- Lower, Russia talks about possibility of a new global currency, pending home sales soar
- Higher, Japan's finance minister says Japan's economy has reached bottom
- Higher, supported by risk appetite, ignores rise in EU unemployment to 10 year high
- Mixed, mortgage approvals and consumer credit rise, Abu Dhabi to sell shares in Barclays
- AUD & CAD higher, RBA holds rate policy steady says global economy is stabilizing
Overview
USD traded at its lowest level since last December pressured by optimism about the global economy, firming equity markets and fresh concern about USD reserve status. Reuters reports that a spokesman for the Russian President Medvedev says that the idea of creation of a supranational world currency may be discussed at this month's BRIC summit. The Reuters report revives concern about the USD losing its reserve currency status. Investors have been diversifying out of USD safe haven positions as the global economy stabilizes seeking return in more risky assets. Threats to the USD reserve currency status also encourage diversification out of USD. Steady RBA rate decision and improving economic data from the UK and Switzerland add to selling pressure of the USD. Swiss May PMI rose to 39.8 from 34.7 last month. EUR rallied despite report that EU unemployment rose to its highest level in 10 years. The main factors pressuring the dollar include, unwind of safe haven USD positions as global equity markets rise and optimism about global economy stabilizing grows, concern about rising US budget deficit and the funding of the deficit, and inflation risk from aggressive monetary actions by the Fed. The USD experienced a brief rally in overseas trade supported by comments from Treasury Secretary Geithner reassuring Chinese officials that China's holdings of US assets are safe. In addition, the Financial Times reports that Chinese official sees little alternative to holding USD reserves. It's been pretty much a one-way street of USD selling over the past few weeks and a period consolidation may begin to emerge.
Today's US data:
April pending home sales rise 6.7% to 90.3, a reading of 86.3 was expected. The increase in pending home sales was driven by record low interest rates and house affordability its at is second best level on record. USD extended its losses post release of the pending home sales as the report plays into the recovery theme. The recovery theme encourages diversification out of USD.
Upcoming US data:
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 623K 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 nfp is 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 credit will also be released Friday expected at -5.85 bln compared to -11.1 bln last month.
JPY
JPY traded higher supported by a statement from Japan's Finance Minister Yasano that Japan's economy has reached bottom and fresh concern about USD reserve status. Yasano went on to say that he did not expect full recovery for Japan's economy until spring 2010. As noted above, Russia's president said the EM may discuss the idea of a supranational world currency. Last week, there were reports that the USD reserve status will be discussed at this month's BRIC meeting in Russia. JPY was also supported by a rebound in cross trade against Europe and the AUD. The rebound in cross trade reflected profit-taking after big cross gains for GBP and AUD in Monday's trade. The only economic data released from Japan was report that Japan's May monetary base declined 4.7%. JPY price direction has been erratic, sometimes tracking risk sentiment and sometimes tracking improving outlook for Japan's domestic economy. The key issue for JPY is whether improving outlook and optimism about the global economy will bring back demand for JPY carry trades. Similar to Monday's trade JPY was pressured by the release of stronger US ISM and today by report of a surge in US pending home sales. Most of the reversal was in JPY crosses.
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 96.63 the June 2nd high and 97.10 the 200 day moving average.
EUR
EUR traded at a fresh high for 2009 supported by rising optimism about the global economy and reversal of earlier equity market losses. EUR traded above 1.4250 despite report of a sharp rise in EU unemployment. EU April unemployment rose to 9.2% from 8.9% in March. This marks the highest level for EU unemployment in 10 years. According to analysts at UBS, the EUR rally against the USD may be entering its last stage and EUR could weaken towards 1.3000 in the next three months. According to UBS yield differential is moving in favor of the USD as US 10 year bond yield surges to an eight-month high. The USD has been weakening as the improving outlook for the global economy and rising global equity markets reduce safe haven demand for US treasuries. Treasury Secretary Geithner tried to talk up the USD last night in China. Geithner said that demand for US debt is sufficient and the Chinese holding of US assets are safe. Chinese officials have been concerned that the rising US budget deficit and potential inflationary impact of the Fed's quantitative ease will hurt the value of its US asset holdings. Geithner went on to explain that he thought the current rise in US bond yields reflects less fear of deflation and stabilization in the global economy. Geithner may be correct in his assessment of demand for US bonds. The Feds custodial holdings for foreign central banks rose to a record level last week and demand for last week's $101 bln US note auctions was above average.
The 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. Today's report of a sharp rise in the unemployment may encourage the ECB to move up the timetable for expanding its asset purchases plan. EUR traded to the day's highs after the release of a surge in US pending home sales.
EU May services PMI along with April PPI will be released on June 3rd. The service PMI is expected to rise to 44.5 out of 43.8 last month. PPI is expected to fall 0.5% compared to -0.7% last month. On June 4th, EU April retail sales would be released expected at -2% compared to -4.2% last month.
The technical outlook for the EUR is positive as EUR trades at yet another new high for 2009. Expect EUR support at 1.4102 the June 2nd 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.
GBP
GBP traded at a seven-month high testing 1.6500 for the first time since last October supported by report of rising consumer credit and mortgage applications. UK consumer credit rises to 0.314 bln from 0.052 bln last month and mortgage applications rise to 43,201 K from 40,038 K last month. These reports suggest the UK economy is stabilizing and fuels optimism that the worst for the UK recession has passed. Today's report of improvement in UK consumer credit and mortgage applications follows Monday's report that UK home prices stabilized and manufacturing PMI showed improvement. GBP extended it rally post release of better than expected US pending home sales. The BOE meet this Thursday. The Bank of England is widely expected to hold interest rates unchanged at a record low of 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 GBP 125 bln. Stabilization in the UK and global economy reduces 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. GBP gains were limited by report that Abu Dhabi may sell GBP 4 bln stake in Barclays.
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 tests its highest level since October 30th. Expect near-term support at 1.6325 the June 2nd low with resistance at 1.6630 and 1.6725 the October 22nd high.
CAD
CAD traded higher approaching its highest level in eight months supported by signs of stabilization in the global economy. The CAD has been a major beneficiary of improving risk sentiment and rising crude prices as global equity markets and energy prices trade at new highs for 2009. Last night, U.S. Treasury Geithner says he sees continuing challenges to the world economy but notes recent signs of stabilization in the global economy. Monday the US reported improvement in May manufacturing ISM with the new orders component rising for the first time since the recession began. The ISM and pending home sales report encourages speculation that the US economy is stabilizing. CAD continues to rally despite mixed Canadian economic data. Monday, Canada reported a decline in Q1 GDP of 5.4% and 0.5% drop in raw material prices. The GDP drop reflected a sharp decline in Canadian exports. CAD rally began in earnest after the March Bank of Canada policy meeting with the Bank of Canada electing to hold off on quantitative ease and indicating that they expect the Canadian economy to rebound faster than its counterparts as the global economy rebounds. The Bank of Canada meet on Thursday and are expected to hold monetary policy unchanged at 0.25%.The BOC is also expected to hold off on adopting quantitative ease. The risk to this outlook is last weeks report of a sharp drop in Canadian inflation Q1 GDP and Monday's report of declining Canadian raw material prices. The BOC has not indicated concern about falling inflation. The fall in raw material prices may increase the risk that the Bank of Canada may want to consider 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 traded below the October 7th low of 1.0950. Look for near-term support at 1.0785 the June 1st low with resistance at 1.1140 the 200 day moving average.
AUD
AUD traded at an eight month high supported by the RBA's decision to hold rate policy steady and report of improvement in Australia's current account deficit and rising building approvals. The RBA elected to hold rate policy steady at 3% as expected. In the statement following the RBA rate decision RBA officials indicated that they see signs that the global economy is stabilizing and financial market conditions are improving but the RBA left the door for future rate cuts open because the Australian domestic economy is still contracting and deflationary pressures continue. RBA Governor Stevens said the prospect for lower inflation over the medium term suggests that scope remains for further rate cuts. The fact that the RBA left the door open for future rate cuts limits today's AUD rally. Australia's Q1 current account deficit narrowed to $A4.61 bln from $ -6.50 bln last quarter and April building approvals rose 5.1%. AUD gains are also limited by light selling pressure and cross trade to the JPY. AUD selling in cross to JPY reflects comments from Japan's finance minister that Japan's economy is reaching bottom and profit-taking after recent strong gains in the cross.
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 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 this weeks rise above 8100. Look for AUD support at 7991 the June 1st low with resistance at 8250.
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