Daily Forex Report; 27 April 2009

USD higher on swine flu fears and safe haven demand

 

• USD: Higher, risk aversion spikes on swine flu outbreak, G-20 did not discuss new reserve currency
• JPY: Higher, supported by safe haven flows, Japan passes a ¥15.4 Trillion supplemental budget
• EUR: Lower, pressured by rising risk aversion and ECB rate cut speculation
• CHF: Lower, Swiss finance minister expects sharp fall in Swiss economy during 2009
• GBP: Lower, pressured by rising risk aversion, falling house prices and weaker mortgage applications
• CAD and AUD: AUD lower & CAD mixed, CRB tumbles and risk aversion rises

 

 

Overview

USD and JPY traded higher supported by a spike in risk aversion and weaker equity markets. The spike in risk aversion was sparked by concern that the spread of swine flu is an additional threat to the global economy. An IMF report that bad bank loan losses will top $5.8 Trillion, a drop in UK house prices and mortgage applications, and a New York Times report of a possible bank default in Kazakhstan added to today’s spike in risk aversion. The trade found limited comfort in comments from the G-7 that the pace of the global decline is slowing. The G-7 expects global recovery later this year but warns that downside risks remain. The G-7 did not discuss a new reserve currency and pledged to restore credit flows and the clean bank assets. EUR was pressured by continued divisions among the ECB about ECB rate outlook. ECB’s Weber says the lower limit of ECB rate cut should be 1%. The ECB’s Wellink says the ECB should discuss cutting rates below 1%. CHF traded lower pressured by a statement from the Swiss finance minister that the Swiss economy is likely to continue to fall during 2009. Commodity currencies were hit by a sharp drop in the CRB as grain prices were hit by the swine flu news and crude prices traded lower on concern that the swine flu breakout threatens the global economy. President Obama says swine flu is no cause for alarm. The decline in US equities was moderate. This suggests that investors do not see the swine flu outbreak as a major threat at this time. FX markets were reluctant to follow the rebound in US equities. The trade awaits the details of US Bank stress tests and news on possible bankruptcy for US automakers, Chrysler and GM. GM will cut 23 K jobs and shut down the Pontiac brand. Bank stress test results are due on May 4th.

 

Today’s US data:

No major US data was released in today’s trade.

 

Upcoming US data:

This week’s US economic calendar includes the April 28th release of Case Shiller February Home Price index, expected at -18 compared to -19 last month. Also on April 28^th, April consumer confidence will be released expected at 30 compared to 26 last month. Q1 GDP will be released on April 29th expected at -5% compared to -6.3% last month. Q1 core PCE deflator will also be released on April 29th expected at 1.4% compared to 0.9% last month. The FOMC meet on April 29th and are expected to hold monetary policy steady. On April 30^th, initial jobless claims for the week ending in 4/25 will be released expected unchanged at 640 K. Personal income and personal consumption for March will also be released on April 30th expected at -0.2% and 0.3% respectively. On May 1^st, April University of Michigan consumer sentiment will be released expected at 63 compared to 61.9 last month. Also on May 1^st, March factory orders will be released expected at -0.8% compared to 1.8% last month along with April ISM index expected at 38 compared to 36.3 last month.

 

JPY

JPY traded higher supported by safe haven flows sparked by falling global equity markets and concern of the spread of swine flu. The outbreak of swine flu is seen as an additional risk for the global economy. Report that Japan’s cabinet passed a record ¥15.4 Trillion supplemental budget to boost growth had limited impact on today’s trade. Japan’s government cut its 09/10 economic forecast to -3.3%, and expects CPI to fall by 1.3%. JPY was also supported in cross trade with EUR/JPY pressured by comments from ECB’s Wellink calling for more aggressive rate cuts. GBP/JPY traded lower with GBP pressured by report of falling UK house prices and weak UK mortgage demand. AUD/JPY traded almost 2% lower with AUD pressured by falling CRB and concern that the spread of the swine flu may hurt global demand. BOJ meet Thursday and are expected to keep rates unchanged and maintain a grim view for the Japanese economic outlook. BOJ monthly preview is expected to forecast a recovery for Japan’s economy in early 2010.

 

This week’s Japanese economic calendar includes the April 28th release of March retail sales expected at -0.5 % compared to -0.3% last month. On April 30^th, March industrial output will be released expected at 2% compared to -9.4% last month. March housing starts and construction orders will also be released on April 30th. Housing starts are expected to rise 2% and construction orders are expected down 28%. On May 1^st, March CPI will be released expected at 0.2% compared to -0.3% last month. March employment and household spending will also be released on May 1st. The unemployment rate is expected to rise to 4.6% from 4.4% last month and household spending is expected down 0.2% compared to 0.3% in February.

 

Key technical levels to watch in USD/JPY include support at 95.95 the March 30th low with resistance at 98.45 the April 23rd high.

 

 

 

 

EUR

EUR traded lower pressured by a spike in risk aversion and ECB rate cut speculation. EUR was pressured by concern that the spread of swine flu could further weaken the global economy. EUR price direction has been re- linked to the direction of equities and risk sentiment. USD benefits from safe haven flows on fears the global economy may continue to weaken if the swine flu outbreak turns into a pandemic. The ECB remains divided over the outlook for ECB monetary policy. The ECB’s Weber says that the downside limit for ECB rate cut should be 1% and he does not see deflation risk in the EU. The ECB’s Wellink says the ECB should discuss cutting rates below 1%. Last week there were reports from the EU which suggest that the EU economy may be stabilizing. German business confidence surveys and EU manufacturing and services PMI’s posted moderate improvement. These reports encourage some of the ECB members to conclude that EU economy will recover in the second half of 2009 and less aggressive ECB action is needed. Fear of Kazakhstan bank default also pressured the EUR.

 

This week’s EU economic calendar includes the April 28th release of German CPI expected at 0.7% compared to 0.5% last month. On April 29^th, EU April business climate will be released expected at -3.53 compared to -3.58 last month. On April 30^th, March unemployment will be released expected to rise to 8.7% from 8.5% last month

 

The technical outlook for the EUR is mixed as rallies fail above 1.3300. Expect EUR support at 1.2980 the April 23rd low with resistance at 1.3246 the April 27th high.   

 

 

 

CHF

CHF traded lower pressured by a statement from the Swiss Finance Minister Mertz that he expects a sharp fall in the Swiss economy during 2009. Mertz went on to say that Swiss banks have ample liquidity. Last week the CHF was one of the best performing currencies gaining 2.4% against the USD. CHF was supported by improving risk sentiment and a statement by Swiss Chairman Hildebrand that the SNB must be patient and let past rate moves have time to work. Hildebrand’s comments appeared to dampen fears of intervention. CHF is also supported by last week’s report of improvement in the Swiss ZEW index. The Swiss ZEW index improved to -27.7 from -57 last month. This week’s Swiss economic calendar includes Tuesday’s release of UBS consumption index expected at 0.890 compared to 0.886 and Wednesday’s release of KOF leading indicator expected at -1.90 compared to -1.79 last month. EUR/CHF is trading below 1.5100. The SNB intervened aggressively near the 1.5100 level in the cross during March. CHF strength in cross trade and versus the USD increases the risk of another round of intervention by the SNB. Expect USD/CHF support at 1.1305 April 13th low with resistance at 1.1600 April 22nd high.

 

 

  

 

GBP

GBP traded lower pressured by rising risk aversion, report of falling UK home prices and a drop in demand for UK mortgage applications. As noted above, the spread of swine flu generates concern about additional risk to the global economy. UK April Hometrack house prices fall 10.1% and mortgage approvals fall to 26K in March from 28 K last month. Former UK Treasury’s Bootle warns of the risk of a 1930s type depression in house prices. GBP was also pressured by a statement from IMF’s Strauss Khan that he doubts the validity of the assumptions in the UK budget. Last week the UK announced its 2009 budget. The budget included a sharp increase in deficit spending and assumptions of improving growth starting in mid 2010. The UK budget deficit will reach 175 bln pounds and 12.4% of GDP. Moody’s warned that UK debt rating may be at risk for a downgrade. In addition, UK Q1 GDP weakened in its fastest pace in thirty years. GBP was pressured by selling in cross trade to JPY on concern that the swine flu outbreak may spread to Europe and contribute to additional economic and financial turmoil in the region. GBP downside was limited by a rebound in US equities as President Obama says to not be alarmed about the swine flu outbreak and gains in cross trade to the EUR. GBP gains versus the EUR are attributed ECB rate cut speculation and NYT report of possible Kazakhstan bank default.

 

This week’s UK economic calendar includes the April 28th release of April CBI retail sales expected at -40 compared to -44 in March. On April 30^th, April GFK survey will be released expected to improve to -29 from -30 last month. Also on April 30^th, April Nationwide House Price index is due for release expected to fall to -1% compared to 0.9% last month. On May 1st, March consumer credit, mortgage applications and mortgage lending will be released. Consumer credit is expected at 0.2bln compared to 0.245 bln last month. Mortgage applications are expected at 40K compared to 38K in February and mortgage lending is expected to rise to 1.6 bln compared to 1.507 bln last month. UK April manufacturing PMI will also be released on May 1st expected at 39 compared to 38 last month.

 

The technical outlook for GBP is mixed as GBP holds support at 1.4440 the April 23rd low. Expect near-term support at the 1.4395 the April 22nd low with resistance at 1.4775 the April 24th high.

 

 

 

 

CAD

CAD traded mixed to lower pressured by weaker CRB and a spike in risk aversion. The CRB traded lower with grains and crude pressured by concern that the spread of swine flu will hurt global demand for commodities. Crude price dropped below $50 a barrel and soybeans hit limit down. CAD downside was limited by a rebound in US equities and last week’s decision by the BOC to not implement quantitative ease at this time. The BOC elected to cut interest rates to record low 0.25% last week but stopped short of implementing quantitative ease. CAD surged in reaction to the BOC’s decision to hold off on quantitative ease for now. The BOC’s decision to hold off on quantitative ease is seen as a sign that the Bank of Canada is confident that the Canadian economy will recover in the second half of 2009. CAD is supported by speculation that the Canadian economy is likely to improve faster than its counterparts and that the BOC’s decision to hold off for now on quantitative ease is a positive sign for Canada’s economic outlook. The fact that the BOC did not follow the BOE and FED and adopt quantitative ease is a mild positive for the CAD. The preferred strategy to sell USD/CAD on rallies to 1.2300. A Bloomberg survey of 38 analysts and economists, finds that the CAD is expected to trade at 1.1900 by the end of March of 2010.

 

This week’s Canadian economic calendar includes the April 30th release of February GDP expected at -0.5% compared to -0.7% in January. Canada’s industrial and raw materials prices will also be released on the 30th with March IPPI expected at 0.6% and RMPI expected at 1%.

 

The technical outlook for CAD has improved with last week’s break of 1.2200. Look for near-term resistance at 1.2416 the April 23rd high with support at support at 1.2075 the April 17th low. Expect key USD/CAD support at 1.1875 January 12th low.

 

 

 

AUD

AUD traded lower pressured by rising risk aversion as equity markets decline on concern about the spread of swine flu virus. The spread of swine flu adds additional threat to the global economy and dampens hope for economic recovery. In addition, the IMF forecast that bad bank loans with top $5.8 Trillion. The IMF says it does not see economic recovery before 2010 and the global recession has another year to run. Fear that the swine flu break out will turn into a pandemic generates risk aversion. The trade will look to news of possible US auto maker bankruptcies and the May 4th release of US Bank stress test results for further clues to the global economic outlook and risk sentiment. Last week, RBA Governor Stevens confirmed that the Australian economy is in recession. Australian producer prices fell and inflation dropped to an 18 month low. Declining Australian inflation and deteriorating growth outlook will increase pressure on the RBA to cut interest rates. AUD price direction will continue to key off risk sentiment.

 

This week’s Australian economic calendar includes the May 1st release of March private sector credit expected at 0.3 mln compared to flat last month. NAB business confidence survey will also be released on May 1^st, expected at -40 compared to -42 last month. On Thursday, AIG PMI survey will be released expected at 34 compared to 33.4 last month.

 

The technical outlook for the AUD is mixed as AUD breaks support at 7200. Look for AUD support at 6950 the April 20th low with resistance at 7240 the April 20th high and 7325 the April 23rd high.