for the AUD has improved with today's rally above the October high of 7745. Look for AUD support at 7687 the May 20th low with resistance at 7820 the October 3rd high and 7945 October 2nd high.
|
