- Higher, existing home sales and inventories rise, upside limited by concern about US debt
- Higher, report of possible Yuan revaluation offsets impact of escalating North Korean tensions
- Lower, pressured by ECB rhetoric, ECB officials cannot rule out further rate cuts, may expand QE
- Higher, mortgage approvals rise, gains in cross trade to the EUR ,CBI says UK contraction has slowed
- AUD & CAD mixed, touched 2009 highs tracking rising crude prices, profit taking limits gains
Overview
USD traded mixed with numerous cross currents impacting volatile USD price action. Safe haven demand sparked by escalating tensions with North Korea, speculation that the worst of the global recession has passed, positive housing data from the UK, negative ECB rhetoric, crude prices rising above $63 a barrel were some of the major cross currents impacting today's FX trade. JPY opened lower in reaction to North Korean threats against South Korea and report that North Korea has restarted its plutonium plant. JPY downside was limited by rumors of possible Yuan revaluation. Global equity markets continue to rally fueling improving risk appetite. Tuesday's release of much better than expected US consumer confidence, a narrowing of the US two-year, ten-year note spread to its best level in six years and report that business economists expect the US recession to end in the third quarter fuel risk appetite. GBP traded above 1.6000 for first time since last November supported by improving UK housing data and optimism about that the UK recession is nearing an end. EUR traded lower pressured by ECB rhetoric. ECB officials suggested that more rate cuts may be needed and that the outlook for the EU economy remains negative for 2009. CHF was pressured by an IMF report which forecasts significant contraction for the Swiss economy. CAD and AUD rally to new highs for 2009 supported by improving risk appetite and a rally in crude prices to new highs for 2009. CAD and AUD failed to hold their gains as the crude rally stalled and geopolitical tensions continued to escalate. The trade showed limited reaction to a Financial Times report warning that exploding debt in America could be a huge risk to the USD. The Financial Times report warns that the USD value could be cut in half. In addition, Mark Farber warns that US could see hyperinflation because the Fed is reluctant to raise interest rates. The USD remains vulnerable to diminishing safe haven attraction as the global economy stabilizes and focus shifts to rising US debt and threat of US inflation. If global equity markets continue to rally and crude prices continue to firm we would expect continued investor diversification out of USD. The trade will be monitoring the level of foreign demand in today's five-year and Thursdays seven-year US note auction.
Today's US data:
US April existing home sales rise 2.9% to 4.68 mln units compared to a 3.4% decline in February. A 1.4% rise was expected. The US has an inventory of a 10.2 months supply of existing homes. The USD extended its gains after the release of the existing home sales report. FHFA home prices fell 1.1% in March and 0.5% in Q1. This marks the largest fall in FHFA house prices since last November.
Upcoming USD data:
On May 28th, initial jobless claims for the week ending in 05/23 will be released expected at 625K compared to 631K last week. Also on May 28th, April durable goods will be released expected at -0.2% compared to -0.8% last month along with April new home sales expected at 360K compared to 356K last month. On May 29th Q1 GDP will be released expected at -5.6% compared to -6.1% last quarter. Chicago PMI and Michigan consumer sentiment will also be released on May 29th. Chicago PMI is expected to rise to 42 from 40.1 last month and the University of Michigan sentiment is expected at 67.9 compared to 65.1 last month.
JPY
JPY traded mixed with initial selling pressure attributed to escalating tensions with North Korea. JPY downside was limited by firmer global equity market trade and report of improvement in Japan's trade surplus. North Korean rhetoric has intensified with North Korea threatening to attack South Korea. There also reports that North Korea has restarted a plutonium plant. Because of Japan's close proximity to North Korea, JPY may be vulnerable if North Korea increases its nuclear threat against neighboring countries. Japan's April trade surplus widened to ¥69.0 bln as exports post a modest recovery. The recovery in Japanese exports generates hope that the worst for Japan's recession may have passed. JPY traded mixed in cross trade gaining on the EUR and AUD and weakening versus GBP. The minutes of the BOJ policy meeting for April 30th, state that the Bank of Japan is concerned that the US recession will be prolonged if bad loans aren't disposed of quickly. In addition, the BOJ said they may have to take more steps to support the corporate sector and are monitoring the impact of issuing bonds on long-term interest rates. The BOJ appears to be discussing a possible exit strategy from quantitative ease. JPY downside was limited by rumors that the Yuan may be revalued. JPY has remained quite resilient in the face of rising geopolitical tensions and improving risk appetite. This suggests that the JPY may be heading higher, supported by growing optimism that the worst has passed for the Japanese and global economy.
On May 28th, April retail sales will be released expected at 0.3% compared to -1.1% last month. On May 29th, April CPI will be released expected at -0.1% compared to 0.3% last month. April unemployment, industrial output, housing starts and construction orders will also be released on May 29th. April unemployment is expected to rise to 5% from 4.8%, industrial output is expected to rise to 2.1% from 1.6% last month, housing starts are expected to fall to 1.1% from 2.5% last month and construction orders are expected to improve to -34 from -37.8 last month.
Key technical levels to watch in USD/JPY include 94.50 the May 26th low with resistance at 9620 the May 20th high.
EUR
EUR traded lower pressured by ECB rhetoric, selling in cross trade to the GBP and lower German inflation. ECB's Canstancio says that EU economic indicators are negative and EU growth rate will be negative in 2009. ECB Liikanen says lower interest rates cannot be ruled out and 1% is not necessarily as low as ECB interest rates may go. German May inflation declined to -0.1%. EUR selling in cross trade to GBP is attributed to growing optimism that the UK recession is nearing an end. Today the UK reported improving housing data. Because the UK government and Bank of England have taken aggressive fiscal and monetary policy actions there is growing speculation that the UK economy may recover faster than the EU. EU officials have been reluctant to increase fiscal stimulus to boost growth and the ECB has implemented only modest quantitative easing. This week's EU economic data points to continued deterioration of the EU economy and the UK press is warning about rising EU debt risk. Final German Q1 GDP contracted by a record 3.8% and March industrial orders fall 0.8%. Exports dropped 9.7%. The GDP decline and industrial output report raise questions about recent signs of economic recovery in the EU. Weak German data and fresh concerns about German banks may increase pressure on the ECB to lower interest rates. The Daily Telegraph reports about the potential risk of an additional banking crisis in Germany and warns that German debt is set to blow like a grenade. EUR was also pressured by technical selling as the EUR fails to hold above 1.4000.
On May 28th, EU economic sentiment will be released expected at 69 compared to 67.2 last month. On May 29th, EU April money supply and unemployment will be released. The money supply is expected to rise by 6% compared to 5.6% last month and April unemployment is expected at 9% compared to 8.9% last month. In addition, EU April HICP will be released on May 29th expected at 0.2% compared to 0.6% last month.
The technical outlook for the EUR is turning mixed as EUR fails to hold above 1.4000. Expect EUR support at 1.3830 with resistance at 1.4023 the May 26th high and 1.4060 the January 2nd high .
GBP
GBP traded above 1.6000 for the first time since last November supported by optimism that the worst of the UK and global recession has passed. The UK reported improvement in mortgage approvals last month. The improvement in UK housing data fuels speculation that the UK recession is nearing its end. In addition the CBI reports that the rate of contraction in UK has slowed markedly. GBP price direction remains closely correlated to risk sentiment in the direction of global equity markets. Global equity markets continue to firm supported by rising crude prices and a number of economic reports which suggest the global economy stabilizing. Whether the GBP rally can be sustained will depend on whether the improvement in risk sentiment will eventually be supported by improvement in global economic fundamentals. As noted above, GBP was also supported in cross trade to the EUR. The EUR is pressured by concerns about deteriorating economic outlook in the EU, concern about rising EU bank debt exposure and by ECB rate cut speculation. Some analysts attribute today's GBP gains to an article in the Financial Times warning that exploding US debt threatens America. The USD ended last week near a five-month low pressured by improving risk sentiment and concern that the US may lose its AAA debt rating. S&P warned last week that the UK was at risk for downgrade. The Financial Times report suggests that the UK warning is a wake-up call for the US governments spiraling borrowings. GBP was also supported by technical buying with buy stops triggered above 1.6000. GBP has been firming since trading above the 200 day moving average of 1.5580 on May 20th.
On May 28th, May CBI retail sales will be released expected at -8 compared 3 last month. Main nationwide house prices are also due for release Thursday.
The technical outlook for GBP has improved as GBP trades above psychological resistance at 1.6000. Expect near-term support at 1.5915 the May 26th low with resistance at 1.6120.
CAD
CAD rallied to an eight-month high supported by rising crude prices and firmer global equity markets. Crude prices rose above $63 a barrel and global equity markets continue to gain on optimism that the worst global recession has passed. CAD gains were limited by long liquidation pressures and early setback in US equity markets. The trade ignored comments about rising Canadian budget deficit from Canada's Finance Minister Flaherty. Flaherty says Canada will have at least a $C50 bln 2009 budget deficit. Flaherty went on to say that Canada's budget deficit would be much worse than anticipated due to a drop in tax receipts and deeper than expected recession. Canada's PM Harper said that Canadian budget deficits are affordable and modest in comparison with other nations. No major Canadian economic data was released in today's trade. The main risk to the CAD is that the rally may have gone too far too fast. CAD direction will hinge on the direction of energy prices and speculation about the global economy.
This week's Canadian economic calendar is light with the May 29th release of Q1 current account the only major report scheduled.
The technical outlook for CAD is positive as USD/CAD trades below support at 1.1465. Look for near-term support at 1.0995 the October 8th low with resistance at 1.1355 the May 26th high.
AUD
AUD traded at a new high for 2009 supported by rising crude prices and mixed Australian economic data. AUD recovered from early losses which were sparked by escalating tensions with North Korea. Australia's Q1 construction work falls 3.7%, a 3% decline was expected. March Westpac leading index rose 0.7%, 0.3% decline was expected. AUD has been one of the best performing currencies supported by declining risk aversion and speculation that the worst of the global economy has passed. Last week RBA Governor Stevens predicted that the Australian economy rebound by year end. AUD price direction will hinge on equity markets, risk sentiment and speculation about the global recovery. AUD gains were limited by weaker US equity market trade and selling in cross trade to the JPY. AUD/JPY selling pressure was attributed to speculation that the Yuan may soon be revalued. RBA meet next Tuesday and are expected to hold rates steady at 3%. Steady RBA rate decision could lend additional support to the AUD. The trade looks for a near-term target of 8000 for the AUD.
This week's Australian economic calendar includes the May 28th release of Q1 CAPEX expected at 13 compared to 17.8 last month. On May 29th, April private sector credit will be released expected at 0.3% compared to 0.1% last month.
The technical outlook for the AUD remains positive with today's rally above 7800. Look for AUD support at 7705 the May 26th low with resistance at 7940.
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