- Higher, Asian central banks see no alternative to USD reserve status and bonds, equity markets correct
- Lower, Japan to drop worsening from its economic assessment
- Lower, Q1 GDP confirmed sharply lower, PPI falls, liquidation in front of Thursday's ECB meeting
- Lower, consumer confidence rises to highest level since last November, services PMI jumps
- AUD & CAD lower, Australia's Q1 GDP rises and Australia avoids recession
Overview
USD rebounds from 2009 low supported by profit-taking, weaker equity markets and report that Asian central banks will continue to buy US treasuries. Global equity markets rallied to a seven and a half month high but turned lower pressured by a wave of profit-taking. Investors are reluctant to push equity markets higher waiting for more signs that the global recession is ending. Reuters reports that Asian central banks will continue to buy US treasuries even if US debt rating is downgraded because there are no alternatives to the US bond market. Part of the recent decline in the US dollar has been attributed to concern about threats to the USD reserve currency status. The latest challenge to the USD reserve status comes from the Russian president who calls for alternatives to USD as the world reserve currency and he suggests the need for a new world global reserve currency. The Reuters report on Asian central bank demand for US treasuries helped to offset the Russian call for replacing the USD as the world's global reserve currency. Today's USD rebound is unlikely to be sustained unless upcoming economic data generates fresh concern about whether the global recession is ending. Pimco's Gross advises its clients to diversify out of USD before central banks and sovereign wealth funds do. Pimco expects the USD to weaken because of concern about surging US budget deficit.
So far most of the optimism about the end of the global recession has been fueled by data that shows that the rate of economic contraction has slowed. The trade will be watching upcoming data to see whether the global economy is about to expand and the rate of the expansion. Fed Chairman Bernanke says he expects the US economy to recover later this year and recent data suggest the pace of contraction is slowing. He expects consumer spending and household demand to improve. He went on to say that financial market conditions have improved but he expects sizable job losses and higher employment in the months ahead. The main risk to this outlook would be a relapse of financial market stress. Bernanke also said he wasn't sure what the impact of the stimulus bill would be on growth but it will impact the budget deficit. He sees GDP debt ratio rising from 40% to 70% by 2011.
Today's US data:
May ADP employment falls by 532 K, a reading of -525K was expected. April factory orders rise 0.7% a reading of -0.5% was expected. ADP reports that US employment is likely to decline for the next several months but at a slower pace. The ADP report suggests that the US recovery will likely be weak. May non-Manufacturing ISM rises to 44, a reading of 45.3 was expected. MBA mortgage approvals declined last week by 16.2% from a 14.2% decline in the prior week. These reports paint a mixed picture and suggest that US employment and housing market remains weak and that the manufacturing sector is showing modest improvement. The reaction to these reports was limited in FX trade with the USD consolidating opening gains.
Upcoming US data:
On June 4th, initial jobless claims for week ending in 5/30 will be released expected at 615 K compared to 623K last week. Final Q1 productivity also will be released on June 4th expected at 1% compared to 0.8% last month. On June 5th, May nonfarm payroll and the unemployment rate would be released. The nfp is expected to fall by 523K compared to -539K last month. The unemployment rate is expected to rise 9.2% from 8.9% last month. April consumer credit will also be released Friday expected at -5.85 bln compared to -11.1 bln last month.
JPY
JPY traded lower pressured by a broad USD rebound in reaction to weaker equity market trade and report that Asian central banks will continue to buy US treasuries. Reuters reports that Japan, India and South Korea see no alternatives to the USD as the main reserve currency. There was limited impact from a Nikkei report which says that the Japanese government will remove "worsening" from its June economic assessment. JPY crosses were mixed to firm. GBP/JPY traded lower despite a report that UK consumer confidence rose to its highest level since last November. AUD/JPY traded lower with AUD downside limited by report of better than expected Australian Q1 GDP. The Australian GDP report shows that the Australian economy has avoided recession. EUR/JPY drifted lower with the EUR pressured by confirmation of the sharp decline in EU Q1 GDP. EU Q1 GDP declined at its fastest pace in 13 years. JPY remains in a narrow 94.50 to 96.60 range.
Key technical levels to watch in USD/JPY include 94.45 the June 1st low with resistance at 96.63 the June 2nd high and 97.10 the 200 day moving average.
EUR
EUR traded lower pressured by confirmation that EU Q1 GDP was very weak, weaker equity market trade and report that Asian central banks will continue to buy US treasuries. A Reuters report that China, India and South Korea will continue to use the USD as their primary reserve currency sparked heavy liquidation selling of the EU Q1 GDP contraction was confirmed at -2.5%. The GDP report shows that inventory investment plunged in the EU during the first quarter of 2009. Tuesday the EU reported the biggest annual fall in producer prices on record in April. EU April producer prices declined 1%. The ECB meet Thursday and the weak Q1 GDP and employment data coupled with falling inflation may encourage the ECB to consider expansion of its asset purchase program. However, recent EU economic data including rises in manufacturing and services PMI and improving consumer confidence suggest that the EU economy may be stabilizing. The trade showed limited reaction to report that EU April services PMI rose to 44.8 from 43.8 last month.
The week's key event for the EUR is Thursday's ECB policy meeting. At the last ECB policy meeting the ECB lowered interest rates to historic low of 1% and announced a plan to buy 60 bln EUR in covered bonds. The main focus at the ECB meeting will be whether the ECB elects to expand its planned asset purchases and if the ECB has concluded that 1% will be the low level for ECB interest rates. Comments from ECB officials suggest that the ECB may be considering expanding asset purchases to corporate and private bonds. ECB officials have indicated that there is no definitive decision on whether 1% will be the low for ECB rate cuts. Today's report of a sharp decline in EU Q1 GDP and PPI may encourage the ECB to move up the timetable for expanding its asset purchases plan. If the ECB elects its asset purchase program it would be a modest negative for the EUR. According to a Bloomberg report, the ECB's Nowotny has written a letter that says that the ECB can expand its asset purchase program to buy commercial paper and corporate bonds. According to the report, the letter was considered to be in an academic context. It remains unclear if the ECB will vote to expand its asset purchases. Wire reports suggest that the ECB remains split over whether to expand asset purchases. One report says that the ECB had initially considered an asset purchase plan for 125 bln EUR but elected to announce a plan for 60 bln EUR at the May policy meeting. This leaves the door open for expansion of ECB asset purchases.
On June 4th, EU April retail sales would be released expected at -2% compared to -4.2% last month.
The technical outlook for the EUR turned mixed as EUR corrects from overbought RSI. Expect EUR support at 1.4102 the June 2nd low with resistance at 1.4339 the June 3rd high. Note in the graph below that the Fibonacci extension projection suggests the EUR could rally to 1.4731. EUR needs to hold above the May 29th low of 1.3935 level to maintain a positive upside technical bias.
GBP
GBP traded at a seven month high supported by report of improving UK consumer confidence and a rise in UK services PMI. UK May Nationwide consumer confidence index rises to 53 from 51 in April. This marked the highest level for UK consumer confidence since last November. The rise in UK consumer confidence follows Tuesday's report of rising UK consumer credit and mortgage applications. Monday the UK reported improvement in manufacturing PMI and stabilization in home prices. May services PMI jumped to 51.7 from 48.7 in April. These reports feed into recent speculation that the UK recession is nearing an end. GBP turned lower in the US session pressured by profit-taking sparked by weaker equity market trade and a Reuter's report that Asian central banks will continue to use the USD as the primary reserve currency. Equities markets were pressured by caution emerging about the outlook for the global economy and whether the recent surge in global equity markets and risk appetite can be sustained without concrete economic data confirming the global recession is nearing an end. GBP price direction has been closely tied to the direction of equities and risk sentiment. GBP was also pressured by rising political turmoil in the UK with a report that PM Brown may soon be forced out of office.
The BOE meet Thursday. The Bank of England is expected to hold interest rates unchanged at record low 0.5%. This would mark the third straight month that the Bank of England held monetary policy unchanged. At the last Bank of England policy meeting the Bank of England expanded quantitative ease by GBP50 bln to GBP 125 bln. Stabilization in the UK and global economy reduces the likelihood of any change in BOE policy at this week's meeting. Steady GBP policy decision will be a modest positive for the GBP.
On June 5th, May PPI will be released expected at -0.2% compared to -0.3% last month.
The technical outlook for GBP remains positive but the rally is overextended. A modest period of consolidation and downside technical correction is expected for GBP to work off overbought technical signals. Expect near-term support at 1.6200 with resistance at 1.6630 and 1.6725 the October 22nd high.
CAD
CAD traded lower reversing from eight month high. CAD was pressured by a wave of profit-taking which hit equity markets, weaker crude prices and diminished fear that Asian central banks will stop buying US treasuries. CAD has been a major beneficiary of the recent improvement in global equity markets and risk sentiment along with the rise in crude to a new high for 2009. As noted above, part of the USD decline to its lowest level since last November is related to possible challenges to the USD reserve status and concern that if the US debt rating was lowered than foreign central banks would boycott US bond auctions. Reuter's reports that Asian central banks plan to continue to buy US treasuries because there are no alternatives in terms of liquidity to the US bond market. No major Canadian economic data was released in today's trade. Focus turns to Thursday's BOC policy meeting.
The Bank of Canada meet on Thursday and is expected to hold monetary policy unchanged at 0.25%.The BOC is also expected to hold off on adopting quantitative ease. If the BOC surprises and elects to adopt quantitative ease it could spark a significant downside correction for the CAD.
On June 4th, April building permits will be released expected at 10% compared to 23.5% last month. On June 5th, May unemployment and employment growth will be released. The unemployment rate is expected to rise to 8.1% from 8% last month. Employment growth is expected at -5 K compared to 35.9 K last month.
The technical outlook for CAD is positive but the rally is overextended. Look for near-term support at 1.0796 the June 3rd low with resistance at 1.1120 the 200 day moving average.
AUD
AUD traded at an eight month high supported by report of a surprise rise in Australia's Q1 GDP. Australia's Q1 GDP rose 0.4%, a 0.2% rise was expected. The Q1 GDP report confirms that Australian economy avoided recession as the global economy weakened. Tuesday the RBA elected to hold interest rate policy steady at 3%. Today's Australian GDP report adds credibility to the steady RBA policy decision. RBA yields remain well above yields in North America, Japan and Europe. Yield differential should continue to support demand for AUD on breaks. Note that RBA Governor Stevens said the prospect for lower inflation over the medium term suggests that scope remains for further rate cuts. The fact that the RBA left the door open for future rate cuts may limit AUD upside. AUD turned lower in the US session pressured by weaker equity market trade and the broad USD gains sparked by the Reuters report that Asian central banks plan to continue to buy US treasuries and do not seek to replace the USD as the world's global reserve currency. AUD gains are also limited by light selling pressure in cross trade to the JPY. AUD selling in cross to JPY reflects a report that Japan is expected to remove worsening from its June economic assessment and by repatriation flows related to recent change in corporate tax laws in Japan. The trade looks for the next AUD target of 8400. Today's AUD sell off suggests that the straight-line rise in the AUD may be nearing an end.
April trade balance will be released on June 4th expected to widen to A$2.65 bln from $A2.50 bln last month
The technical outlook for the AUD is turning mixed as the rally stalls in front of the 8300 level. Look for AUD support at 8050 the June 2nd low with resistance at 8263 the June 3rd high.
|
