Daily Forex Report-USD rebounds, Fed may change policy guidance
Tuesday, April 13th, 2010- USD: Mixed, trade deficit widened more than expected, import prices rise less than expected
- JPY: Flat, BOJ may revise up its CPI forecast, corporate goods prices post a modest rise
- EUR: Lower, strong demand for today’s Greek T- bill auction
- GBP: Higher, trade deficit narrows as exports surge, retail sales and house prices rise
- CAD and AUD: AUD & CAD lower, Australia’s business conditions rise, Canada’s trade surplus improves
Overview ÂÂ
The USD traded mixed Tuesday with downside limited by report that the Fed may change its policy guidance. GBP traded higher supported by report of a narrowing of the UK trade deficit and a surge in UK exports. GBP was also supported by report of stronger UK retail sales, rising house prices and a pledge from the Conservative party to take quick action to reduce the UK deficit. EUR traded mixed with downside limited by strong demand for today’s Greek T-bill auction. The Greek bill auction was oversubscribed which is seen as an endorsement of yesterdays announcement of an IMF/EU rescue package for Greece. AUD opened higher supported by report that Australia’s March NAB business conditions rose to their highest level since January 2008. CAD traded mixed initially supported by report of a larger than expected improvement in Canada’s trade surplus. JPY traded higher supported by report that the BOJ may revise up its CPI forecast. US economic data was mixed. The US trade balance widened by slightly more than expected and import prices rose by slightly less than expected. Excluding oil prices import prices declined. US bond yields and the USD drifted lower after the release of the import price report. US trade gap with China held to its lowest level since March 2009. The narrowing of the trade gap with China may help to reduce some of the tensions over the value of the Yuan. USD downside was limited by weaker equity markets and weaker commodity prices. USD turned higher for the day in reaction to a Reuters report that an influential US think tank says the Fed may soon change its policy guidance. Focus turns to Wednesday’s release of US CPI and retail sales.
Today’s US data:
March import prices rose by 0.7%, a reading of 0.9% was expected. February trade balance widened by 39.7bln, a reading of -38.6bln was expected.
Upcoming US data:
On April 14th March CPI will be released expected to rise by 0.1% compared to flat last month. March retail sales and February business inventories will also be released on April 14th. Retail sales are expected to rise by 0.8% compared to 0.3% last month and business inventories are expected to rise by 0.3% compared to flat last month. On April 15th April Empire Manufacturing Index will be released expected at 23.75 compared to 22.78 last month along with initial jobless claims for the week ending 04/10 expected and 451k compared to 460k last week. March industrial production, capacity utilization and the April Philly Fed will also be released on April 15th. Industrial production is expected to rise by 0.4% compared to 0.1% last month. Capacity utilization is expected at 73.1 compared to 72.7 last month and the Philly Fed is expected at 19 compared 18 in March. On April 16th March housing starts, building permits, and April University of Michigan consumer sentiment will be released. March housing starts are expected at 590k compared to 575k last month with building permits expected at 620k compared to 612k last month. Michigan consumer sentiment is expected at 74 compared to 73.6 last month.
JPY
JPY traded higher supported by report of modest rise in Japans corporate goods prices and in reaction to weaker equity market trade. JPY gains were limited by report that the Fed may change its policy guidance. Japan’s March corporate goods prices rose by 0.2%, a 0.1% rise is expected. Nikkei reports that the BOJ may up its CPI forecast for the coming fiscal year in its economic outlook report to be released on April 30th. JPY was initially pressured by report of escalating tensions between the Japanese government and the BOJ over BOJ monetary policy. The Japanese government wants the BOJ to take more action to combat deflation. It is not clear if today’s report of a rise in corporate goods prices will temper Japanese government pressure directed at BOJ monetary policy. BOJ minutes for the March policy meeting indicate that some of the BOJ board members are against further easing of monetary policy. The BOJ minutes could be seen as a mild positive for the JPY if the BOJ elects to continue to maintain steady rate policy. JPY dropped to the low for the day in early overseas trade pressured by a report that a Japanese government party panel says that the government should try to keep the USD level versus the JPY around 120. JPY firmed in cross trade supported by a modest uptick in risk aversion as the Nikkei closed 90 lower and European and US equity markets traded weaker as well. EUR/JPY traded lower reversing early gains that were sparked by strong demand for today’s Greek T-bill auction with selling of the cross attributed to fading euphoria about the Greek rescue package.
On April 15th revised February industrial output will be released expected to fall by 0.9% compared to a 2.7% rise in the original report.
Key technical levels to watch in USD/JPY include support at 92.04 the March 29th low with resistance at 94.27 the April 7th high.
EUR
EUR initially traded firmer supported by strong demand for today’s Greek T-bill auction. EUR gains were limited as the euphoria over the Greek rescue plan for Greece fades and the EUR turned lower for the day in reaction to report that an influential think tank says the Fed may soon change its policy language. The Greek T-bill auction is seen as an endorsement by investors of the IMF/EU Greek rescue package announced over the weekend. EUR gains were limited by diminishing investor euphoria over the impact of the Greek rescue package as investors shift focus to sovereign debt risks in other peripheral EU nations like Spain, Portugal and Ireland. Today’s Daily Telegraph carried a report titled “Euphoria over Greek rescue fades as first cracks appear.” The article says that the Greek rescue package has sparked angry reactions in Germany and that the package does little more than delay the day of reckoning for the Greek deficit. The Telegraph article carried a quote from the head of the US PIMCO bond fund that his firm does not plan to buy Greek debt because the rescue package does not address the underlying solvency challenges in Greece. A member of the Free Democratic Party in Germany says the rescue package is a subsidy and violates the EU summit deal. A spokesman for the Finance Ministry in Berlin said the rescue package is not automatic and cannot be activated if any of the EU states object. The Telegraph article concludes that the outlook for Greece will depend on whether Greece can continue to reduce its deficit in the years ahead. The Greek government plans to reduce its deficit have been met with significant opposition in Greece. In addition, the rescue package for Greece may encourage other nations to get in line and look for financial aid from the richer EU nations. This increases the risk of moral hazard in Europe and could be taking the EU down a slippery slope.
This week’s EU economic calendar includes the April 13th release of German CPI expected at 0.5% compare to 0.4%last month. On April 14th EU industrial production will be released expected flat compared to a 1.7% rise last month. On April 16th EU March CPI will be released expected at 0.9% compared to 0.3% last month along with  the February trade balance expected at -1bln compared to -8.9bln in January.
The technical outlook for the EUR is mixed as EUR holds above 1.3500. Expect EUR support at 1.3520 the April 12th low with resistance at 1.3692 the April 12th high.
GBP
GBP traded higher supported by report of the sharp narrowing in the UK trade deficit and in reaction to report of improving retail sales. GBP gave back most of its overseas gains pressured by a Reuter’s report which says that the Fed may soon change its policy guidance. UK February trade balance narrowed to -6.17bln from -8.06bln last month. The narrowing of the trade balance reflects a surge of 9.5% in exports. March BRC retail sales rose by 4.4%. The BRC said that consumer spending increased by 6.6% in March. RICS house price balance rose by 9% in March and the Department of Communities and Local Government house price index rose 7.4% in February. The improvement in UK exports, retail sales and house prices suggest that the UK recovery is improving. These reports follow Monday’s report of a sharp rise in UK import prices. The surge in input prices should reduce the odds of additional asset purchases by the BOE. These data may reduce the risk that the BOE will elect to expand its asset purchases and encourage the BOE to move towards normalization of monetary policy. The end of the BOE’s asset purchases and normalization of monetary policy would be positive for the GBP.GBP was also supported by a pledge from the conservative party that they will take quick action to reduce the US deficit. Uncertainty about the May 6th general election has limited demand for the GBP with the GBP pressured by concern that the election could result in a hung parliament. A hung parliament is unlikely to take action to reduce the UK budget deficit. Failure to take action to reduce the UK budget deficit may lead to a downgrade of the UK AAA debt rating. Tuesday the Conservative party reiterated its plans to take quick action to reduce the UK deficit. The conservative party platform on the UK deficit contrasts with the Labor party. The head of the Labor Party PM Brown does not favor quick reduction of UK deficit because of his concern that reducing the deficit will hurt the UK recovery. The latest UK election polls suggest that the Labor Party may hold a slight majority in parliament after the election. Last Thursday the BOE elected to hold rate policy steady and maintain the current level of asset purchases at £200. BOE minutes for the March policy meeting will be released on Wednesday. Investors will be looking to the minutes to see whether the BOE maintains a dovish policy bias or sees the need to move towards normalization of monetary policy as the economy improves and inflationary pressures build.
On April 13th the will be released expected it -7.35bln compared to -7.98 billion last month.
The technical outlook for GBP is positive as GBP holds above 1.5300. Expect near-term support at 1.5267 the April 9th low with resistance at 1.5575 the February 23rd high.
CAD
CAD traded mixed initially supported by report of a larger than expected Canadian trade surplus and wider than expected US trade deficit. CAD turned lower for the day as the USD was supported by report that the Fed may soon change its policy language and equities and commodities traded Lower. Canada’s February trade surplus surged to 1.4bln, the trade was looking for a 600mln surplus. This marks the largest Canadian trade surplus since October 2008. The widening the Canadian trade surplus reflects an increase in import demand and export sales. The trade report confirms improving outlook for Canadian economy. In contrast the US trade deficit widened more than expected. CAD gains were limited by weaker equity and commodity prices report of low expectation Canadian new housing price index. Canada’s new housing price index rose by just 0.1%, the trade had expected a 0.4% rise. This marks the eighth straight month of gains in the Canadian new housing price index. The improvement in Canada’s trade surplus and housing data may increase speculation that the BOC may move the time table forward for tightening of monetary policy. Last month BOC Governor Carney said that he was open to consideration of a rate hike as early as June 1st. The BOC has pledged to maintain record low yields until June as long as inflation remains in check. Uncertainty about the timing of a BOC rate hike may limit demand for the CAD.
On April 16th February manufacturing shipments will be released expected at 1.6% compared to 2.4% last month.
The technical outlook for CAD is mixed as USD/CAD holds above1.0000. Look for near-term support at 0.9991 the April 9th low with resistance at 1.0230 the March 30th high.
AUD
AUD traded mixed initially supported by report that Australia’s business conditions index rose to its highest level since January 2008. AUD consolidated around unchanged with gains limited by speculation that the Fed may soon change its policy guidance. March NAB business conditions index rose by five points to +13. AUD gains were limited by weaker equity markets, lower commodity prices and ongoing uncertainty about the potential for Yuan revaluation. President Obama urged China to move toward a more market oriented exchange rate but said Yuan policy was up to China. AUD is consolidating near a 19 month high versus the USD with gains limited by mixed Australian economic data and uncertainty about the outlook for RBA policy. Monday Australia reported weaker than expected housing finance data and the RBA’s Debelle said interest rate are close to normal levels. The decline in the housing finance may be an indication that Australia’s domestic recovery is slowing. Debelle’s comments may dampen RBA rate hike speculation. Recent AUD strength has been partly a reflection of RBA rate hikes and RBA rate hike speculation. Last week the RBA raised interest rates 25bps to 4.25% and left the door open for future rate hikes. AUD rally may begin to slow with pressure sparked by uncertainty about the global recovery and speculation and the RBA will be in no hurry to hike rates again. In addition the long side of the AUD is getting crowded and this may make the AUD vulnerable to a technical correction. According to a Bloomberg report investors are the most bullish the AUD since 2000 and there are reports of large long positions in AUD/EUR that could be unwound if the Greek rescue plan is seen as positive for the EUR.
The technical outlook for the AUD is positive as the AUD rallies above 9300. Expect AUD support at 9165 the April 6th low with resistance at 9389 the April 12th high.
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Written by Easy-Forex
