Daily Forex Report; 18 May 2009
USD and JPY lower as equities and crude prices rise
- USD: Lower, equities and crude oil prices rise, Indian equities surge, Lowe’s earnings beat estimates
- JPY: Lower, threat of intervention, Moody’s downgrades Japan’s AAA debt rating
- EUR: Mixed, ECB’s Weber warns not to exaggerate signs of improvement in EU economy, exports rise
- CHF: Mixed, gains limited by threat of intervention and falling inflation
- GBP: Higher, supported by report of improving UK house prices and gains in cross trade to EUR and JPY
- CAD and AUD: AUD & CAD higher, IMF expects global expansion to start next year
Overview
The USD starts the week mixed with the JPY pressured by threat of intervention, GBP supported by rising UK house prices and commodity currencies firming in cross trade to the JPY. Japan’s Vice Finance Minister Sugimoto said that Japan is watching FX movements. His comments increase the risk of intervention from Japan to try to weaken the JPY. JPY was also pressured by report that Moody’s cut Japan’s AAA debt rating. UK May Rightmove house prices rose 2.4%. The rise in UK house prices generate optimism about UK economic recovery. EUR traded mixed with gains limited by comments from ECBs Weber warning to not exaggerate recent signs of stability in EU economy. A rally in European and US equities and crude oil sparked demand for commodity currencies as risk appetite improves. A 17% rise in Indian equities, better than expected earnings at Lowes and a statement form the World Bank President that pace of the global decline was set to slow fuels Monday’s improvement in risk sentiment. CHF edged higher with gains limited by threat of SNB intervention. Markets were closed in Canada for Victoria Day but the CAD rallied as crude prices firmed. AUD traded higher supported by firmer equity markets and gains in cross trade to the JPY. The Indian equity market traded sharply higher after positive Indian election results. Rumors of Asian central bank buying of the AUD/JPY cross supported the AUD. Commodity currencies price direction remains closely correlated to the direction of equities. Threats of intervention and risk sentiment are the driving factors for FX trade.
Today’s US data:
May NAHB index is due for release expected at 16
Upcoming USD data:
On May 19th, April housing starts will be released expected at 520K compared to 510K last month. On May 21st, jobless claims will be released for week ending in 05/16 expected at 610 K compared to 637K last week. Leading economic indicators for April and May Philly Fed survey will also be released on May 21st. The April LEI is expected at 0.2% compared to -0.3% last month. Philly Fed survey is expected at -19 compared to -24.4 in April.
JPY
JPY traded lower versus the USD and weakened in cross trade pressured by threat of intervention and Moody’s downgrade of Japan’s debt rating. Japan’s Vice Finance Minister Sugimoto said Japan is watching FX movements closely and he is concerned that excessive FX movements may hurt Japan’s economy. His comments increase the risk of BOJ intervention. The JPY closed at a two month high Friday mainly supported by safe haven flows as the recent rally in global equity markets stalled. US and European equity markets rallied in Monday’s trade and risk sentiment improved. Japanese officials are concerned that strong JPY is a threat to economic recovery in Japan and contributes to deflationary pressures. Moody’s cut Japan’s debt rating and upgraded Japan’s local debt rating. The impact of the debt rating cut was partly offset by improving Japanese manufacturing and consumer data. Japan’s May Tankan manufacturing index improved to -69 from-76 in April and April consumer confidence index rises to 32.4 from 28.9 in March. JPY weakened in cross trade to GBP with GBP supported by report of improving UK house prices. EUR/JPY traded higher with the EUR supported by report of improving EU trade balance. AUD/JPY traded more than 1.5% higher with AUD supported by report of Asian central bank buying and firmer equity markets. Threat of intervention and risk sentiment will be the key drivers for JPY price direction. USD/JPY traded at 94.55 in overseas trade with JPY supported by a sharp drop in the Nikkei. The Nikkei closed 226 points lower. Japanese intervention rhetoric surfaced around the same time as JPY strength and overnight highs. This suggests that 94.55 is the first level that Japanese officials would prefer not to see the JPY rise through.
This week’s Japanese economic calendar includes the May 19th release of revised industrial output for March expected at 1.6% compared to -9.4% last month. On May 20th Q1 GDP will be released expected at -4% compared to -3.2% previous report. On May 21st, April trade balance is due for release expected at ¥-110 bln compared to ¥-234 bln last month. Also on May 21st, March tertiary activity is due for release expected unchanged at -0.8%, along with his March leading index expected at 2.4%.
Key technical levels to watch in USD/JPY include 94.55 the May 18th low and 94.15 the March 20th low with resistance at 96.70 the May 13th high.
EUR
EUR traded flat with gains limited by selling in cross trade to GBP and comments from ECB’s Weber that he does not see positive growth in the EU until the middle of 2010. Weber also warned not to exaggerate the recent signs of improvement in the economy. EUR was pressured in cross trade to the GBP after the release of report of improving UK house prices. EUR downside was limited by report of improvement in EU trade balance and gains in cross to the JPY. The EU trade report shows exports have risen for the second month in a row. March trade surplus rises to 0.4bln from 1 bln deficit last month. Last week the EU reported that GDP declined at a record pace. Despite the fall in EU GDP, a number of ECB officials have expressed optimism about the EU economy. ECB’s Provopoulos says that he sees green shoots which suggest that the EU economy is stabilizing. Weber’s comments are in opposition to these optimistic comments from other ECB members and limit demand for the EUR. EUR firmed in cross to the JPY after Japan’s vice finance Minister warned excessive FX price movements may hurt the Japanese economy. His comments increase the risk of BOJ intervention. The trade will be looking closely at this week’s German business sentiment index and EU manufacturing and services PMI for clues to whether the EU economy will continue to deteriorate. Despite last week’s report of a sharp fall, all EU GDP ECB officials have stated they expect improvement in the EU economy.
This week’s EU economic calendar includes the May 19th release of the May German ZEW index expected at 14 compared to 13 last month. On May 20th, April PPI will be released expected at -0.5% of compared to -0.7% last month. On May 21st, EU May manufacturing and services PMI will be released. The manufacturing PMI is expected at 38 compared to 36.8 last month and the services PMI is expected at 44.5 compared to 43 last month.
The technical outlook for the EUR is mixed as the EUR fails to regain the 1.3600 level and drops back near the 200 day moving average at 1.3415. Expect EUR support at 1.3415 and 1.3345 the May 8th low with resistance at 1.3615 the May 15th high.
CHF
CHF edged higher with upside limited by threat of intervention. Last week the CHF was pressured by verbal intervention from SNB officials. SNB officials warned that they would take action and possibly buy the EUR to try to combat deflation. SNB intervention rhetoric intensified after last weeks release of weaker than expected Swiss producer and import prices. The SNB intervened in March and sparked a sharp 500 point rally in the EUR/CHF cross. EUR/CHF is trading near 1.5100 and the SNB is expected to defend 1.1500 level in the cross. There is debate as to whether the SNB intervened on Friday. This week’s Swiss economic calendar is light with Wednesday’s release of April ZEW Index expected at -28 compared to -27.7 last month. Threat of intervention is the dominant focus for CHF trade. Expect USD/CHF support at 1.0980 the May 13 th low with resistance at 1.1310.
GBP
GBP traded higher supported by report of improving UK house prices and gains in cross trade to the EUR and JPY. UK May Rightmove house prices rise 2.4%. The rise in UK house prices generates speculation that the UK economy is stabilizing. GBP gains in cross trade to the EUR reflect today’s UK house price data and comments from the ECBs Weber warning not to exaggerate improvement in EU economic data. Threat of intervention and downgrade to Japan’s AAA debt rating by Moody’s sparked selling of the JPY in cross trade. GBP direction will key off the outlook for the UK economy and this week’s active UK economic calendar. This week’s UK economic calendar includes Tuesday’s release of inflation and retail prices. On Wednesday, the Bank of England’s minutes for the May 6/7th BOE policy meeting will be released. On Thursday, retail sales and public-sector borrowing will be released and Friday GDP will be released.
This week’s UK economic calendar includes the May 19th release of April CPI expected at 0.1% compared to 0.2% last month. On May 20th, May CBI orders will be released expected at -55 compared to -57 last month. MPC minutes for the May 6/7th BOE meeting will also be released on May 20th. On May 21st, April public-sector borrowing will be released along with April retail sales. The public-sector borrowing is expected at 20 bln compared to 19.087 bln last month. April retail sales are expected at 0.1% compared to 0.3% last month. On May 22nd, GDP will be released expected at – 2% compared to -1.9% last quarter.
The technical outlook for GBP has improved as GBP traded above 1.5200. Expect near-term support at 1.5115 the May 18th low with resistance at 1.5355 the May 12th high. Next major resistance for GBP is 1.5500.
CAD
Markets were closed in Canada for Victoria Day. The CAD traded higher supported by firming equity markets and rising crude prices. The rise in equity markets is attributed to an upbeat outlook from Lowe’s and a 17% rally in the Indian stock market after the results of the Indian election raises hope for political stability in India. CAD traded over 2% lower last week pressured by weaker equity market trade and declining crude prices. The direction of the CAD will key on the direction of equities and crude. The correlation of the CAD and equities is over 94%. The main economic reports for this week’s trade will be the May 20th release of CPI and the May 22nd release of retail sales. The Bank of Canada lowered interest rates at the start of the month but elected to hold off on quantitative ease. The BOC’s decision to hold off on quantitative ease partly reflects expectation that the Canadian economy will recover more quickly as the global economy recovers and the BOC does not see imminent risk of deflation. The CPI and retail sales report will be an important test for the BOC’s outlook on inflation and the Canadian economy. USD/CAD is holding above key technical support at 1.1465 the November 5th low. A break of this level will be needed to encourage further CAD gains.
This week’s Canadian economic calendar includes the May 20th release of April CPI expected at 1.3% compared to 1.2% last month. On May 21st, March wholesale sales will be released, along with March net foreign investment. Wholesale sales are expected at -0.2% compared to -0.6% last month. Net foreign investment is expected at 5.33 bln compared to 6.11 bln last month. On May 22nd, March retail sales will be released expected at 0.4% compared to 0.2% in February.
The technical outlook for CAD is turning mixed as USD/CAD trades above major support at 1.1465. Look for near-term support at 1.1555 the May 15th low with resistance at 1.1815 the May 18th high.
AUD
AUD traded sharply higher supported by improving risk sentiment as equities rally in India, Europe and the US and crude prices rise. India’s stock market rallied 17% supported by euphoria after the Indian election. The IMF’s Lipsky expects the global expansion to start next year. Chinese officials said that they will implement more measures if economy slows. All these factors combined to boost today’s improvement of risk sentiment. Threat of intervention supports AUD in cross trade to the JPY as Japanese officials expressed concern that JPY strength may hurt the Japanese economy. AUD/JPY traded 6% lower last week with AUD pressured by falling global equity markets and JPY supported by safe haven demand. AUD rebounded from early losses in overseas trade that were sparked by weaker Asian equity markets. This week’s Australian economic calendar is relatively light with reports on labor prices and new car sales scheduled for release. AUD price direction will hinge on equity markets, risk sentiment and speculation about the global recovery. No major Australian economic data was released in today’s trade.
This week’s Australian economic calendar includes the May 20th release of Q1 labor prices expected at 0.8% compared to 1.2% last quarter. On May 21st, April new car sales will be released expected at 2% compared to -3.2% last month.
The technical outlook for the AUD is mixed. AUD rally has stalled in front of major resistance at 7745, the October high. Look for AUD support at 7451 the May 18th low with resistance at 7620 the May 7th high and 7745 the October 6 th high.
