- Mixed, North Korean tension gains, downside limited by jump in consumer confidence
- Higher, supported by safe haven flows and gains in cross trade
- Lower, German Q1 GDP contracts most on record, weak German data and German bank worries
- Mixed, unemployment rises, ignores SNB warning that they may buy EUR to weaken CHF
- Higher, BOE's Sentence says it's too early to look for green shoots in the UK economy
- AUD & CAD mixed, rebound supported by US equity market rally/US consumer confidence
Overview
USD traded higher supported by rising geopolitical tensions and concern about German banks. USD reversed early gains in reaction to a sharp rebound in US equities sparked by report of a jump in May US consumer confidence. North Korea launched a nuclear missile test Monday and two more missile tests Tuesday. The missile tests were condemned by the international community. North Korea remains defiant and says the country is prepared for any US attack. North Korean tensions are expected to have limited impact on a FX trade and global financial markets. The Daily Telegraph reports that German financial regulator BaFin warned that toxic debt of German banks could blow up like a grenade blast unless banks take advantage of government bad bank plans to prepare for the next phase of the crisis. The USD rebounded from a five-month low. Report of much better than expected US consumer confidence sparked a rally in US equities and a modest USD selloff.
USD price direction will key on this week's US bond auctions. The U.S. Treasury will auction $101 bln in two year notes Tuesday, five year notes Wednesday and seven-year notes Thursday. Recent concern that the US may lose its AAA debt rating may discourage foreign demand for US bonds. The trade will be looking to see how well this week's US bond auctions are received. Poor auction results could spark fresh selling pressure of the USD on concern about the US ability to finance its record budget deficit. Recent signs of recovery in the global economy and stronger equity market trade reduced risk aversion and safe haven demand for USD. Today's weak German economic data and OECD report that the global economy contracted by its fastest pace on record in Q1 generates concern about global recovery. The rise in US consumer confidence revives hope for the US and global recovery.
Today's US data:
Case Shiller House Price Index came in worse than expected at -18.7%, a reading of -18.5 was expected. May consumer confidence rises to 54.9, a reading of 42 was expected. USD traded lower after the release of much better than expected consumer confidence as equity markets surged. The consumer confidence report revives hope that the worst of the US economy has passed.
Upcoming USD data:
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 firm supported by gains in cross trade sparked by news of North Korean missile tests and concern about the German banking sector. The North Korean missile tests sparked light safe haven demand for the JPY and USD and selling of global equity markets. A Telegraph report warning about another possible wave of banking troubles in Germany coupled with weak EU industrial output data sparked selling of EUR/JPY. GBP /JPY traded lower with GBP pressured by concern about the outlook for global recovery as the BOE's Sentence says it's too early to be talking about green shoots in the UK economy. AUD/JPY traded lower with AUD pressured by an OECD report which says that Q1 global GDP fell the most on record. JPY direction will hinge on how global equity markets react to the latest concerns about the global economic outlook and whether this week's US Treasury auctions attract foreign buyers. Weaker global equity market trade may spark safe flows to the JPY. Poor demand for US auctions could generate concern that investors are moving away from the USD.
On May 27th, April trade balance will be released expected at ¥-60bln 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%, 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 93.85 the May 22nd low with resistance at 9540 and 9620 the May 20th high.
EUR
EUR traded lower pressured by North Korean tensions, weak EU economic data and worries about German banks. The North Korean missile tests sparked light safe haven demand for the USD and pressured equity markets. 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. Despite today's German data ECB's Weber says that economic downtrend in Germany is easing. ECB's Gonzalez-Paromo says he expects economic recovery in 2010 and the ECB has not yet decided if 1% is a low-level for interest rates. 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. The trade showed limited reaction to comments from ECB's Nowotny that he sees neither deflation nor inflation in the foreseeable future for the EU. EUR traded above 1.4000 last week 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 percent 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. This week's US bond auctions will be a good test of investor confidence in the USD. Weak demand for this week's US bond auctions could spark fresh selling pressure of the USD. EUR reversed most of its early decline after the release of much better than expected US consumer confidence and a sharp rally in US equities.
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 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 1.3750 with resistance at 1.4023 the May 26th high and 1.4060 the January 2nd high.
CHF
CHF traded mixed initially pressured by a spike in risk aversion on news of a North Korean missile test and report of a rise in Swiss unemployment. Swiss Q1 non farm payroll rises 0.8%. The trade was looking for a 0.1% decline in Swiss unemployment. The rise in Swiss unemployment is another sign that the Swiss economy remains weak. CHF reversed early losses to trade higher in the US session supported by a rebound in US equities on news of a sharp rise in US consumer confidence. Last week CHF traded over 3% higher versus USD mainly supported by concern that the US may lose its AAA debt rating and signs of global recovery would reduce safe haven demand for USD. CHF rallied despite comments from SNB officials that they may intervene and buy EUR to try to weaken the CHF. This week's Swiss economic calendar is light with the April trade balance due for release Thursday expected at 0.15 bln compared to 0.12 bln last month. On Friday, KOF indicator will be released expected at -1.78% compared to -1.86% last month. Expect USD/CHF support at 1.1060 with resistance at 1.1356 the May 26th high.
GBP
GBP opened lower pressured by weaker equity markets and concern about the UK and global recovery. The North Korean missile tests heighten geopolitical risk and sparked safe haven USD demand. The BOE's Sentence said that it is too early to look for green shoots in UK economy and that the economy must stop contracting before it begins to recover. Sentence's comments dampen recent optimism that the UK economy is bottoming. GBP downside was limited by gains in cross to the EUR as BaFin warns that the German bank debt may soar Last week S&P cut UK outlook to negative from stable because of growing UK budget deficit. 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. GBP turned higher for the day after the release of much better than expected US May consumer confidence and in reaction to a sharp rise in US equities. GBP should be well supported on breaks by speculation that aggressive UK government and Bank of England actions would boost UK growth and help the UK better weather the financial crisis than the EU. The main risk to GBP will be the return of risk aversion if concern about the global economy intensifies.
On May 28th, May CBI retail sales will be released expected at -8 compared to 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 1.5750 the May 22nd low with resistance at 1.6040 the November 6th high.
CAD
CAD opened lower pressured by declining crude prices and weaker equity markets. Crude prices were pressured by concern about global demand. Equity markets were pressured by rising geopolitical tensions and news of the latest North Korean missile tests. CAD was also pressured by comments from Canada's Finance Minister Flaherty that Canada's manufacturing sector will become a smaller percentage of the Canadian economy. 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. CAD reversed early looses and traded higher after the release of much better than expected US May consumer confidence. US consumer confidence provides hope about the global recovery.
CAD traded at its highest level since October last week supported by rising commodity prices and broad dollar weakness. 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. CAD direction will hinge on the direction of energy prices and speculation about the global economy. Canada's economic outlook is mixed with last week's report of a slight rise in retail sales, a drop in leading indicators and inflation falling to its lowest level in 14 years. The BOC is expected to remain on hold and has indicated that they do not see a current need for implementing quantitative ease.
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 1.1190 the May 25th low with resistance at 1.1485 the May 21st high.
AUD
AUD traded sharply lower in reaction to news of the North Korean missile tests and weaker EUR trade. AUD rebounded in US session supported by a rally in US equities after report of a jump in US consumer confidence. AUD has been one the best performing currencies supported by declining risk aversion and speculation that the worst of the global economy has passed. AUD was pressured by fresh uncertainty about global recovery and a dip in risk appetite as global equity markets decline in reaction to North Korean tension. Weak industrial output and GDP from Germany coupled with OECD report that global economy contracted by the most ever in Q1 revived concern about global economic outlook. Are these reports looking at the global economy from the rearview mirror and will investors look beyond these reports? Last week RBA Governor Stevens predicted that the Australian economy will rebound by year end. Economic data released last Thursday from Australia indicates that the Australian economy may be stabilizing and deflationary pressures diminishing. Labor costs rose 0.9% in Q1and auto sales were also stronger last month. AUD downside was limited by a sharp rally in US equities and report of a sharp jump in US consumer confidence. AUD traded 4.6% higher last week versus the USD. 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.
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 last weeks rally above the October high of 7745. This level will need to hold for AUD to maintain a positive upside bias. Look for AUD support at 7665 the May 21st low with resistance at 7870 the May 22nd high.
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