- USD: Mixed, stocks rebound in reaction to a 2.7% surge in construction spending
- JPY: Lower, reverses oversees gains as equity markets erase sharp early losses, political uncertainty
- EUR: Lower, threat of EU bank write-downs and more sovereign debt ratings cuts, stocks recover
- GBP: Higher, UK manufacturing PMI at 15 month high, two year high versus EUR
- CAD and AUD: AUD & CAD lower, RBA leaves rate policy unchanged, BOC hiked rates 25bps to 0.5%
USD traded at a 15 month high Tuesday supported by European debt worries and bank concern and in reaction to weak PMI data from China. There are rumors circulating that ratings agencies may downgrade France and Italy’s sovereign debt ratings. Late last week Fitch cut Spain’s sovereign debt rating to AA+ from AAA. The ECB issued a report warning that European banks may be faced with additional €195 billion in write-downs. China’s May PMI declined to 53.9 from 55.7 last month. Equity markets traded sharply lower in reaction to concern about European debt ratings and bank losses and slowing of the Chinese economy. GBP outperformed supported by positive UK PMI data and a rally to a two-year high versus the EUR. Positive PMI and GDP data from Switzerland were overshadowed by negative news from the EU. The EU unemployment rate rose to its highest level in 12 years at 10.1%. The RBA voted to hold rate policy steady and the BOC hiked rates 25 bps. Commodity currencies traded lower and the JPY traded at higher tracking today’s spike in risk aversion. US economic data was mixed with construction spending rising much more than expected and the ISM manufacturing index coming in right on expectation. USD pared oversees gains after the release of today’s US data as equity markets reverse sharp early losses and turn higher for the day. The reversal in the equity markets helped negate negative risk sentiment from overseas trade.
Today’s US data:
April construction spending rose 2.7%, a 0.1%% decline was expected. May ISM manufacturing index, came in as expected at 59.7.
Upcoming US data:
On June 2nd May ADP employment and April pending home sales Index will be released. The ADP report is expected at 51k compared to 31k last month. Pending home sales index is expected at 106.2 compared to 102.9 last month. On June 3rd initial jobless claims for week ending 05/29 will be released expected at 452k compared to 460k last week. 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 opened higher supported by a spike in risk aversion sparked by global debt and growth worries. Concern about additional write-downs by European banks and possible new European sovereign ratings cuts coupled with weak PMI data from China sent equity markets sharply lower generating safe haven flows to the JPY.EUR/JPY traded 1% lower and AUD/JPY traded 1.5% lower in early trade with EUR pressured by EU debt and bank worries and AUD pressured by the RBA‘s decision to hold rate policy steady. JPY gains were limited by political uncertainty in Japan as Japans PM Hatoyama faces a split in his coalition government and his popularity takes a hit in the polls. Japanese press reports that the Hatoyama is under pressure to resign. Hatoyama will meet with party leaders Wednesday. This meeting could determine his political fate. Japan will hold upper house elections on July 11th and Hatoyama declining popularity is seen as a threat to his party’s chances in the July election. JPY turned lower for the day reversed cross gains as US equities rally in reaction to report of strong US construction spending. JPY direction will continue to track risk sentiment.
Key technical levels to watch in USD/JPY include support at 89.81 the May 26th low with resistance at 91.88 the May 20th high.
EUR traded at a fresh four-year low versus the USD 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. Today’s news from the EU generates concern that the EU debt crisis may be spreading and that the crisis threatens the EU recovery. European government efforts to reduce budget deficits will likely curb EU growth. Bank of Tokyo Mitsubishi cut its year-end forecast for the EUR to 1.16 as the EU debt and banking crisis will force the ECB to maintain low yields. EUR turned higher midsession as US equities erased sharp early losses in reaction to report of a surge in US construction spending. 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 sharply higher supported by strong UK PMI data and gains in cross trade to the EUR. UK May manufacturing PMI was unchanged at 58. This marked a 15 year high for UK manufacturing PMI. The PMI report suggests that the UK recovery is gaining momentum. Strengthening of the UK economy may encourage the BOE to move more quickly towards normalization of monetary policy. The OECD last week said 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%. Last week’s UK economic data was mixed with Q1 GDP revised slightly higher, mortgage approvals were higher but retail sales were weak. GBP traded at a two-year high versus the EUR with EUR pressured by fresh concern about EU bank losses and sovereign debt ratings. As noted above, there are rumors of possible sovereign debt downgrades for France and Italy and ECB warned that EU banks may face an additional hundred €195 billion in write-downs. GBP was also supported by report that Prudential may drop its bid for AIA. The trade will continue to monitor developments in regard to the EU debt crisis and this week’s effort by the new UK government to lay out plans for budget deficit reduction.
This week’s UK economic calendar includes the June 2nd release of April money supply, mortgage approvals consumer lending and May PMI construction. The money supply is expected to rise by 0.1%. Mortgage approvals are expected at 48k compared to 51k last month. Consumer lending is expected at 9bln compared to 9.6blnlast month. The PMI construction index is expected at 57.5 compared to 58 last month.
CAD traded lower tracking weaker equity markets and declining commodity prices. Equity markets traded lower in reaction to weak PMI data from China, concern about EU sovereign debt ratings and bank losses and a sharp selloff in BP stock as the latest efforts to contain the oil spill in the Gulf have failed. Crude oil initially traded lower than turned higher for the day as equity markets reversed early losses in reaction to strong US construction spending report. CAD remained on the defensive 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.
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 1.0706 the May 27th high.
AUD traded lower pressured by a weaker equity markets and the RBA‘s decision to hold monetary policy unchanged. AUD was also pressured by report of weak PMI data from China. China’s May manufacturing index fell to 53.9 from 55.7 in April .China’s is Australia’s major trading partner. Slowing of the Chinese economy will reduce demand for Australian exports. 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. Today’s Australian economic data was mixed. April retail sales rose by 0.6%, April building approvals declined by 14.8% and May PMI declined 3.5 points to 56.3. Apart from the retail sales rise today’s Australian data suggest that the domestic recovery may be slowing. The RBA may have also taken this into account in its policy decision today. Focus turns to tomorrow’s release of Australia’s Q1 GDP.AUD price direction is closely tracking risk sentiment. AUD retraced about half of its early decline supported by a rebound in US equity markets.