Daily Forex Report-USD higher, Lockhart says time for rate hike nearing
Thursday, June 3rd, 2010- USD: Higher, improving risk appetite as equity markets rally, hawkish rate comments from Fed’s Lockhart
- JPY: Lower, political uncertainty, CAPEX spending drops
- EUR: Lower, EU retail sales decline and services PMI growth slows
- GBP: Lower, houses prices rise and services PMI improves, Moody’s and Fitch downgrade BP
- CAD and AUD: AUD & CAD higher, Australian exports jump, hawkish comments from Canada’s Flaherty
Overview
USD traded mixed Thursday initially weakening versus European and commodity currencies and trading at a three week high versus the JPY. USD was pressured by improving risk appetite as global equity markets rally in reaction to positive US economic data and fresh optimism about the global recovery. EUR gains were limited by report of a sharp decline in EU retail sales. GBP traded higher supported by report of rising UK house prices with gains limited by a downgrade of British Petroleum. AUD traded higher supported by report that Australia’s trade deficit swung to surplus last month as exports jump. CAD traded higher supported by a modest rally in the price of crude oil and in reaction to a statement from Canada’s Finance Minister Flaherty that the time is nearing for the G-20 nations to begin exit strategies. JPY traded lower pressured by improving risk appetite and continued political uncertainty in Japan sparked by news that Japan’s PM Hatoyama resigned yesterday. Japan’s Finance Minister Kan is expected to become the new PM of Japan. Kan in the past has been a proponent of a weak JPY policy. US economic data was mixed with ADP employment rising by slightly less than expected, initial jobless claims came in close to market expectation declining by 10k last week, and April factory orders came in slightly below expectation.Q1 productivity gains slowed and labor costs dropped. Nonmanufacturing ISM came in close to expectation. USD firmed in reaction to a statement from the Atlanta Fed’s Lockhart that the time to hike rates is nearing and that the Fed should not wait too long before raising interest rates.
Focus turns to central bank policy meetings in Europe next week and the FOMC meeting the following week. The ECB has little choice but to maintain steady policy because of concern that the EU debt crisis and new austerity measures will curb growth. The BOE will maintain steady rate policy and the current level of asset purchases because the UK recovery is uneven and the new governments plan to cut the record UK budget deficit is a risk to the recovery. UK inflation has been rising and if the rise continues the BOE may be forced to move towards a normalization of rate policy before year end. The Fed will maintain steady policy because of uncertainty about the fallout from the EU debt crisis and lack of inflationary pressures. A number of the Fed board members would like to soon begin an exit strategy. The Fed may drop its “extended period” language to set the stage for asset sales and a rate hike before year end. The BOC rate hike Tuesday increases the odds of a modest shift in the Fed policy statement and may encourage the Fed to hike the discount rate 25bps to 1%.The EU debt crisis however may force the Fed to push back any policy changes until next year. We expect the Fed to keep the Fed funds rate unchanged because of financial strains in Europe.
Today’s US data:
May ADP employment increased by 55K, a reading of 60K was expected. Initial jobless claims for week ending 05/29 declined by 10k to 453k, a reading of 452K was expected. April factory orders came in at 1.2%, a 1.8% rise was expected. May ISM nonmanufacturing index came in at 55.4, a reading of 55.6 was expected. Q1 productivity was revised lower to 2.8% from an initial reading of 3.6% and unit labor costs declined by 1.3% compared with initial report of a 1.6% decline.
Upcoming US data:
On June 4th May nonfarm payrolls and unemployment will be released. Nonfarm payrolls are expected to rise by 513Kk compared to 290k last month. The unemployment rate is expected to dip by 0.1% to 9.8%.
Next week’s US economic calendar includes the June 7th release of April consumer credit expected unchanged at 2bln. On June 9th April wholesale and inventories will be released expected at 0.6% and 0.5% respectively. On June10th initial jobless claims for week ending 06/05 will be released expected at 447k compared to 453k last week. April trade balance will be released on June10th expected at -41bln compared to -40.4bln last month along with the May Treasury budget expected at -140bln compared to -189.7bln last month. On June 11th May retail sales, preliminary June Michigan sentiment, and April business inventories will be released. Retail sales are expected at 0.2% compared to 0.4% last month and 0.2% ex. autos. Michigan sentiment is expected at 74 compared to 73.6 last month and business inventories are expected unchanged at 0.4%.
JPY
JPY traded sharply lower pressured by political uncertainty in Japan and in reaction to improving risk appetite has global equity markets traded two week high. Wednesday Japan’s PM Hatoyama 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. 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. The Nikkei closed 311 points higher, European equity markets traded 2% higher than at the time of this writing US equity markets extended Wednesday’s gains. JPY was also pressured by report that Japan’s Q1 CAPEX declined by 11.5% and in reaction to comments from the BOJ policy Board Suda. Suda said that the EU debt crisis may hurt Japan that he sees downside risk to the Japanese economy and the deflationary pressures continue. JPY remains vulnerable to political uncertainty in Japan and improving risk sentiment.
Next week’s Japanese economic calendar includes the June 8th release of the April current account expected at Â¥1.44 trillion compared to Â¥2.53trln and last month along with May money supply expected at 0.2% compared to 0.5% last month. Also on June 8th, April preliminary leading indicators will be released expected at 2.9% compared to 4.5% last month. On June 9th April machinery orders will be released expected at 7% compared to 5.4% last month. On June10th May CGPI and 2nd Q1 GDP will be released. The CGPI is expected at 0.3% compared to 0.4% last month. GDP is expected at 1.2% compared to 1% in the original report.
Key technical levels to watch in USD/JPY include support at 92.03 the June 3rd low with resistance at 93.65 the May 13th high.
EUR
EUR traded mixed initially supported by improving risk sentiment as global equity markets rally and in reaction to a report from S&P that weak EUR will help boost EU export sales. EUR gains were limited by report of a sharp drop in EU retail sales and fresh rumors of a possible Greek debt default. EU April retail sales declined by 1.2%. The decline in retail sales reflects the impact of the EU debt crisis on consumer sentiment and spending. Additionally EU services PMI growth slowed to 56.4 from 57.3 last month. Today’s EU retail sales report and services PMI may increase worries that the EU debt crisis will curb recovery. The risk of slower EU growth will force the ECB to maintain accommodative policy. A majority of analysts expect the ECB to remain on hold for the remainder of the year. Recent US economic data shows improvement in the US housing and labor market. The improvement in the US economy may encourage the Fed to consider moving forward its timetable for raising interest rates. The Fed’s Lockhart said that the time for raising rates is nearing. Growth and yield differential are moving more in favor of the USD as the ECB is seen on hold and the EU economy is slowing with the US recovery gaining traction and Fed rate hike speculation may soon emerge.  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.
Next week’s EU economic calendar includes the June 7th release of June Sentix index expected at -5.1 compared to -6.4 last month. On June 8th release of German April current account, trade balance and industrial production. The trade balance is expected at 12.9bln compared to 13.3bln last month industrial production is expected at 2.9% compared to 4% last month. On June10th German May CPI will be released expected at 0.1% compared to -01% 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
GBP initially traded higher supported by report of rising UK house prices and improving UK service sector PMI. GBP gains were limited by downgrade of British Petroleum and dovish statements from BOE Governor King. UK May Nationwide house prices rose for the third consecutive month reported up 0.5%. May services PMI improved to 55.4 from 55.3 last month. These reports follow yesterday’s report of improving UK mortgage approvals and strong UK construction PMI. Despite recent improvements in the UK economic outlook and rising inflation and BOE officials remain cautious about the sustainability of the UK recovery and expect inflationary pressures to be transitory. BOE’s King said that he remains cautious about the UK recovery and he expects inflation to return to target in the months ahead. King’s comments are seen as dovish and indicate that the BOE is in no hurry to consider a change in policy or a rate hike. 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 Wednesday. The report confirms that the BOE expects inflation to return to the 2% target over the next two years.
Next week’s UK economic calendar includes the June 8th release of May BRC retail sales expected at 1.8% compared to 3% last month along with May Nationwide consumer confidence expected at 74.2 compared to 74 last month. On June 9th April trade balance will be released expected at -7.2bln compared to -7.5bln last month. On June 11th April industrial production and May and PPI will be released. Industrial production is expected at 1.3% compared to 2% last month. PPI is expected at 0.8% compared to 0.6% last month.
The technical outlook for GBP is mixed as GBP struggles to hold above 1.4600. Expect near-term support at 1.4439 the June 1st low with resistance at 1.4771 the June 2nd high.
CAD
CAD traded higher supported by firmer equity markets, a modest rise in the price of crude and in reaction to hawkish comments from Canada’s Finance Minister Flaherty. CAD has posted strong gains over the last two trading sessions partly in reaction to Tuesday’s BOC rate hike and speculation that the BOC will hike rates again before year-end as the Canadian economy continues to improve and inflationary pressures are building. Flaherty said that the time is nearing for G-20 nations to begin their exit strategies. This statement by Flaherty suggests that recent market turmoil sparked by the EU debt crisis is unlikely to discourage the BOC from moving to normalize monetary policy. 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. The BOC hiked rates 25 bps to 0.50% Tuesday. 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. Part of today’s CAD rally is attributed to anticipation that Friday’s US and Canadian employment data will show significant improvement. Estimates for US nonfarm payrolls growth range from 200k to 700k. Much of the US nonfarm payrolls gained will do to the government hiring of census workers. CAD tuned lower midsession as equity markets give back early gains and crude drops back to unchanged for the day.
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.
Next week’s Canadian economic calendar includes the June 8th release of May housing starts expected at 203.2k compared to 201k last month. On June 10th April trade balance and new housing price index will be released. The trade balance is expected at 0.7bln and new housing price index is expected unchanged at 0.3%.On June11th Q1 capacity use will be released expected at 71.2% compared 70.9% last month.
The technical outlook for CAD is mixed as USD/CAD trades below 1.0600. Look for near-term support at 1.0246 the May 18th low with resistance at 1.0573 the June 2nd high.
AUD
AUD traded higher supported by improving risk sentiment as global equity markets rally and in reaction to better than expected Australian trade data and strong Australian vehicle sales. Asian and European equity markets rallied following Wednesday’s strong gains on Wall Street. Australia’s April trade balance swung to A$134mln surplus as exports rose by 11% and imports were unchanged. The jump in Australian exports suggests that the global economy has experienced limited slowdown despite tightening of monetary policy in China and the EU debt crisis. Australia’s May new vehicle sales rose by 9.6%. Strong vehicle sales confirm that the Australian domestic economy remains strong. These reports follow report that Australia’s Q1 GDP rose by 0.5%. The resilience of the Australian economy may encourage fresh RBA rate hike speculation. The RBA elected to hold rate policy steady at Tuesday’s meeting. Opinions are split over whether the RBA is nearing the end of its tightening cycle or taking a temporary pause. 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. Bloomberg reported Wednesday 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.
Next week’s Australian economic calendar includes the June 9th release of April housing finance expected at -1.5% compared to -3.4% last month June Westpac consumer confidence will also be released on the 9th and is expected at -4 compared to -7 last month along with May NAB expected at 6 compared to 8 last month. On June 10th May employment will be released expected at 5.3% compared to 5.4% with employment growth at 27k compared to 33.7k last month.
The technical outlook for the AUD is mixed as the AUD trades above 8500. Expect AUD support at 8414 the June 3rd low with resistance at 8638 the May 19th high.
Written by Easy-Forex
