Daily Forex Report; 29 May 2009

USD sinks pressured by improving risk appetite

• USD: Lower, pressured by improving risk appetite and concern about funding of US budget deficit
• JPY: Higher, industrial production rises, manufacturing PMI improves
• EUR: Higher, German retail sales rise, risk appetite improves, diminished ECB rate cut speculation
• GBP: Higher , housing prices rise, risk appetite improves
• CAD and AUD: AUD & CAD higher, crude rises above $66 a barrel, risk sentiment improves

Overview     

USD traded at a five month low pressured by improving risk appetite as global equities and crude prices rally to a new high for 2009. Hope for second-half of the year recovery in the global economy fuels demand for equities and commodities. The USD was also pressured by report that South Korea plans to reduce exposure to US bonds and concern about financing of US debt. The Daily Telegraph reports that the six-month high in US 10 year bond yields defies efforts by the Fed to push long-term interest rates lower. This may be a sign that US yields will have to rise to attract funds to finance the growing US budget deficit. Investors may demand a higher risk premium for holding US assets. Improving industrial production in Japan, rising house prices in the UK and stronger German retail sales data contributed to improving optimism about the global recovery and added to selling pressure of the USD. Speculation that the global recession is ending sparked unwind of safe haven USD positions and encouraged demand for higher yield assets. The direction of equity markets and the price of crude remain the primary market drivers for FX trade. Next week’s release of US May unemployment and nonfarm payroll will be key to whether optimism about recovery continues. Treasury Secretary Geithner visits China next week. The trade will be monitoring Geithner’s trip to gauge how the largest holder of US bonds views the outlook for US assets. There is fear that China will reduce demand for US bonds because of concern about rising US debt and risks to the USD. The reaction to today’s news from South Korea shows how sensitive the trade has become to the US need to fund its rising budget deficit. The Daily Telegraph reports that the US may have to sacrifice the USD as China grows impatient and the Fed is considering expanding quantitative ease.

Today’s US data:

US preliminary Q1 GDP was revised to -5.7% from -6.1%. PCE price index falls 1% in Q1. Chicago PMI came in much worse than expected at 34.9, a reading 42 was expected. May University of Michigan sentiment rose to 68.7, a reading of 67.9 was expected. Most reports suggest that today’s USD decline reflects optimism about the end of recession and unwind of safe haven USD positions. Today’s US economic data and rising US bond yields may raise questions about whether optimism about the global recovery is premature. Global market gains may be based more on hope than reality.

Upcoming USD data:

Next week’s US economic calendar includes the June 1st release of April personal income and consumption. Personal income is expected at -0.2% compared to -0.3% last month. Personal consumption is expected unchanged at -0.2%. April construction spending and May ISM index will also be released on June 1st. Construction spending is expected to fall 1.2% compared to 0.3% rise last month. The ISM manufacturing index is expected to improve to 42 from 40.1 last month. On June 2^nd, 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 3^rd, 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 4^th, initial jobless claims for week ending in 5/30 will be released expected at 615 K compared to 623K last week. Final Q1 productivity will be released on June 4th expected at 1% compared to 0.8% last month. On June 5^th, May nonfarm payroll and the unemployment rate will be released. NFP is expected to fall by 523K compared to -539K last month. 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 traded higher supported by report of improving industrial production in Japan and speculation that investors are continuing to reduce exposure to US assets. JPY price action continues to be caught between selling attributed to diminishing safe haven demand as risk appetite improves and by demand fueled by concern about funding of the US debt. As noted above, South Korea plans to reduce exposure to US bonds and equities. The current rise in US bond yields to six-month high may reflect investor demand for a higher risk premium to hold US assets. Today’s economic data from Japan shows that April industrial production rose 5.2%, a 3.2% rise was expected. April CPI declined 0.1%, unemployment rose to five and half year high of 5%, household spending declined 0.9%, housing starts fell 32.4% and manufacturing PMI improved to 46.6. The improvement in industrial production, weak household spending and housing starts data suggest that the recovery will be weak. JPY traded relatively stable in cross trade to Europe and weakened in cross trade to the commodity currencies as crude prices rise above $66 a barrel. The rise in crude prices reflects the impact of a weaker dollar and speculation that the end of the global recession will fuel increased demand for crude. The trade will be monitoring key resistance at the 200 day moving average of 97.20 for USD/JPY and whether improving outlook for the global economy will bring back demand for JPY carry trades. 

No major economic reports from Japan are due for release next week.

Key technical levels to watch in USD/JPY include 95.20 the May 28th low and 94.50 the May 26th low with resistance at 97.20 the 200 day moving average.

EUR

EUR traded at a new high for 2009 breaking above 1.4100 supported by improving risk sentiment and speculation that optimism about the global recovery will encourage further diversification out of USD. EUR was also supported by report of improving German retail sales and diminished ECB rate cut speculation. German retail sales rose for the first time in three months reported up 0.5%. Today’s rise to 2009 high in global equity markets and crude prices fuels optimism that the worst of the global recession has passed. Capital is flowing out of the dollar on speculation that the worst of the global recession is over. Rising crude prices may also reduce the likelihood that the ECB will lower interest rates as focus shifts to inflation risks. EU M3 for April rises 4.9% and the May inflation rate was flat. EU inflation fell to a record low in May. The low EU inflation may leave the door open for future ECB rate cuts despite the current improvement in crude prices and optimism about the global recovery. ECB’s Draghi sees slight risk of deflation and that rising government debt will put upward pressure on long-term interest rates. Draghi’s comments suggest that ECB monetary policy will remain on hold. Steady ECB rate outlook is a positive for the EUR as interest rates have been cut more aggressively in the UK and the US.

Next week’s EU economic calendar includes the June 1st release of EU manufacturing PMI expected at 38 compared to 36.8 last month. On June 2^nd, EU April unemployment will be released expected unchanged at 8.9%. On June 3^rd, 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 4^th, 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 1.3943 the May 29th 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 new high for 2009 supported by improving risk sentiment and report of rising UK house prices. GBP price direction has been closely correlated to equity markets and risk sentiment. Today’s rise to a new 2009 high in global equity markets sparked demand for the GBP. UK Nationwide house prices rose 1.2% in May. The rise in UK house prices fuels optimism that the UK recession is ending. However, UK May GFK consumer confidence was unchanged at -27. Thursday the UK reported a sharp drop in CBI retail sales and BOE Blanchflower warned that UK recovery may be delayed. Thursday’s CBI report and Blanchflower’s comments dented optimism about the UK recovery. Today’s report of rising house prices and steady consumer confidence suggests that the UK economy is stabilizing. What’s interesting to note is that investor optimism continues to improve in the face of rising US long-term yields. The rise in long-term US yields may complicate the Fed’s effort to boost the US economy. GBP was also supported by reports that South Korea plans to reduce exposure to US assets. Diversification out of US bonds is a double-edged sword because US interest rates will have to rise to attract demand and rising US interest rates may reduce the chance of global economic recovery.

Next week’s UK economic calendar includes the June 1st release of May Halifax house prices expected at -17% compared to -17.7% last month. May CIPS manufacturing PMI will also be released on June 1st expected at 43.7 compared to 42.9 last month. On June 2^nd, 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 3^rd, May consumer confidence index will be released expected at 52% compared to 50% last month. On June 3^rd, May CIPS services will be released expected at 49.2% compared to 48.7% last month. On June 5^th, 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 1.6100 and rallied to a new high for 2009. Expect near-term support at 1.5920 the May 28th low with resistance at 1.6330 and 1.6400 the November 3rd high.

CAD

CAD traded sharply higher as crude prices rise to new highs for 2009 and rising equity markets fuel improved risk sentiment. CAD was also supported by report of a slight improvement in Canada’s Q1 current account deficit and strong Canadian bank earnings. Canada’s Q1 current account deficit came in better than expected at $C9.0 6 bln, the trade was looking for a deficit of $C10.5 bln. CAD is closing higher for the third month in a row rising 8.4% versus the USD, since April 30th. The CAD rally is attributed to the Bank of Canada’s decision to hold off on quantitative ease, speculation that the Canadian economy will recover more quickly than its counterparts when the global economy recovers and rising energy prices as Canada is a major exporter of oil. The rally remains impressive in light of rising Canadian budget deficit. Canada’s Finance Minister Flaherty announced earlier in the week that Canada’s budget deficit would rise to C$50 bln. Investors are confident that the Canadian budget deficit is affordable and small in comparison to other nations CAD direction will hinge on the direction of energy prices and speculation about the global economy.

Next week’s Canadian economic calendar includes the June 1st release of March GDP expected unchanged at -0.1%. Canadian industrial and raw material prices will also be released on June 1st with April I PPI expected at 0.5% compared to 0.3% last month and RMPI expected at 8% compared to 12.1% last month. On June 4th, April building permits will be released expected at 10% compared to 23.5% last month. On June 5^th, 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 1.0850 with resistance at 1.1160 the May 29th high.

AUD

AUD traded sharply higher trading above 8000. AUD was 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. As noted Thursday, Japanese investors have increased purchase of foreign stocks and bonds. Australia offers attractive yields and improvement in risk sentiment encourages Japanese demand for Australian yields. RBA meet next Tuesday and are expected to hold rates steady at 3%. AUD was also supported by report that Australia’s private sector credit rose 0.1% in April. AUD reached a key short-term target at 8000. Profit-taking and a modest technical correction can be expected, but the underlying trend remains positive for the AUD.

Next week’s Australian economic calendar includes the June 1st release of the Q1 company profits expected at -7% compared to – 6.5% last quarter. Q1 business inventories will also be released on June 1st expected at -1% compared to 1.4% last month, along with April retail sales expected to rise 2.4% compared to 2.2% last month. On June 2^nd, 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 3^rd, 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 $A2.65 bln from $A2.50 bln last month.

The technical outlook for the AUD remains positive with this weeks rally above the 200 day moving average at 7954. Look for AUD support at 7848 the May 29th low with resistance at 8095 the September 30th high.

Special Commentary; 28 May 2009

Optimism about the recovery may be premature

US housing market remains weak

US mortgage delinquencies and foreclosures rose to record high in Q1 2009. Mortgage delinquencies rose to 9.12% from 7.8% and foreclosures rose to 1.37%. One in eight US homeowners faces foreclosure. Existing home sales for April rose only 0.3%. Case Sheller reports that house prices continue to fall. The US has a 10.2 month inventory of unsold homes. Until prices stop falling and home sales improve the housing market remains a threat to the US recovery and US banks. The next shoe to drop in housing market may be the resetting of adjustable rate mortgages.

GM to declare bankruptcy June 1st

GM reached a debt swap deal with it bond holders Thursday but the deal will not prevent GM from declaring bankruptcy. The Obama administration hopes that GM will return to a public company within the next 14 to 18 months. The US government is a 70% owner of GM and some are calling the auto company Government Motors. Although the bankruptcy restructuring for GM may speed up the process for revival of the auto corporation, the GM bankruptcy news suggests that the US auto industry remains weak and presents continuing risks for the US economy.

Roubini warns of possible double dip recession

Economist Roubini of York University says that the US recession may be over by the end of the year but he warns that another dip in the economy is possible next year. Roubini was credited with predicting the current financial crisis and he continues to see risks to global growth. According to a Forbes report, Roubini expects the current recession to last 24 months and that the recovery will likely be U shaped. He warns of possible double dip recession and a W shaped recovery. The risks to the global current recovery include rising energy prices, rising public debt, expected increase in real interest rates, rising inflation and the expiration of a number of US tax cuts in 2010.

Warning of hyperinflation risk

Economist Mark Farber warns that the US may experience hyperinflation because this government debt is growing fast and Fed will be reluctant to raise interest rates because of uncertainty about whether the recovery has taken hold. According to Farber, the producer that is pumped into the economy must be removed at some point. The Fed’s strategy to exit quantitative ease will determine how much inflation may rise in the years ahead. Bloomberg reports that according to Farber the US will experience hyperinflation approaching levels seen in Zimbabwe. Farber recommends gold as a hedge against the risk that rising deficit spending and aggressive Fed monetary ease will lead to higher inflation.

Daily Forex Report; 28 May 2009

USD and JPY lower on optimism about the global recovery

• USD: Mixed, jobless claims fall, durable goods rise, housing data weak, bond yields at six-month high
• JPY: Lower, pressured by heavy Japanese investor outflows in search of yield
• EUR: Higher, EU economic sentiment improves and German unemployment rate falls
• GBP: Lower, CBI retail sales fall more than expected, BOE’s Blanchflower warns recovery may be delayed
• CAD and AUD: AUD & CAD higher, crude rises above $64 a barrel , risk sentiment improves

Overview

USD rallied sharply versus the JPY, traded weaker against Europe and the commodity currencies. The USD is supported versus JPY by a rise in US bond yields to a six-month high and Moody’s affirmation of US AAA bond rating. The Moody’s affirmation of US debt rating reduces fear that investor demand for US bond auctions will decline. JPY was also pressured by report of the investor outflows as Japanese investors seek higher yield abroad, encouraged by rising optimism about the global economy. The rise in US bond yields reflects improving economic optimism and concern about increased supply as US budget deficit grows. The USD was pressured versus EUR by optimism about the global recovery and unwind of safe haven positions. EUR was supported by report of improving EU economic sentiment and falling unemployment in Germany. CHF edged higher supported by report of widening trade surplus as exports rise 8.3% in April. GBP drifted lower pressured by report of weaker than expected CBI retail sales and comments from BOE’s Blanchflower that UK recovery will likely be delayed. The commodity currencies firmed supported by rising risk appetite and higher crude prices as OPEC keeps production levels unchanged. Crude oil prices traded above $64 a barrel supported by report of a 5.4 mln barrel drop in crude inventories. Better than expected rise in US April durable goods orders and a drop in jobless claims added to speculation that the worst of the US economy has passed. Existing home sales data came in weaker than expected and the USD pared losses as equity markets decline and uncertainty about US recovery resurfaces.

Today’s US data:

US April goods orders rise 1.9%, the trade was looking for a 0.8% decline. Jobless claims fall 13K to 623K the trade was looking for a decline to 620K. Continuing claims rise to another record high. This report suggests that the US economy and labor market is stabilizing. April new home sales rise just 0.3% compared to 3% decline in March, the trade was looking for a 1% rise. Equities reversed early gains in reaction to the disappointing new home sales report. The report suggests that the US housing market remains weak.

Upcoming USD data:

On May 29^th, 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 expected at 67.9 compared to 65.1 last month. 

JPY

JPY traded sharply lower pressured by rising US bond yields, improving risk sentiment, continued geopolitical tensions with North Korea and heavy selling in cross trade. JPY was pressured by report that Japanese investors have increased their demand for overseas assets. According to Japan’s finance minister Japanese investors increased purchases of foreign bonds last week to the highest level in a month. MOF flows data show a sharp increase in Japanese demand for foreign stocks and bonds. MOF flows data for week ending May 23rd shows that Japanese investors were net buyers of ¥76.8 bln in foreign stocks and ¥641.1 bln of foreign bonds last week. The increase in Japanese investor demand for foreign assets is fueled by improving risk sentiment and growing confidence that the worst for the global economy is behind. JPY was also pressured by selling in cross trade to the EUR with EUR supported by report of improving economic sentiment and employment. AUD/JPY traded 2% higher as Japanese investors seek higher yields in Australia. What is interesting about today’s JPY decline is that recent JPY rally was supported by the same optimism about the recovery and speculation that investors would reduce safe haven holdings of USD. Today, JPY was pressured by improving outlook for the global economy. Analysts at Nomura forecast that the JPY may rally to 87.00 supported by the global recovery. JPY weakened despite report of a 0.6% rise in April retail sales. The rise in April retail sales suggests that the Japanese economy is stabilizing. The trade will be monitoring key resistance at the 200 day moving average at 97.30 for confirmation the reversal of recent JPY rally will continue. The trade will also be looking to see whether improving outlook for the global economy will bring back demand for JPY carry trades.

On May 29^th, 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 95.49 the May 28th low with resistance at 97.30 for 200 day moving average and 97.85 the May 12^th high.

EUR

EUR traded higher supported by improving EU and German economic data and heavy buying in cross trade to the JPY. EU May consumer sentiment improved to -30 from -31 last month and economic sentiment improved to 69 from 67.2 last month. May business climate declined to 3 from 3.33 last month. German unemployment unexpectedly declined to 8.2% from 8.3% last month. The German economy only lost 1K jobs last month, the trade expected report of a loss of as many as 60K. Today EU economic data suggests that the EU economy is stabilizing. ECB’s Nowonty says that the economy is bottoming but will remain weak. Today’s EU and German economic data clouds the outlook for ECB policy and whether the ECB will set a floor for interest rates at 1%. ECB’s Constancio said the ECB has not decided on whether the central bank will cut rates below 1%.EUR gained almost 2% versus the JPY with the EUR/JPY cross trading above 134.50. The cross gains to the JPY are attributed to Japanese demand for foreign assets sparked by improving outlook for the global economy. Rising US bond yields and yesterdays report that the ECB may be considering expanding quantitative ease limits EUR gains versus the USD. Reuters reported yesterday that the ECB may increase its asset purchases and buy mortgage-backed bonds or public-sector bonds loans. More aggressive easing by the ECB could be seen as a mild negative for the EUR.

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 on May 29^th 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 1.3793 the May 28^th low with resistance at 1.4023 the May 26th high and 1.4060 the January 2nd high . 

GBP

GBP traded lower pressured by report of weaker than expected UK retail sales, a warning from the BOE’s Blanchflower about UK economic outlook and selling in cross trade to the EUR. May CBI retail sales fell to -17 from +3 last month, the trade was looking for a reading of -10. Blanchflower says he does not see an improvement in UK growth this year or next year and warns that UK recovery may be delayed. He went on to say that he cannot assume that the financial crisis has passed. The decline in UK CBI sales and Blanchflower comments dent in recent optimism that the UK recession was nearing an end. Improving EU economic sentiment and declining German unemployment sparked a recovery in the EUR/GBP cross. EUR/GBP traded sharply lower Wednesday with GBP supported by speculation that the UK economy will recover faster than EU because the Bank of England has taken more aggressive action than the ECB to boost growth. A Bloomberg report which suggests that the Fed may be considering expanding its asset purchases had limited impact on today’s trade. The report suggests that the Fed may continue to expand its balance sheet until the Fed is convinced that the economic recovery has taken hold.

The technical outlook for GBP has improved as GBP trades above psychological resistance at 1.6000. Expect near-term support at 1.5775 the May 26th low with resistance at 1.6085 the May 27th high.

CAD

CAD traded higher consolidating near eight-month highs supported by optimism about the global recovery and rising energy prices. Comments from Treasury Secretary Geithner that the US is entering the early stages of recovery and a spike in US bond yields to a six-month high, contributed to the latest improvement in optimism that the worst of the global recession has past. The price of crude traded above of $64 a barrel as OPEC elects to hold production unchanged and crude inventories dropped sharply last week. CAD was also supported by firmer US equity market trade, sparked by reports of declining US jobless claims and better than expected rise in durable goods. There were no major Canadian economic reports released today. The trade ignored a political row brewing over Canada’s rising budget deficit. Canada’s Finance Minister Flaherty announced earlier in the week that Canada’s budget deficit would rise to C$50 bln. Canada’s opposition party is pressing PM Harper to fire Flaherty over the rising budget deficit. PM Harper defends the budget and says the deficits are affordable and modest compared with other nations. Harper noted that the Canadian government is borrowing at low interest rates and that the budget is designed to boost growth. Focus turns to Friday’s release of Canada’s current account. The Q1 current account is expected to fall to $C-10.5 bln from $C-7.49bln last quarter. CAD direction will hinge on the direction of energy prices and speculation about the global economy.

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 but the rally is losing steam price action consolidating around 1.1100. Look for near-term support at 1.0995 the October 8th low with resistance at 1.1355 the May 26th high. 

AUD

AUD traded higher supported by optimism that the worst of the global economy has passed and by sharp gains in cross trade to JPY. AUD rallied despite report of a bigger than expected drop in Australia’s Q1 CAPEX spending. Q1 CAPEX spending falls 8.9%, a 7% decline was expected. AUD traded at a new high for 2009 Wednesday supported by rising crude prices and improving risk sentiment. AUD gains in cross trade are attributed to Japanese demand for higher yields as the global economy stabilizes. Japanese investors were buying the Toshin auction. As noted above, Japanese investors have increased purchase a foreign stocks and bonds. Australian offers attractive yields and improvement in risk sentiment which encourages Japanese demand for Australian yields. RBA meet next Tuesday and are expected to hold rates steady at 3%. With short-term yields near zero in Japan, the return of confidence in the global economy encourages investors to purchase riskier assets. Steady RBA rate decision could lend additional support to the AUD. The trade looks for a near-term target of 8000 for the AUD.

On May 29^th, 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 this weeks rally above 7800. Look for AUD support at 7705 the May 26th low with resistance at 7954 the 200 day moving average.

Special Commentary; 27 May 2009

US debt, end of US recession, Geithner to China  

US debt explosion

GBP traded at its highest level since last November and the AUD and CAD touched new highs for 2009 Wednesday. There are two interesting articles in today’s financial press which help explain why the USD is weakening. The first article appeared in the Financial Times titled “Exploding debt threatens America” written by John Taylor. Taylor writes that US debt will equal 41% of GDP at the end of 2008 and could reach 100% of GDP within the next ten years. He goes on to say that the risk presented by the US debt expansion could do more damage than the current financial crisis. According to the article, it will be difficult for the Fed to exit quantitative ease and reduce its balance sheet and inflation could balloon. Taylor concludes that the Fed may be forced to monetize the debt and the USD could fall sharply in value.

End of US recession?

Reuters carried a report which says that a survey of 45 forecasters at the National Association of Business Economists (NABE) found that three quarters surveyed expect the US recession to end in Q3 2009 and a mild recovery into 2010. The recovery will be more moderate than in the past according to the NABE. The NABE forecasts 1.2% GDP growth into the year end and for growth to return to near trend of 2.7% by Q4 2010. It does not take much to get the US officials excited about possible US economic recovery. The Head of the Council of Economic Advisors Romer says that lower jobless claims and rising consumer confidence encourages the White House that the economy is getting back on track. At some point optimism about the recovery will have to be backed by improvement in fundamentals. Concern about US debt explosion and optimism about the global recovery are the main drivers that have weakened the USD.

Geithner to China

US Treasury Secretary Geithner will travel to China next week to meet with Chinese leaders. His trip is to promote stable and balanced growth between the US and China. Rumors circulated today that China may soon revalue the Yuan. Yuan revaluation rumors supported the JPY and partly offset the impact of escalating tensions with North Korea. US officials are concerned that the Yuan is undervalued and in the past have criticized China for allegedly manipulating its currency to increase export competitiveness. China has expressed concern about rising US debt, its holdings of US assets and has called for a study of replacing the USD as the global reserve currency. The trade will be monitoring Geithner’s trip to see if any of these issues are revisited. If China restates concern about US debt or holdings of US assets the USD could experience additional selling pressure.

Daily Forex Report; 27 May 2009

USD gains in volatile trade, existing homes sales rise

• USD: Higher, existing home sales and inventories rise, upside limited by concern about US debt
• JPY: Higher, report of possible Yuan revaluation offsets impact of escalating North Korean tensions
• EUR: Lower, pressured by ECB rhetoric, ECB officials cannot rule out further rate cuts, may expand QE
• GBP: Higher, mortgage approvals rise, gains in cross trade to the EUR ,CBI says UK contraction has slowed
• CAD and AUD: AUD & CAD mixed, touched 2009 highs tracking rising crude prices, profit taking limits gains

Overview

USD traded mixed with numerous cross currents impacting volatile USD price action. Safe haven demand sparked by escalating tensions with North Korea, speculation that the worst of the global recession has passed, positive housing data from the UK, negative ECB rhetoric, crude prices rising above $63 a barrel were some of  the major cross currents impacting today’s FX trade. JPY opened lower in reaction to North Korean threats against South Korea and report that North Korea has restarted its plutonium plant. JPY downside was limited by rumors of possible Yuan revaluation. Global equity markets continue to rally fueling improving risk appetite. Tuesday’s release of much better than expected US consumer confidence, a narrowing of the US two-year, ten-year note spread to its best level in six years and report that business economists expect the US recession to end in the third quarter fuel risk appetite. GBP traded above 1.6000 for first time since last November supported by improving UK housing data and optimism about that the UK recession is nearing an end. EUR traded lower pressured by ECB rhetoric. ECB officials suggested that more rate cuts may be needed and that the outlook for the EU economy remains negative for 2009. CHF was pressured by an IMF report which forecasts significant contraction for the Swiss economy. CAD and AUD rally to new highs for 2009 supported by improving risk appetite and a rally in crude prices to new highs for 2009. CAD and AUD failed to hold their gains as the crude rally stalled and geopolitical tensions continued to escalate. The trade showed limited reaction to a Financial Times report warning that exploding debt in America could be a huge risk to the USD. The Financial Times report warns that the USD value could be cut in half. In addition, Mark Farber warns that US could see hyperinflation because the Fed is reluctant to raise interest rates. The USD remains vulnerable to diminishing safe haven attraction as the global economy stabilizes and focus shifts to rising US debt and threat of US inflation. If global equity markets continue to rally and crude prices continue to firm we would expect continued investor diversification out of USD. The trade will be monitoring the level of foreign demand in today’s five-year and Thursdays seven-year US note auction.

Today’s US data:

US April existing home sales rise 2.9% to 4.68 mln units compared to a 3.4% decline in February. A 1.4% rise was expected. The US has an inventory of a 10.2 months supply of existing homes.  The USD extended its gains after the release of the existing home sales report. FHFA home prices fell 1.1% in March and 0.5% in Q1. This marks the largest fall in FHFA house prices since last November.  

Upcoming USD data:

On May 28^th, initial jobless claims for the week ending in 05/23 will be released expected at 625K compared to 631K last week. Also on May 28^th, 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 with initial selling pressure attributed to escalating tensions with North Korea. JPY downside was limited by firmer global equity market trade and report of improvement in Japan’s trade surplus. North Korean rhetoric has intensified with North Korea threatening to attack South Korea. There also reports that North Korea has restarted a plutonium plant. Because of Japan’s close proximity to North Korea, JPY may be vulnerable if North Korea increases its nuclear threat against neighboring countries. Japan’s April trade surplus widened to ¥69.0 bln as exports post a modest recovery. The recovery in Japanese exports generates hope that the worst for Japan’s recession may have passed. JPY traded mixed in cross trade gaining on the EUR and AUD and weakening versus GBP. The minutes of the BOJ policy meeting for April 30^th, state that the Bank of Japan is concerned that the US recession will be prolonged if bad loans aren’t disposed of quickly. In addition, the BOJ said they may have to take more steps to support the corporate sector and are monitoring the impact of issuing bonds on long-term interest rates. The BOJ appears to be discussing a possible exit strategy from quantitative ease. JPY downside was limited by rumors that the Yuan may be revalued. JPY has remained quite resilient in the face of rising geopolitical tensions and improving risk appetite. This suggests that the JPY may be heading higher, supported by growing optimism that the worst has passed for the Japanese and global economy.

On May 28^th, April retail sales will be released expected at 0.3% compared to -1.1% last month. On May 29^th, 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 94.50 the May 26th low with resistance at 9620 the May 20th high.

EUR

EUR traded lower pressured by ECB rhetoric, selling in cross trade to the GBP and lower German inflation. ECB’s Canstancio says that EU economic indicators are negative and EU growth rate will be negative in 2009. ECB Liikanen says lower interest rates cannot be ruled out and 1% is not necessarily as low as ECB interest rates may go. German May inflation declined to -0.1%. EUR selling in cross trade to GBP is attributed to growing optimism that the UK recession is nearing an end. Today the UK reported improving housing data. Because the UK government and Bank of England have taken aggressive fiscal and monetary policy actions there is growing speculation that the UK economy may recover faster than the EU. EU officials have been reluctant to increase fiscal stimulus to boost growth and the ECB has implemented only modest quantitative easing. This week’s EU economic data points to continued deterioration of the EU economy and the UK press is warning about rising EU debt risk. 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. 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. EUR was also pressured by technical selling as the EUR fails to hold above 1.4000.

On May 28^th, EU economic sentiment will be released expected at 69 compared to 67.2 last month. On May 29^th, 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 on May 29^th 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 1.3830 with resistance at 1.4023 the May 26th high and 1.4060 the January 2nd high .

GBP

GBP traded above 1.6000 for the first time since last November supported by optimism that the worst of the UK and global recession has passed. The UK reported improvement in mortgage approvals last month. The improvement in UK housing data fuels speculation that the UK recession is nearing its end. In addition the CBI reports that the rate of contraction in UK has slowed markedly. GBP price direction remains closely correlated to risk sentiment in the direction of global equity markets. Global equity markets continue to firm supported by rising crude prices and a number of economic reports which suggest the global economy stabilizing. Whether the GBP rally can be sustained will depend on whether the improvement in risk sentiment will eventually be supported by improvement in global economic fundamentals. As noted above, GBP was also supported in cross trade to the EUR. The EUR is pressured by concerns about deteriorating economic outlook in the EU, concern about rising EU bank debt exposure and by ECB rate cut speculation. Some analysts attribute today’s GBP gains to an article in the Financial Times warning that exploding US debt threatens America. The USD ended last week near a five-month low pressured by improving risk sentiment and concern that the US may lose its AAA debt rating. S&P warned last week that the UK was at risk for downgrade. The Financial Times report suggests that the UK warning is a wake-up call for the US governments spiraling borrowings. GBP was also supported by technical buying with buy stops triggered above 1.6000. GBP has been firming since trading above the 200 day moving average of 1.5580 on May 20th. 

On May 28th May CBI retail sales will be released expected at -8 compared 3 last month. Main nationwide house prices are also due for release Thursday.

The technical outlook for GBP has improved as GBP trades above psychological resistance at 1.6000. Expect near-term support at 1.5915 the May 26th low with resistance at 1.6120.

CAD

CAD rallied to an eight-month high supported by rising crude prices and firmer global equity markets. Crude prices rose above $63 a barrel and global equity markets continue to gain on optimism that the worst global recession has passed. CAD gains were limited by long liquidation pressures and early setback in US equity markets. The trade ignored comments about rising Canadian budget deficit from Canada’s Finance Minister Flaherty. Flaherty says Canada will have at least a $C50 bln 2009 budget deficit. 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. Canada’s PM Harper said that Canadian budget deficits are affordable and modest in comparison with other nations. No major Canadian economic data was released in today’s trade. The main risk to the CAD is that the rally may have gone too far too fast. CAD direction will hinge on the direction of energy prices and speculation about the global economy.

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 1.0995 the October 8th low with resistance at 1.1355 the May 26th high.

AUD

AUD traded at a new high for 2009 supported by rising crude prices and mixed Australian economic data. AUD recovered from early losses which were sparked by escalating tensions with North Korea. Australia’s Q1 construction work falls 3.7%, a 3% decline was expected. March Westpac leading index rose 0.7%, 0.3% decline was expected. AUD has been one of the best performing currencies supported by declining risk aversion and speculation that the worst of the global economy has passed. Last week RBA Governor Stevens predicted that the Australian economy rebound by year end. AUD price direction will hinge on equity markets, risk sentiment and speculation about the global recovery. AUD gains were limited by weaker US equity market trade and selling in cross trade to the JPY. AUD/JPY selling pressure was attributed to speculation that the Yuan may soon be revalued. RBA meet next Tuesday and are expected to hold rates steady at 3%. Steady RBA rate decision could lend additional support to the AUD. The trade looks for a near-term target of 8000 for the AUD.

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 29^th, 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 today’s rally above 7800. Look for AUD support at 7705 the May 26th low with resistance at 7940.

Specoal Commentary; 26 May 2009

Will investors continue to move away from USD?

Risk of downgrade US debt rating

Tuesday’s USD price action suggests that without safe haven demand the USD has little to support it. The USD firmed on news of North Korean missile tests and report of German debt risk. A report of much better than expected US May consumer confidence sparked a rally in US equities and a reversal of USD safe haven gains. The USD is consolidating at a five month low. This week the US Treasury will auction 101 Billion in two, five and seven year bonds. During the US recession investors have bought the USD and US Treasuries as safe havens. The USD is weakening partly because of concern that US AAA debt rating may be cut. A cut in US debt rating could discourage safe haven demand for the USD and make financing of the US deficit a problem. Fear of US debt rating downgrade and rising budget deficit present a growing risk for the USD and US Treasuries. This weeks US note auction will be a good test for the USD. Poor demand for the auctions may spark additional selling of the USD.

Investor diversification

There are other reasons why the USD has been weakening. The first is investor diversification of US holding as the global economy stabilizes. Rising global equity markets and improving risk appetite has sparked unwind of safe haven USD positions and generates speculation that the worst for the global economy has passed. Investor diversification may reduce demand for US notes.

Inflation threat

A second reason for the current dollar decline is concern that the Fed’s quantitative ease raises the risk of inflation. The Fed’s Plosser says that inflation may be a more serious threat than commonly believed. Plosser says the Fed will have to act quickly to raise interest rates to reduce the central bank’s balance sheet when the financial and housing markets improve. Plosser says prices may rise 2.5% in 2011. Until the Fed outlines its strategy to exit quantitative ease the USD may be vulnerable to US inflation risk. Rising US inflation risk may reduce demand for US notes.

Challenge the US reserve currency status

China is the biggest holder of US bonds. China holds an estimated 800 Billion US debt. China has called for a study of whether the USD should be replaced as the global reserve currency and suggested that the USD be replaced with currency tied to the SDR of the IMF. China may reduce its purchase of US notes because of challenges to the US reserve currency status. Challenge to US reserve status may reduce demand for US notes.

Conclusion:

The threat of an imminent downgrade of US debt is unlikely at this time. The likelihood that US would default on its debt is remote. Concern about US debt may be overstated. Worst case scenario is the US can print money to pay off USD denominated debt. The White House says it is not concerned about the US debt rating. The US will sell a record 3.25 Trillion of debt during the fiscal year ending September 30, 2009. As investors become less risk-averse and unwind of safe haven USD positions will likely continue. The threat of inflation is not imminent. The Fed will begin raising interest rates and outline the plans for its exit strategy to quantitative ease before inflation pressures emerge. Over 60% of global reserves are held in the USD. Change in USD reserve status is impractical at this time. There is no viable alternative to the USD considering the depth of US financial markets. Although there are numerous risks to the USD, the primary driver for USD price action will be risk sentiment and unwind of safe haven USD positions. The level of foreign interest in this week’s US note auctions will be a good gauge of whether investors are continuing to move away from USD. Today’s two year note auction was well received. Indirect bidders took 54.4% of the $40 Billion two year note auction. Indirect bidders include foreign banks.

Note in the weekly graph below EUR is approaching the January 2nd high of 1.4060. A break of this level could spark a move to the Fibonacci extension of 1.4731. Expect EUR support at 1.3650 the May 10th rally high.

Daily Forex Report; 26 May 2009

USD reverses early gains as consumer confidence jumps

• USD: Mixed, North Korean tension gains, downside limited by jump in consumer confidence
• JPY: Higher, supported by safe haven flows and gains in cross trade
• EUR: Lower, German Q1 GDP contracts most on record, weak German data and German bank worries
• CHF: Mixed, unemployment rises, ignores SNB warning that they may buy EUR to weaken CHF
• GBP: Higher, BOE’s Sentence says it’s too early to look for green shoots in the UK economy
• CAD and AUD: 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 27^th, April existing home sales will be released expected at 4.65 mln compared to 4.57 mln last month. On May 28^th, initial jobless claims for week ending in 05/23 will be released expected at 625K compared to 631K last week. Also on May 28^th, 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 29^th, 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 27^th, April trade balance will be released expected at ¥-60bln compared to ¥10 bln last month. On May 28^th, April retail sales will be released expected at 0.3% compared to -1.1% last month. On May 29^th, 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 28^th, EU economic sentiment will be released expected at 69 compared to 67.2 last month. On May 29^th, 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 28^th, 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 29^th, 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.

Daily Forex Report; 22 May 2009

USD lower pressured by US debt and inflation risk

• USD: Lower, concern about US debt,  possible loss of US AAA debt rating, threat of inflation
• JPY: Lower, BOJ upgrades Japan’s outlook, says exports are bottoming, not considering intervention
• EUR: Higher, investors unwind safe haven dollar positions, weak demand for US bond auction
• GBP: Mixed, OECD does not see justification for cutting UK debt rating , Q1 GDP revised at -1.9%
• CAD and AUD: 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 26^th, 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 27^th, April existing home sales will be released expected at 4.65 mln compared to 4.57 mln last month. On May 28^th, initial jobless claims for week ending in 05/23 will be released expected at 625K compared to 631K last week. Also on May 28^th, 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 29^th, 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 27^th, April trade balance will be released expected at ¥-60 bln compared to ¥10 bln last month. On May 28^th, April retail sales will be released expected at 0.3% compared to -1.1% last month. On May 29^th, 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 26^th, 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 28^th, EU economic sentiment will be released expected at 69 compared to 67.2 last month. On May 29^th, 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 29^th, 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 28^th, 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 29^th, 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.

 

Daily Forex Report; 21 May 2009

USD gains limited despite weaker equity market trade

• USD: Higher, equities retreat on downgrade of UK outlook and IMF warning on banks, LEI & Philly Fed rise
• JPY: Mixed, BOJ may upgrade Japan’s outlook, inverse JPY/equity correlation breaks down
• EUR: Lower, pressured by weaker equity market trade, downside limited by improving EU manufacturing PMI
• GBP: Lower, S&P downgrades UK outlook to negative from stable, warns UK may lose top debt rating
• CAD and AUD: 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 26^th, 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 22^nd, 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 22^nd, 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.

Special Commentary; 20 May 2009

Why is investor confidence rising?

The USD traded at a four and a half month low Wednesday pressured by improving investor confidence and unwind of safe haven USD positions. The improvement in investor confidence reflects narrowing of the TED spread, a sharp drop in the VIX index and LIBOR rates and increasing global demand as the Baltic Freight Index rises. In this report, we will take a look a these four major indicators of investor confidence. Whether the USD will continue to decline depends on investor confidence. What is interesting about the analysis which follows is that investor confidence has returned to the pre-Leman Brothers collapse levels of last September. What remains unclear is whether investor sentiment will continue to improve or if risk aversion is about to return? Last night a major investment firm recommended liquidating risky assets because they do not think global economy is out of the woods yet and suggested that the markets are overly optimistic in pricing the end of the global recession. The graphs below suggest otherwise.

The TED spread

Ted spread is often used to measure fear and risk in capital markets. The TED spread measures the difference between the interest rate at which the U.S. Treasury funds itself and the interest rate at which banks lend to each other. Note in the graph below, provided by Bloomberg, the extreme widening of the Ted spread above 400 at the height of the credit crisis. The sharp widening of the Ted spread after September was an indication of severe fear in the capital markets. The TED spread has dropped below 100 and the pre-September crisis level. The narrowing of the Ted spread suggests that fear in the capital markets has dropped significantly.

VIX index

VIX is the symbol for the Chicago Board of Options Exchange Volatility Index. The VIX is used to measure the implied volatility of the S&P index options. The index measures investor’s expectation of volatility over the next 30 days. The higher the VIX index the greater risk for the market. Note in the graph below, provided by the CBOE, that the VIX index spiked to 80 after the credit crisis expanded in September. Currently the VIX index has dropped below 30 and is approaching a pre-credit crisis level. The sharp decline in the VIX index indicates a significant reduction in investor fear and reduced expectation of volatile price action in the S&P.

LIBOR rate

The LIBOR rate is the London Interbank Offered Rate. The LIBOR rate is the rate at which London banks are willing to lend to other banks. The LIBOR rate has narrowed significantly since September. This is an indication that London banks are more comfortable in providing credit. LIBOR is generally looked at as an indicator of the level of stress in credit markets. The current level LIBOR suggests that credit market fears have been greatly reduced since last September. Note in the graph below provided by MoneyCafe.com that LIBOR rates are below the pre- September crisis level. Quantitative easing by the Bank of England has significantly helped to unfreeze the credit markets. 

Baltic Dry Freight index

The Baltic Dry Freight Index (BDI) tracks the daily average prices to ship raw materials. The BDI measures the demand to move raw materials and the precursors to production. The BDI is considered forward looking indicator and a tool to measure global demand. Note in the graph below that the decline in the BDI closely tracked the start of the credit crisis in September falling dramatically until mid-January of 2009. Although the BDI is still significantly below the September 2008 level, the index is currently trading at its best level in almost 4 months. This is an indication that global demand has improved. The rise in the BDI adds to investor confidence that the global economy has stabilized and the worst of the crisis is behind.

Summary

It’s too early to tell whether the improvement in global credit markets, the drop in volatility and uptick in global demand will continue. If they do, the USD decline may be just starting. The direction of equity markets remains the best gauge of investor confidence and risk sentiment. Note in the graph below the Dollar Index was trading at 7600 in September and the direction of the index closely tracked investor sentiment discussed above. If investor confidence continues to improve, then the dollar index may be heading back to 7600.