- Lower, concern about US debt, possible loss of US AAA debt rating, threat of inflation
- Lower, BOJ upgrades Japan's outlook, says exports are bottoming, not considering intervention
- Higher, investors unwind safe haven dollar positions, weak demand for US bond auction
- Mixed, OECD does not see justification for cutting UK debt rating , Q1 GDP revised at -1.9%
- AUD & CAD higher, supported by inflation fears and uncertainty about the Feds exit strategy
Overview
USD trades at a new low for the year pressured by concern that the US may lose its AAA debt rating. A warning from S&P that the UK debt rating may be cut, comments from Pimoco's Gross and weak demand for the Treasury's bond auction sparked selling of the USD. The UK debt rating warning generates concern that the US may also have its debt rating reduced. The US has embarked on a similar deficit expansion as the UK. Gross said the USD is declining because of fear US will lose its AAA debt rating. Treasury Secretary Geithner says the US must get its financial house in order or risk having the government crowding out productive private investment. Geithner went on to say that the US will take action to reduce its deficit. If the US does not take action to reduce the budget deficit fear of the US debt downgrade will intensify and the USD may experience more significant selling pressure. A downgrade of the US debt rating would increase the cost of US funding of its deficit. The US may be forced to pay off the debt with cheaper USD. The USD was also pressured by a statement from Japan's finance minister that Japan is not considering intervention at this time. The JPY has joined the broad USD selloff. The fact that Japanese officials are not intervening to try to stop the JPY suggests that the JPY has more room to rise. JPY traded lower Friday confounding those of us noting the recent breakdown of JPY equity market correlation.
The USD traded lower ignoring this week's decline in US equity markets. This suggests that the USD is losing its safe haven appeal. The loss of USD safe haven appeal is partly attributed to the improvement in risk appetite over the last four months. As risk appetite improves, investors are returning to more risky assets and unwinding safe haven USD positions. In addition, investors may be shifting focus to negative USD fundamentals which include the risk of inflation and deteriorating US fiscal outlook. The expanding monetary base and Fed balance sheet increases the risk of inflation. The record US budget deficit may become harder to finance as investors fear reflation. This may in part explain the weak reception for yesterdays US bond auction. The Feds plan to exit quantitative ease will be significant factor in how the USD trades and whether the US can attract foreign interest to purchase US bonds. Next week's US bond auctions will be a key test for the USD. The USD is also pressured by threat to the USD reserve currency status as China looks for ways to reduce its exposure to US assets and calls for a discussion of replacing the USD is a global reserve currency. Although the replacement of the USD is as the global reserve currency is not imminent it remains on the mind of investors.
Today's US data:
No major US economic data was released in today's trade.
Upcoming USD data:
US markets will be closed for Memorial Day holiday on Monday. 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. On May 27th, April existing home sales will be released expected at 4.65 mln compared to 4.57 mln last month. On May 28th, initial jobless claims for 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 to lower consolidating recent gains. The BOJ elected to hold monetary policy steady and upgraded its outlook for Japan's economy. The BOJ still sees the Japanese economy as deteriorating but according to the BOJ Japan's exports are beginning to level out. The BOJ also announced that it will accept foreign bonds as collateral for loans. JPY was supported by diminishing threat of intervention. Japan's finance Minister Yasano said that Japan is not currently thinking about intervention. This is important because Japan may be signaling that the current level of the JPY is acceptable. A diminished threat of intervention may encourage additional buying of the JPY. For most of this week, the JPY has traded independently of the direction of equity markets and joined the broad dollar decline. This may be a sign that focus is shifting from risk aversion and safe haven flows to concern about the outlook for US funding of its debt and threat of inflation. JPY upside was limited by selling in cross trade as investors look to increase exposure to riskier assets as the global economy shows signs of stabilizing. The threat of possible downgrade of US debt rating discourages flows to the USD. This makes it difficult to determine if FX flows are being driven by improving risk sentiment or the return focus to negative USD fundamentals.
Next week's Japanese economic calendar includes the May 25th release of March all industry activity expected at -2.1% compared to -2% last month. On May 27th, April trade balance will be released expected at ¥-60 bln compared to ¥10 bln last month. 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% last month, 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 93.55 the March 19th low and 9250 the February 20th low with resistance at 9540 and 9620 the May 20th high.
EUR
EUR traded above 1.4000 supported by concern that the USD may lose its AAA debt rating. EUR was also supported by unwind of safe haven USD positions on concern about US debt and inflation outlook. Over 60% of global foreign reserves are held in the USD and if USD would lose its AAA debt rating it could cause substantial liquidation of USD reserves. Thursday, the US bond auction was not well received as investors worried that the Fed's quantitative ease has increased the risk of inflation. Record US budget deficit increases the risk that US debt rating may be downgraded. The Fed's Plosser said that there is a rising risk of inflation over the medium and long-term. Pimoco's Gross says that the USD is declining because the US may eventually lose its AAA debt rating. No major EU economic data was released today. Thursday the EU reported improvement in manufacturing PMI. The May manufacturing PMI rose to its highest level in seven months. The PMI report is another indication that the EU economy may be stabilizing and will reduce pressure on the ECB to expand quantitative ease. The divergence in Fed and ECB policy outlook adds to the dollar selloff versus the EUR. Today's EUR rise above 1.4000 may pave the way for a test of 1.4145 the December 31st high.
Next week's EU economic calendar includes the May 25th release of German May IFO and CPI. The IFO is expected to improve to 85 from 83.7 last month and the CPI is expected to fall to 0.3% from 0.7% in April. On May 26th, German Q1 GDP will be released expected at -1.9% along with German June GDP index expected unchanged at 2.5%. EU March industrial orders will be released on May 26th expected at -0.2% compared to -0.6% last month. 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. Also on May 29th, EU April HICP will be released expected at 0.2% compared to 0.6% last month.
The technical outlook for the EUR is positive as the EUR breaks above 1.4000. Expect EUR support at 1.3900 the May 20th low with resistance at 1.4145 the December 31st high. Note in the graph below the break above 61.8% Fibonacci resistance. If this break is sustained it could set the stage for an extension rally to 1.4800 and may signal potential for broad technical weakness for the USD versus the EUR.
GBP
GBP traded mixed supported by report that the OECD does not see justification for cutting UK debt rating and a comment from the BOE's Blanchflower that the UK has gone past the midpoint of recession. GDP gains were limited by selling in cross trade to the EUR. The EUR has been leading the latest bout of selling pressure versus the dollar. EUR gains versus the GBP may partly reflect concern about UK debt outlook and divergence in BOE and ECB monetary policy outlook. The BOE has embarked on much more aggressive quantitative ease and has reduced interest rates further than the ECB. UK Q1 GDP was unrevised at -1.9%. Thursday, the GBP was pressured by report that S&P cut UK outlook from stable to negative and warned that the UK debt rating may be cut 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 has been supported by optimism that the worst of the UK recession has passed and now is benefiting from additional support as focus turns to the risks of rising US debt and inflation threat.
UK markets are closed on Monday. Next week's UK economic calendar includes the May 25th release of a Nationwide House Prices expected at -13 compared to -15 last month. On May 28th, May CBI retail sales will be released expected at -8 compared 3 last month.
The technical outlook for GBP has improved but the GBP rally has stalled in front of psychological resistance at 1.6000. Expect near-term support at 1.5545 the 200 day moving average with resistance at 1.6040 the November 6th high.
CAD
CAD traded at its highest level since last October supported by rising commodity prices and broad dollar weakness. The rise in commodity prices partly reflects the weaker dollar and may reflect stabilization in the global economy. The broad dollar weakness is attributed to concern that the US may lose its AAA debt rating and unwind of the safe haven positions sparked by fear that the Fed's quantitative ease policy may increase the risk of inflation. The trade showed limited reaction to report that Canada's March retail sales rose 0.3% but was down 0.2% ex-autos. CAD was also supported by technical buying as USD/CAD trades below key technical support at 1.1465 the November 5th low. The main risk to the CAD is that the rally may have gone too far too fast with CAD up over 4% for the week versus the USD. Next week's Canadian economic calendar is light with the May 29th release of Q1 current account as the only major report scheduled.
The technical outlook for CAD is positive as USD/CAD breaks major support at 1.1465. Look for near-term support at 1.1105 the 200 day moving average with resistance at 1.1485 the May 21st high.
AUD
AUD traded higher supported by rising risk of inflation and demand for higher yields as the global economy appears to be stabilizing. AUD is a commodity-based currency and the recent recovery in risk appetite and signs that the worst of the global recession have passed sparked inflows to the AUD. In addition, economic data released Thursday from Australia indicates that the Australian economy may be stabilizing and deflationary pressures diminishing. Labor costs rose 0.9% in Q1 and auto sales were also stronger last month. There were no major Australian economic reports in today's trade. AUD was also supported by a 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 gained in cross trade to the JPY despite a statement from Japan's economics Minister Yasano that Japan is not considering intervention at this time.
AUD started the week at 7450 and traded above 7800 Friday. As noted above in discussion of the CAD, this week's AUD rally may be too much too fast and AUD is ripe for a technical correction. AUD price direction will hinge on equity markets, risk sentiment and speculation about the global recovery. In addition, AUD price direction will focus on concern about US fiscal outlook and the threat of inflation.
Next 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 has improved with this weeks rally above the October high of 7745. Look for AUD support at 7625 the May 19th low and 7580 with resistance at 7945 the October 2nd high.
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