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.