- Higher, equities retreat on downgrade of UK outlook and IMF warning on banks, LEI & Philly Fed rise
- Mixed, BOJ may upgrade Japan's outlook, inverse JPY/equity correlation breaks down
- Lower, pressured by weaker equity market trade, downside limited by improving EU manufacturing PMI
- Lower, S&P downgrades UK outlook to negative from stable, warns UK may lose top debt rating
- AUD & CAD lower, Australia's labor costs & auto sales rise, investment flows to Canada rise
Overview
USD rebounded from a four and a half month low supported by a spike in risk aversion as global equity markets slide in reaction to fresh bank worries and S&P downgrade of the UK outlook. The USD traded at its lowest level in over four months in late trade Wednesday pressured by improving risk sentiment and the FOMC minutes for the April policy meeting. The recent improvement in risk sentiment has been generated by rising global equity markets, tentative signs of stabilization in the global economy, narrowing of credit spreads and the drop in volatility. The FOMC minutes downgraded US economic outlook and opened the door for expanding the purchase of long bonds. Today's reversal of risk appetite is attributed to an IMF statement that more banks may have to be nationalized and S&P downgrade of UK outlook to negative from stable. S&P warns that the UK may lose its top debt rating because of deteriorating UK budget outlook. There are a number of analysts beginning to question whether the recent improvement in risk sentiment is sustainable. Today's news reminds investors that the global economy may not be quite out of the woods just yet. FOMC officials suggest that full US recovery may take as much as five years. USD direction will remain closely correlated to investor risk sentiment. Just an observation about today's trade: equity markets were weak and there are renewed concerns about the global economy and banks but the USD gains were limited. Today's limited gains for the USD may be an indication that focus is shifting to Fed policy outlook and the implications of the Feds consideration of expanding it bond purchase plan. The USD traded sharply lower after the Fed announced back in March of the initial plan to buy 300 Billion long bonds. The fact that the Fed may increase its purchases of long bonds may limit safe haven demand for USD.
Today's US data:
Initial jobless claims for week ending in 05/16 fell 12K to 631K, a reading of 610K was expected. Continuing claims rise to another record high. The jobless claims report suggests that US labor market is stabilizing; however, jobs are hard to find. April LEI rises 1%, a reading of 0.2% was expected. May Philly Fed rises to -22.6 from -24.4 in April, a reading of -19 was expected.
Upcoming USD data:
On May 26th, February Case Shiller House Price Index will be released, along with May Consumer confidence. Case Shiller HPI is expected at -18.5 compared to -18.6 last month. Consumer confidence is expected at 42 compared to 39.2 last month.
JPY
JPY traded lower pressured by mixed economic data and a continued break with the close correlation to the direction of equity markets. Japan's March tertiary index falls 4%. Despite the drop in Japans tertiary index, Nikkei reports that the Japanese government plans to upgrade Japan's economic outlook. The BOJ meet tomorrow and if the Japanese economy is upgraded it will reduce the likelihood that the BOJ will increase asset purchases. This contrasts with Wednesday's release of the FOMC minutes which indicated that the Fed may consider increasing its purchase of assets. If this divergence emerges in BOJ and Fed policy, JPY may experience extended gains. The Nikkei closed 81 points lower. For the past few trading sessions the JPY has not been tracking the direction of equities. In the past weak, equity market trade encouraged safe haven flows to the JPY. JPY direction appears to be joining the broader price moves for the USD. JPY crosses were mixed with the JPY losing ground to the EUR and gaining versus the GDP and AUD. JPY gains in cross to the GBP are attributed to the S&P downgrade UK outlook. JPY gains versus the AUD are attributed to today's spike in risk aversion. It's difficult to predict JPY direction because of this week's decoupling from the direction of equities and investors reluctance to focus on Japanese economic fundamentals.
Key technical levels to watch in USD/JPY include 94.15 the May 20th low and 93.55 the March 19th low with resistance at 96.70 the May 19th high and 9740.
EUR
EUR traded lower despite report of improving EU manufacturing PMI. EUR was pressured by spillover from weaker GBP trade and a decline in global equity markets. EU May manufacturing PMI rises to a seven-month high to 40.5 compared to 36.8 last month. The PMI report is another indication that the EU economy may be stabilizing. Tuesday, Germany reported that investor confidence rose to a three-year high. As noted above, GBP was pressured by S&P downgrade and concern about UK banks. The trade showed little reaction to report that the ECB discussed the possibility of a larger asset purchase plan of €125 EUR. At the May ECB policy meeting, the ECB announced a plan to buy €60 Billion of corporate bonds. The main risk to the EUR rally is a possible shift in risk sentiment should the global equity market rally stall. The trade is beginning to look for the possibility of the test of 1.4000 level as the EUR holds this week's breakout above 1.3735.
The technical outlook for the EUR is improving as the EUR breaks back above 1.3735. Expect EUR support at 1.3630 with resistance at 1.3852.
GBP
GBP traded sharply lower pressured by S&P downgrade of UK outlook to negative from stable and an IMF report which suggests that more banks may have to be nationalized. S&P also warned that the UK may lose its top debt rating because of deteriorating UK fiscal outlook. The UK will sell GBP 220 bln of bonds through 2010 to try and boost UK economy. UK budget deficit will reach 12.4% of GDP in 2009. According to S&P, the odds are one in three that the UK will lose its top debt rating. GBP downside was partly limited by report that Moody's does not plan to change its outlook for the UK and by a strong bid to cover in today's UK five-year gilt auction. GBP was also supported by a report that UK treasury said that it has plans to deal with the budget deficit. UK economic data was mixed. UK Q1 business sentiment falls 5.5%, April public sector borrowing reported at 5.1251 bln, April M4 money supply rises 0.1%, and April retail sales rise 0.9%. GBP direction will continue to focus on the direction of equity markets and risk sentiment. Focus turns to Friday's release of UK GDP. GBP has been supported by optimism about improving UK economic outlook and rising risk appetite.
On May 22nd, GDP will be released expected at - 2% compared to -1.9% last quarter.
The technical outlook for GBP has improved but today's sharp drop brings GBP back to a 200 day moving average support around 1.5530. GBP traded at six-month a high Wednesday. To sustain the rally GBP needs to hold above 1.5450. Expect near-term support at 1.5450 the May 20th low with resistance at 1.5820 the May 21st high.
CAD
CAD weakened from a seven-month high pressured by declining equity markets and weaker crude prices. CAD downside was limited by report of better than expected net foreign investment flows for March and a modest drop in Canada's wholesale sales. Canada's net foreign investment flows rose to 6.89 Billion in March compared to 6.0 6 Billion in February. Canada's wholesale sales fall 0.6% in March; the trade was looking for 0.4%;decline. CAD traded at its highest level, since last October, on Wednesday supported by rising equity markets, higher crude prices and speculation report of a slight increase in Canada's core CPI which will reduce the need for the Bank of Canada to adopt quantitative ease. CAD rallied despite the fact that Canada's inflation rate was at its lowest level in 14 years. The low level of Canada's inflation may force the BOC to revisit the issue of quantitative ease at the next policy meeting in June. CAD was supported by technical buying as USD/CAD breaks key technical support at 1.1465 the November 5th low. CAD traded back to this support level Thursday and 1.1465 level may become a near term pivot point for USD/CAD price direction. Focus turns to Friday's release of Canada's retail sales. Canada's domestic data is not as important to CAD trade as the issue of whether the global economy is stabilizing. If investors begin to question whether the goal recovery is on shaky ground, the CAD rally may soon stall.
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 1.1660 the May 19th high.
AUD
AUD traded lower weakening from fresh highs for 2009 made Wednesday. AUD decline is attributed to weaker equity market trade and a drop in risk appetite as markets react to the S&P downgrade of UK outlook and IMF warns about that more banks may have to be nationalized. AUD downside was limited by mixed Australian economic data. Australia's February AWOTE rises 1.2% and April vehicle sales rise 0.9%. These reports may encourage speculation that deflationary pressures in Australia are subsiding and the domestic economy is stabilizing. AUD downside is also limited by Financial Times report which says that Australia and China may establish a bilateral agreement which could significantly boost Australia's GDP in the years to come.
AUD started the week at 7450 and traded above 7800 on Thursday. Some may begin to wonder if the AUD rally has moved too far too quickly. 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. Today's downgrade of UK outlook and weaker equity market trade brings a dose reality to the financial markets. AUD price direction will hinge on equity markets, risk sentiment and speculation about the global recovery.
The technical outlook for the AUD has improved with this weeks rally above the October high of 7745. Look for AUD support at 7669 the May 21st low and 7580 with resistance at 7820 the October 3rd high and 7945 the October 2nd high.
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