- Lower, optimism about global recovery reduces demand, manufacturing and construction data improve
- Lower, pressured in cross trade, improving risk sentiment and rising US bond yields
- Higher, EU PMI rises to seven month high, gains limited by profit-taking
- Lower, pressured by threat of intervention and concern about the Swiss economy
- Higher, house prices stabilize, PMI rises, gains in cross trade to EUR and JPY
- AUD & CAD higher, crude rises to $68 a barrel, Canada's GDP and raw material prices fall
Overview
USD traded at a new low for 2009 pressured by rising equity markets, higher crude prices and improving PMI data from China and Europe. The USD is down over 7% on a trade weighted basis this year. USD downside was partly limited by profit-taking and liquidation after the release of better than expected US manufacturing and construction data. JPY traded lower pressured in cross trade. PMI data from China and Europe generated optimism that the global economy will recover in the second half of the year and global equity markets traded in new high for 2009. Crude prices rallied to new heights of 2009 trading above $68 a barrel. Commodity currencies surged in reaction to speculation that the global recession is ending supported by rising commodity prices and improving risk appetite. News of the GM bankruptcy appears to have eliminated some uncertainty in the marketplace. The US government pledged another $30 bln to aid GM. US equities post triple digit gains. The USD declined despite reassurances from Treasury Secretary Geithner that the US believes in a strong dollar and that US assets are safe. He went on to call for closer ties with China and encourage China to boost domestic demand. Chinese officials have expressed concern about holdings of US assets because of rising US budget deficit and the threat of US inflation. Despite these concerns the Federal Reserve holdings of treasuries on behalf of central banks rose 3.3% in May and demand for last week's $101 bln in note auction was above average. China increased purchase of US bonds by 3.2% in May. Part of the demand from China for US bonds is to manage the Yuan rate. Today's US economic data paints a mixed picture. The manufacturing and construction sectors of the US economy appear to be stabilizing but personal consumption remains weak. Sustained US economic recovery is not likely until consumer spending improves. US bond yields spiked higher after the release of the manufacturing and construction data. The rising US bond yields appear to limit USD losses.
Today's US data:
April personal income rises 0.5% and personal consumption falls 0.1%. US May manufacturing ISM rises to 42.8 from 40.1 last month and construction spending unexpectedly rose 0.8%. A 1.4% decline was expected in construction spending. USD firmed after release of better than expected ISM and construction data, despite recent price action which has been driven by rising equity markets and improving risk sentiment. The commodity-based currencies maintain their gains supported by optimism about growth in global economy. CAD rally stalled in reaction to reported of weaker than expected Canadian GDP and lower industrial and raw material prices in Canada.
Upcoming US data:
On June 2nd, April pending home sales will be released expected at 86.3 compared to 84.6 last month. Domestic auto sales and light truck sales for May will also be released on June 2nd. On June 3rd, May ISM non manufacturing index will be released along with April factory orders. The non Manufacturing ISM is expected to rise to 45.3 points. Factory workers are expected to rise 0.2%. On June 4th, initial jobless claims for week ending in 5/30 will be released expected at 615 K compared to 623 K 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 will be released. The non farm payroll 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 credits will also be released expected at -5.85 bln compared to -11.1 bln last month.
JPY
JPY opened higher supported by rising global equity markets and better than expected PMI data from China. Rising PMI data from China and firmer global equity markets generate hope that the worst of the global recession has passed. The only economic data released from Japan today was a report that Japan's total cash earnings for April declined 2.5%. JPY upside was limited by selling in cross trade with EUR/JPY, GBP/JPY and AUD/JPY with the crosses supported by rising PMI data and firming commodity prices. Last week, the Bank of Japan upped their outlook for Japan's economy and the release of Japans trade data showed the pace of Japan's export decline slowed. Key issue for JPY is whether improving outlook and optimism about the global economy will bring back demand for JPY carry trades. JPY traded lower for the day, after the release of strong US ISM and construction data. The ISM data fueled equity market gains and demand for high-yield currencies pressuring the JPY in cross trade. During the US session the JPY did not attract carry trade interest.
On June 3rd, Japan's May capital spending will be released expected at -27.1% compared to -17.3% last month
Key technical levels to watch in USD/JPY include 94.45 the June 1st low with resistance at 96.30 and 97.20 the 200 day moving average.
EUR
EUR traded at new high for 2009 breaking above 1.4200 supported by rising EU manufacturing PMI and improving risk sentiment as global equity markets and crude prices rally to new highs for 2009. EU May manufacturing PMI rises to 40.7 from 36.8 last month. This marked the highest level in EU PMI in seven months. The PMI data suggest that the EU economy is stabilizing. The improvement in the EU PMI will likely encourage the ECB to keep interest rates on hold at Thursday's policy meeting. This 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. Last week, the EU reported improvement in consumer confidence and that inflation remained at zero. The low EU inflation reading is the only EU report that may encourage the ECB to change monetary policy change. EUR price direction will continue to key on the outlook for the global economy. The EUR has been benefiting from the fact that ECB interest rates remain above rates in the US and the UK and because quantitative ease by the ECB has been less aggressive than the US and the UK. EUR gave back most of its overseas gains pressured by long liquidation after the release of strong US ISM data and construction spending. The break seemed to be more profit-taking than any significant change in the outlook for the EUR.
On June 2nd, EU April unemployment will be released expected unchanged at 8.9%. On June 3rd, EU Q1 GDP will be released expected at -1.8% compared to -1.6% last quarter. EU May services PMI along with April PPI will be released on June 3rd. The service PMI is expected to rise to 44.5 compared to 43.8 last month. PPI is expected to fall 0.5% compared to -0.7% last month. On June 4th, EU April retail sales will be released expected at -2% compared to -4.2% last month.
The technical outlook for the EUR is positive as EUR trades at a new high for 2009. Expect EUR support at 1.4099 the June 1st low with resistance at 1.4360 the December 29th high. Note in the graph below that the Fibonacci extension projection suggests the EUR could rally to 1.4731.
CHF
CHF traded lower pressured by selling in cross trade to the EUR and by improving risk sentiment which reduces safe haven demand for the CHF. CHF closed at a five-month high versus the USD Friday, despite concern about possible SNB intervention and weak Swiss economic data. Swiss unemployment continued to rise and Swiss LEI remains near record low. This week's focus turns to Tuesday's release of Swiss GDP expected to fall 1.5% compared to -3.10% last month. Swiss May PMI will also be released on Tuesday expected to improve to 36.8 from 34.7 last month. On Friday, May CPI will be released expected to fall 1% compared to - 0.3% last month. EUR/CHF continues to hold above 1.1500. The SNB is expected to defend a 1.5100 Level. Expect USD/CHF support it 1.0 784 the June 1st low with resistance at 1.0954 the May 28th high.
GBP
GBP traded at a new high for 2009 supported by report of stabilizing UK home prices, rising UK manufacturing PMI and improving risk sentiment as global equity markets in crude prices rise to new highs for 2009. UK May Hometrack prices were unchanged and UK manufacturing and PMI for May rises to 45.4 compared to 42.2 last month. These reports suggest that the UK economy is stabilizing. Last week, the UK reported a sharp improvement in mortgage approvals for April and nationwide house prices rose the most in three years. The only negative data from the UK last week was report of a sharp drop in May CBI retail sales. The BOE meet this Thursday. The Bank of England is widely 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 GBP125 bln. Stabilization in the UK and global economy would reduce 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 2nd April consumer credit, mortgage applications and mortgage lending will be released. Consumer credit is expected to rise to 0.1 bln compared to 0.129 bln last month. Mortgage applications are expected to rise to 44K from 39K last month. Mortgage lending is expected at 1 bln compared to 0.757 bln last month. On June 3rd, May consumer confidence index will be released expected at 52% compared to 50% last month. On June 3rd, May CIPS services will be released expected at 49.2% compared to 48.7% last month. On June 5th, May PPI will be released expected at -0.2% compared to -0.3% last month.
The technical outlook for GBP has improved as GBP trades above 1.6400 and rallies to a new high for 2009. Expect near-term support at 1.6240 with resistance at 1.6490 the October 31st high.
CAD
CAD traded higher supported by improving risk sentiment, and rising crude prices. CAD traded higher despite report of weaker than expected GDP, a sharp drop in Canadian exports and soft raw material prices. Canada's IPPI and RMPI fall 0.5%, Q1 GDP falls 0.3% in March and -5.4% in Q1. CAD continues to closely track the price of crude oil. Last week, Canada reported improvement in March retail sales and the biggest drop in inflation in 14 years. Canada also reported that the Canadian budget deficit could rise above $C50 bln. CAD continues to rally despite mixed Canadian economic data mainly supported by optimism that the worst for the Canadian global economy has passed. The CAD rally is also attributed to the Bank of Canada's decision to hold off on quantitative ease. This week the Bank of Canada meet on Thursday and are expected to hold monetary policy unchanged at 0.25%. BOC is also expected to hold off on adopting quantitative ease. The risk of this outlook is lest weeks report of a sharp drop in Canadian inflation. BOC has not indicated concern about falling inflation and this should reduce the odds that they BOC will adopt 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 35.9K last month.
The technical outlook for CAD is positive as USD/CAD approaches the October 7th low of 1.0950. Look for near-term support at 1.0725 the October 3rd high with resistance at 1.1060.
AUD
AUD traded sharply higher rising above 8100 supported by rising commodity prices and report of improving PMI data in China, Europe, Australia and the US. As noted above, PMI data from China came out better than expected and manufacturing PMI in the EU and UK rose to the highest level in seven months. AUD consolidated gains after release of better than expected US May ISM and a rise in US construction spending. The PMI data suggested that the worst of the global economy has passed and generated optimism about recovery in the second half of 2009. Equity markets and crude prices surged on rising economic optimism. Australia's May PMI rises 7.4 points to 37.5 and April retail sales rise 0.3%. Not all the Australian data was positive. Q1 business inventories declined 1.2% in Q1 corporate profits declined 7.2% in the May inflation index falls 0.3%. Today's AUD rallied despite reports of weaker Australian retail sales and company profits illustrated that broad negative dollar sentiment is driving the AUD higher Focus turns to RBA policy meeting Tuesday. AUD is supported by continued improvement in risk sentiment, rising gold and crude prices and investor diversification in search of higher yield. RBA yields are at 3% compared to near zero yields in the US, Japan and parts of Europe. Improving risk appetite encourages investors to seek higher yields in Australia. RBA meet Tuesday are expected to hold interest rates steady at 3%. Steady RBA policy decision should limit AUD downside. This week's key report will be Wednesday's release of Australia's GDP. The GDP report is expected to show a smaller contraction in the Australian domestic economy. The trade looks for next AUD target at 8400.
On June 2nd, April building approvals will be released expected at -20% compared to -16.5% last month. Q1 current account will also be released on June 2nd expected to narrow to $A-4.8 bln from $A -6.50bln last quarter. On June 3rd, Q1 GDP will be released expected at -0.2% compared to -0.5% last quarter. April trade balance will also 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 remains positive with today's rise above 8100. Look for AUD support at 7991 the June 1st low with resistance at 8250.
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