- USD: Lower, jobless claims declined by less than expected, Q1 GDP revised lower, stocks surge
- JPY: Lower, exports rise by 40.4%, pressured by improving risk appetite
- EUR: Higher, China denies that it is reviewing EUR bond holdings
- GBP: Higher, retail sales slowed to a 14 month low, tracking improved risk appetite
- CAD and AUD: AUD & CAD higher, China denial helps add some stability to global markets
USD traded lower Thursday as equity and commodity markets rally in reaction to a shift in market sentiment. The shift in market sentiment was attributed to China’s denial of a report posted in the Financial Times Wednesday titled “China is reviewing its EUR bond holdings.” The article suggests that China is concerned about debt exposure to southern Europe and Ireland. China says that Europe is a key investment market and report of review of EUR holdings is groundless. The China denial contributed to improvement in risk appetite as it helped to dampen concern of widening impact of the EU debt crisis. Commodity currencies traded higher and the JPY traded lower tracking today’s improvement in risk appetite. AUD found additional support from a press report that the RBA may soon resume its tightening cycle and speculation Australia may be backing away from a proposed resource tax. CAD traded higher as crude oil rises above $ 73 a barrel. There was limited reaction to report that Spain approved a 15bln EUR austerity package or report that UK retail sales growth slowed to a 14 month low. US economic data was mixed but disappointing with jobless claims posting a slightly smaller than expected decline and Q1 GDP unexpectedly revised lower. US Q1 economic rebound was slower than originally reported.
Today’s US data:
Initial jobless claims for week ending 05/22 declined by 14k to 360k, a reading of 455k was expected. Revised Q1 GDP came in at 3%, a 3.4% rise was expected.
Upcoming US data:
On May 28th April personal income and consumption will be released expected at 0.4% and 0.3% respectively along with April core PCE deflator, final May University of Michigan sentiment and May Chicago PMI. The PCE deflator is expected unchanged at 1.3%. Michigan sentiment is expected at 73.5 compared to 73.3 last month and Chicago PMI is expected at 63 compared to 63.8 last month.
JPY traded lower pressured by a sudden shift in risk sentiment as equity markets rally in reaction to report that China has denied that it plans to review its EUR bond holdings. The China denial helped to reduce fears that the EU debt crisis is spiraling out of control. The fact that China reaffirmed its commitment to the EU as a major market investment helped to boost risk appetite and selling of the USD and JPY. The Nikkei closed 117 points higher. Japan reported that exports rose for the fifth consecutive month in April. Japan’s April trade surplus widened to ¥742.3 billion with exports up 40.4% and imports up 24.2%. The trade balance report suggests that the Japanese recovery is strengthening. Japan reported that Q1 GDP rose by 4.9%. Japan’s GDP growth is well above GDP growth in the US and EU. Focus turns to Friday’s release of reports on unemployment, household spending, retail sales and CPI. JPY is expected to continue to trade inversely to the direction of equity markets and risk sentiment.
On May 27th April trade balance will be released expected at ¥610bln compared to ¥949bln last month. On May 28th April CPI will be released expected at 0.2% compared to 0.3% last month along with April household spending and unemployment and retail sales. Household spending is expected to fall by 0.6% compared to 4.4% last month, the unemployment rate is expected unchanged at 5% and retail sales are expected to fall by 0.5% compared to a 0.8% rise last month.
Key technical levels to watch in USD/JPY include support at 89.26 the May 25th low with resistance at 90.75 the May 24th high and 91.88 the May 20th high.
EUR traded higher supported by report that China plans to continue to hold EU debt and in reaction to the passage of new austerity measures in Spain. The EU traded sharply lower in Wednesday’s trade pressured by a Financial Times report which suggested that China may be reviewing its holding of EUR debt. The Financial Times report generated fear that China may begin dumping EUR holdings and that if this were to be the case the decline in the EUR would accelerate and fears of contagion from the EU crisis would intensify. A Chinese official denied the Financial Times report and said that the EU remains a major investment market for China and that China has no plans to review its EUR bond holdings. The China denial sparked a sharp recovery in equity markets and risk sentiment and helped to reduce investor fear that the EU debt crisis is spreading. The Spanish parliament approved a 15bln EUR austerity package by the slimmest of margins. The Spanish parliamentary vote for the austerity package was 169 in favor and 168 against. The Spanish austerity measures follow recent plans for austerity measures in Italy and Greece. There were no major economic reports from the EU today. ECB’s Nowotny says that the ECB is not engaging quantitative easing and recent bond purchases does not change ECB policy outlook. He went on to say that EUR depreciation versus USD is a positive development (think exports). EUR price direction will continue to track news in regard to the EU debt crisis.
The technical outlook for the EUR is negative as EUR trades below 1.2300. Expect EUR support at 1.2143 the May 21st low with resistance at 1.2500.
GBP traded higher supported by improving risk appetite as equity markets rally in reaction to the China denial of report that China plans to dump EUR holdings. GBP gains were limited by report of weak UK retail sales and report that Dubai Capital has requested a three-month extension on some of its debt obligations. UK May CBI retail sales declined to -18 compared to +13 last month, a reading of +12 was expected. This is a 14 month low for UK retail sales. The slowdown in UK retail sales may reignite concerns about the strength of the UK recovery. The weak UK retail sales report follows Wednesday’s report that UK mortgage lending slowed last month. Today’s UK economic data cloud the outlook for BOE policy. The OECD said that the BOE faces credibility issues because of recent rise in UK inflation. According to the OECD the BOE should begin to normalize rate policy in the second half of the year and start to reduce its emergency funding program. If the UK economic data continues to weaken it will make it difficult for the BOE to move towards normalization of monetary policy by year-end. UK banks have significant exposure to Dubai Capital debt obligations and today’s report that Dubai capital is seeking a delay in payment of some of these obligations was a negative factor for the GBP. The trade continues to monitor news in regard to the UK budget deficit. UK PM Cameron says that there is an international consensus on the need for countries to deal with budget deficits. The new UK budget will be released on June 22nd and the budget is expected set a goal of eliminating the UK structural deficit over the next five years. Last week, the UK reported a record monthly rise in net public-sector borrowing. The continued rise in UK government borrowing illustrates the difficult fiscal outlook facing the new UK government.
CAD traded higher supported by a rebound in global equity and commodity markets. Crude oil prices rallied above $ 73 a barrel and equity markets traded higher in Asia, Europe and the US. The rebound in global equity markets and commodities helped to boost risk appetite. The rebound in the equity and commodity markets is attributed to report that China has denied that it seeks to reduce EUR bond holdings. The China denial contributed to stability in the global equity and commodity markets and generates hope that the fallout from the EU debt crisis will be limited. Global risk sentiment got a boost Wednesday from report that the OECD had raised its 2010 global growth forecast. The impact of the OECD report was undermined by a sharp selloff in the EUR Wednesday sparked by Financial Times report which suggested that China is reviewing its EUR bond holdings. CAD remains vulnerable to uncertainty about BOC policy outlook. There is a significant debate emerging in regard to the outlook for BOC policy in light of the current turmoil in global markets and uncertainty about global growth outlook. The next BOC meeting will be held on June 1st. Some analysts have argued that the EU debt crisis fallout will force the BOC to delay its rate hike cycle. Bloomberg carried an article Tuesday that says that BOC Governor Carney is prepared to hike rates in June in reaction to strong Canadian domestic growth and the recent boom in commodity demand from Asia. Canada reported its fastest growth in a decade with strong gains in employment and accelerating inflationary pressures. The BOC has not raised rates since July of 2007. Reuters reported Friday that despite EU debt crisis and Chinese growth worries all the Canadian dealers expect the BOC to hike rates 25bps in June.
This week’s Canadian economic calendar includes the May 28th release of Q1 current account expected at – 8.6bln compared to -9.7bln last month.
The technical outlook for CAD is mixed as USD/CAD trades below 1.0800. Look for near-term support at 1.0427 the May 20th low with resistance at 1.0706 the May 27th high.
AUD traded sharply higher supported by firmer equity markets and in reaction to a consultant report which suggests that the RBA may soon resume its tightening cycle. As noted above, global equity markets got a boost from report that China denied that it plans to review its EUR bond holdings. The denial helped to boost risk appetite and demand for high yield currencies. There has been a great deal of uncertainty about RBA policy outlook and whether the RBA will soon pause in its tightening cycle. Part of this uncertainty is attributed to recent RBA policy minutes and statements from RBA officials who suggest that Australia’s interest rates are close to average. Additionally, recent Australian economic data has been mixed. Wednesday Australia reported that the Westpac leading index confirmed the annual Australian growth rate is rising at the fastest pace in 13 years. Monday, Australia reported a strong rise in vehicle sales. There was limited reaction to today’s report that Australia’s Q1 CAPEX declined by 0.2%. Until the global equity and financial markets exhibit signs of stability the AUD remains vulnerable to speculation that the current market turmoil will encourage the RBA to delay plans for another rate hike. AUD is also vulnerable to speculation the debt crisis is a threat the global recovery. For whatever reason investors seem to be less concerned about the fallout from the EU debt crisis today and if this shift in sentiment continues it could boost demand for the AUD.AUD was also supported by a rumor that Australia may be reconsidering a proposed 40% resource tax.
On May 31st April retail sales will be released expected to rise by 0.8% along with Q1 current account, Q1 company profits and April private sector credit.
The technical outlook for the AUD is mixed as the AUD rallies back above 8300. Expect AUD support at 8226 the May 27th low with resistance at 8496 the May 20th high.