- USD: Higher, pending home sales rise, Challenger says job cuts back to pre-recession levels
- JPY: Lower, Japan’s PM resigns, Finance Minister Kan is the likely successor
- EUR: Lower , EU inflation rises more than expected, Iran to sell EUR reserves
- GBP: Lower, mortgage approvals rise, construction PMI at a three-year high, King expects inflation to fall
- CAD and AUD: AUD lower & CAD higher, speculation more BOC rate hikes are in the pipeline
USD traded in a narrow range Tuesday against most of the major currencies with the main focus on a sharp decline in the JPY and a strong rally in the CAD. JPY traded lower pressured by news that Japan’s PM Hatoyama has resigned. European currencies opened higher supported by gains in cross trade to the JPY with upside progress limited by positive US employment and housing data. EUR struggled to hold overseas gains that were sparked by report of higher than expected EU inflation rise and comments from a number of central bankers reaffirming commitment to the EUR.EUR was pressured by report that Iran plans to covert its EUR reserves to USD. GBP traded lower despite report of rising UK mortgage approvals and stronger construction PMI pressured by BOE King’s statement that he expects inflation to fall back to target. Commodity currencies traded mixed with AUD finding limited support from report that Australia’s GDP rose by 0.5% in Q1. CAD traded higher with gains attributed to speculation the BOC will raise interest rates again before year end. Today’s US economic data was positive with the Challenger Gray employment survey showing little change from last month. This suggests that employers are becoming more optimistic about the strength of the recovery and are shedding fewer jobs. April pending home sales rose by 6%, a 4% rise was expected.
Today’s US data:
April pending home sales came in at 110.9, a reading of 106.2 was expected.
Upcoming US data:
On June 3rd initial jobless claims for week ending 05/29 will be released expected at 452k compared to 460k last week along with May ADP employment. (The ADP report was delayed because of Monday’s holiday.) May ADP employment is expected at 60k compared to 31k last month. On June 3rd final Q1 productivity and unit labor costs will also be released along with April factory orders and May ISM nonmanufacturing index. Q1 productivity is expected unchanged at 3.6% and unit labor costs are expected at -1.7%. Factory orders are expected to rise by 1% compared to 1.1% last month. The ISM nonmanufacturing index is expected at 55.6 compared to 55.4 last month. On June 4th May non farm payrolls and unemployment will be released. Nonfarm payrolls are expected to rise by 495k compared to 290k last month. The unemployment rate is expected to dip by 0.1% to 9.8%.
JPY traded sharply lower pressured by report that Japan’s PM Hatoyama has resigned. Japan’s Finance Minister Kan is Hatoyama’s likely successor. In the past Kan has been an advocate of weaker JPY but recently he has refrained from comments about the level of the JPY. According to a Bloomberg report Kan called for the weaker JPY in January and has said that Japan’s manufactures see a JPY range of 90 to the mid the 90s as desirable. Kan is considered a fiscal conservative.Kan has also been a vocal critic of the BOJ and has urged the BOJ to do more to boost the economy and set an inflation target. JPY was also pressured in cross trade with EUR/JPY supported by report of higher-than-expected EU inflation, GBP/JPY supported by report of above expectation UK mortgage approvals and strong UK construction PMI and AUD/JPY supported by a report on Bloomberg that yesterday’s steady policy decision by the RBA signals a pause but not an end to the RBA tightening cycle. JPY remains vulnerable to political uncertainty in Japan.
Key technical levels to watch in USD/JPY include support at 91.02 the June 2nd low with resistance at 93.65 the May 13th high.
EUR traded in a narrow range initially supported by gains in cross trade to the JPY and in reaction to report of faster than expected rise in the EU inflation. EUR rallied in cross trade to the JPY in reaction to news that Japan’s PM has resigned. EU April PPI rose by 0.9% a 0.7% rise was expected. This marked the fastest rise in EU inflation since April 2008. The acceleration in EU inflation complicates ECB policy. The ECB is widely expected to maintain accommodative policy well into next year because of concern that the EU debt crisis and new austerity measures will slow the EU recovery. The ECB has recently been buying EU bonds. Despite assurances from the EBC that the bond purchases will be sterilized and the bond purchases are not inflationary investors have their doubts. If EU inflation continues to rise it will raise credibility questions for the ECB. The ECB mandate is price stability. The EUR found limited support from a comment from the ECB’s Noyer that the EUR will remain a strong stable currency and that the current level is not exceptionally low. EUR also found limited support from report that central banks in Brazil, India, Japan, Russia and South Korea reaffirmed commitment to the EUR and were reported buyers of the currency today. In contrast Iran said that it is selling an estimated €45bln and wire reports suggested Iran may stop investing in the EUR. EUR traded at a fresh four-year low versus the USD Tuesday pressured by a confluence of negative news from the EU which included new worries about EU government sovereign debt ratings, bank losses and EU growth outlook. There are rumors circulating that ratings agencies may be preparing to downgrade the sovereign debt ratings of France and Italy. Last week Fitch cut Spain’s debt rating to AA+ plus from AAA. The ECB issued a report which says that European banks may be faced with an additional hundred €195 billion in write-downs. The EU unemployment rate rose to a 12 year high of 10.1% and May manufacturing PMI declined to 55.8 from 58.6 last month. EUR price direction will continue to track news in regard to the EU debt crisis.
On June 3rd EU May service is PMI Index will be released expected at 55.2 compared to 55.6 last month.
The technical outlook for the EUR is negative as EUR trades below 1.2200. Expect EUR support at 1.2111 the June 1st low with resistance at 1.2353 the June 1st high.
GBP traded lower struggling to hold onto overseas gains as equity markets traded lower in Europe and Asia. GBP was initially supported by report of better than expected UK mortgage approvals and strong UK construction PMI. UK April mortgage approvals rose to 49,871 compared to 49,008 last month and May construction PMI rose to three year high of 58.5 compared to 58.2 last month. Today’s UK data follows Tuesday’s report that May manufacturing PMI rose to 15 year high. These data suggest that the UK recovery may be gaining strength and this could encourage speculation that the BOE will move more quickly towards normalization of monetary policy. The OECD said last week that the BOE needs to hike rates to maintain its credibility because of the recent sharp rise in UK inflation.UK April inflation rose by 3.7%.The BOE inflation report was released today. BOE Governor King said that despite volatility he expects UK inflation to meet the 2% target over the next two years. GBP gains were limited by King’s comments and uncertainty about UK budget outlook. The trade will continue to monitor this week’s effort by the new UK government to lay out plans for budget deficit reduction.
CAD traded higher supported by gains in US equities and in reaction to Tuesday’s BOC rate hike. Today’s CAD strength was impressive in light of the fact that crude oil prices drifted lower and BOC Governor Carney said that future BOC rate hikes may be delayed because of the EU debt crisis. Part of today’s CAD rally is attributed to anticipation that this week’s US and Canadian employment data will show significant improvement. Challenger Gray said that US job cuts are back to pre-recession levels. Estimates for US nonfarm payrolls growth due for release Friday range from 200k to 700k .A Reuter’s poll shows 11of Canada’s 12 dealers expect the BOC to hike rates in July and a number of analysts look for BOC rates to reach 1.25% by year end. CAD traded lower Tuesday despite the BOC’s decision to hike interest rates 25bps to 0.50%. The rate hike had been widely expected. According to the statement accompanying the BOC policy decision the BOC recognizes that the global recovery remains uneven noting strong growth in emerging markets some consolidation in the US and Japan and renewed weakness in Europe. The BOC went on to state that the EU debt crisis will result in higher borrowing costs but the impact of events in Europe have been limited to a modest decline in commodity prices and some tightening of financial conditions. The BOC based its rate decision on the fact that economic growth in Canada accelerated at a faster pace in Q1 led by housing and consumer spending and improved employment growth. Canada’s inflation remains in line with the banks April projections. The BOC concluded its policy statement noting that there is considerable uncertainty about the outlook going forward as monetary stimulus is reduced and the central bank must balance domestic considerations versus global economic developments. CAD was also supported by gains in cross to the AUD as the BOC is at the start of its tightening cycle and the RBA is on hold.
On June 4th May unemployment growth, unemployment rate, April building permits and May Ivey PMI will be released. The unemployment rate is expected unchanged at 8.1% with employment growth at 90k compared to 108.7 K. last month. Building permits are expected to rise by 6% compared to 12.2% last month. Ivey PMI is expected at 55 compared to 58.7 last month.
The technical outlook for CAD is mixed as USD/CAD trades below 1.0600. Look for near-term support at 1.0386 the May 19th low with resistance at 1.0573 the June 2nd high.
AUD traded lower pressured by report a slightly weaker than expected Australian Q1 GDP and in reaction to RBA policy uncertainty. Australia’s Q1 GDP rose by 0.5%, a 0.6% rise was expected. The Australian Q1 GDP report was relatively strong and Australia’s Swan said the Q1 GDP report is a tentative sign of a self-sustaining recovery and strong exports. Tuesday the RBA elected to hold rate policy unchanged. In its policy statement the RBA noted that there is a little more uncertainty because of the debt crisis in Europe and the RBA appeared to signal that rates may remain on hold for some time to come. The RBA was widely expected to hold rate policy unchanged. A Bloomberg report today suggests that the RBA has elected to pause its tightening cycle but that its tightening cycle has not ended. The RBA raised rates six times in the last seven meetings to the current 4.5% level. A number of economists believe that the RBA wants rates closer to 5% by year end because of rising Australian inflation, tight labor market conditions and relatively strong domestic growth. AUD was also pressured by rumors that China may soon hike rates. AUD price direction will continue to track risk sentiment and equity markets.
On June 3rd April trade balance with released expected at -0.20bln compared to -2.08bln Last month.