USD Extends Rally, US Retail Sales Worse than Expected
USD Extends Rally, US Retail Sales Worse than ExpectedUSD: Higher, supported by a spike in risk aversion as weak US retail sales dampens risk appetiteJPY: Mixed, FT says US could lose AAA debt rating, BBC says opposition party may not buy US treasuriesEUR: Lower, EU industrial output falls at a record pace, ECB may increase bond purchaseGBP: Lower, BOE cuts growth and inflation forecast, recovery will be slow, CPI at 1.2% by 2012 CAD and AUD: AUD & CAD lower, China’s industrial production slows, pressured by return of risk aversionOverview
USD rebounded from a four-month low and the JPY traded higher supported by concern about the US bond rating, Japan’s opposition parties threat to boycott US bonds and the Bank of England’s inflation and growth forecast. The Financial Times reports that US AAA bond rating may be at risk. Yesterday, the US government reported its first April deficit in 26 years. The US warned that the Medicare Trust Fund will be insolvent by 2017 and the Social Security Trust fund will run out of funds by 2037, four years earlier than expected. Monday, the US announced a record 1.8 Trillion 2009 budget deficit. The BBC reports that Japan’s opposition party may avoid buying US bonds if elected. The USD initially weakened in reaction to the Financial Times and BBC reports. USD turned higher as equity markets weakened and economic data from Europe was disappointing. Also the rating agency warning noted by the Financial Times was more than two years old. The Bank of England Quarterly Inflation report was weaker than expected. The Bank of England looks for low inflation over the next two years and a continued contraction in the UK economy for the remainder of 2009. Concern about US bond rating, Bank of England report and report of a record drop in EU industrial output sparked selling of equity markets and a spike in risk aversion. In addition, China’s April industrial production slowed. China’s April industrial production rose by just 7.3%, an 8.3% rise was expected. China’s April retail sales rose 14.8%. The trade is debating whether global economy is bottoming or if recent signs of recovery are little more than false hope. Today’s Bank of England report, weaker industrial production reports in China and the EU and bigger decline in US retail sales than expected generate concern that the recent rise in global equity markets and optimism about the global economy may be premature. USD extended its opening rally after the release of worse than expected US retail sales. The decline in US retail sales suggests that the US economy is unlikely to experience a rapid recovery. The trade expects a modest pull back in equities and an uptick in risk aversion on the theory that the rally has gone to far to fast and optimism about the global economy is overdone. The trade bias is to sell USD on the pullback in risk appetite.
Today’s US data:
US April retail sales decline 0.4% and 0.5% ex autos, a flat reading was expected, April import prices rise 1.4%, a 0.4% rise was expected. April wholesale sales declined 1.6%.The retail sales decline suggests the US consumer remains cautious .Inventories fell for the seventh month in a row. The decline in inventories could be a positive sign for the US economy if the backlog of inventories is cleaning up. Eventually the need to replenish inventories will boost demand for US goods. Crude inventories fall 4.7 Million barrels, a 1.3 Million rise was expected. Crude prices rallied in reaction to a bigger than expected drawdown.
Upcoming USD data:
On May 14th, initial jobless claims for week ending in 05/09 will be released expected at -580K compared to -601K last month. Also on May 14th, April PPI will be released expected at 0.2% compared to -0.2% last month. On May 15th, April CPI will be released expected at -0.1% compared to flat last month. May Empire State manufacturing index, April industrial production and capacity use and the May University Michigan sentiment will also be released on May 15th. Empire manufacturing index is expected at -14.6 compared to -12.5 last month. Industrial production is expected at -1.5% compared to -0.7% last month. Capacity utilization is expected at 69.3 compared to 60.9 last month. Michigan sentiment is expected at 68.3 compared to 65.1 last month.
JPY
JPY traded higher for the second day in a row and gained in cross trade supported by weaker global equity markets and a spike in risk aversion. A Financial Times report which suggests that the US AAA debt rating may be at risk and a BBC report that if Japan’s opposition party is elected they may avoid buying US bonds and support the JPY. Japanese economic data was largely ignored with the money supply rising 2.6% in April, corporate bankruptcies up 9.4% in March and the current account surplus declining 48.8% y/y. There is an interesting report on Bloomberg which says that Japanese housewives have increased their bets to the highest level in six months, that the JPY will weaken as the economy stabilizes. The Bloomberg article is interesting because it may confirm that optimism about the global economy has reached an extreme. JPY traded higher in cross trade to EUR and AUD. EUR/JPY traded lower with the EUR pressured by report of a record drop in EU industrial output. GBP/JPY traded over 1% lower with GBP pressured by dovish Bank of England inflation report. AUD/JPY traded 1.5% lower with the AUD pressured by weaker global equity markets and report of slowing industrial production growth in China. This week’s rise of JPY has caught many by surprise and the rally may increase the risk of intervention to try to limit further gains. The Japanese economy remains weak and stronger JPY could derail a recovery for Japan’s economy. Good bids are noted for USD /JPY at 95.50. JPY turned lower for the day in reaction to comments from Treasury Secretary Geithner that the worst of the financial class crisis has passed and report of a sharp drawdown in crude inventories. With limited reason to buy equities at current levels, the price of crude is becoming a more important indicator of risk sentiment and outlook for the global economy.
On May 15th, April CGPI will be released expected flat compared to -0.2% last month. March machinery orders and industrial production, along with Q1 GDP will also be released on May 15th.
Key technical levels to watch in USD/JPY include support at 95.50 the March 23rd low with resistance at 97.85 the May 12th high.
EUR
EUR traded lower pressured by a spike in risk aversion and a record drop in EU industrial output. The spike in risk aversion was attributed to concern about US debt rating, possible reduced demand for US bonds from Japan and weak economic data from China, Europe and the US. China’s industrial production growth slowed in April. EU March industrial output declined at a record pace of 2% and 20.2%y/y. The Bank of England cut growth and inflation forecast more than expected. These reports generate concern about the global recovery and may raise questions as to whether recent optimism about the global economy is based on false hope. EUR was also pressured by a statement from ECB’s Kranjec that the ECB may increase its bond purchases and broaden its asset purchase plan beyond covered bonds. EUR extended its decline after the release of worse than expected US retail sales drop. The drop in US retail sales raises questions about whether the US economy is nearing a bottom. Today’s weaker than expected EU industrial output data may increase pressure on the ECB to consider additional rate cuts. Last Thursday, the ECB lowered interest rates 25 basis points and announced a plan to buy 60 Billion EU denominated covered bonds. It’s not clear if the ECB has established a level for interest rates. The ECBs Liikanan says that the ECB has not decided if 1% is low enough for the ECB refinance rate. This leaves the ECB with some policy leeway to respond to future developments in the EU economy.
EUR direction will continue to key on risk sentiment and ECB policy outlook. The trade will look to Fridays release of EU GDP and inflation reports for clues to inflation and growth outlook. If EU inflation and growth continues to deteriorate it will bring focus back to ECB policy outlook.
On May 15th, EU Q1 GDP is due for release expected at -2% compared to -16% last quarter, along with Q1 HICP expected at 0.3% compared to 0.6% last quarter.
The technical outlook for the EUR has improved as the EUR rallies above the 200 day moving average at 1.3480. Expect EUR support at 1.3563 the May 12th low with resistance at 1.3735 March 19 th high.
GBP
GBP traded lower pressured by the Bank of England Quarterly Inflation report which has reduced optimism about the UK economic recovery. The Bank of England quarterly report says that inflation may slow to as low as 0.4% and annual growth will continue to contract in 2009 before growth resumes in 2010. The BOE expects CPI near 1.2% in two years. This is well below the Bank of England’s 2% inflation target. According to the BOE, the timing and strength of the UK recovery remains highly uncertain. The BOE expects a slow recovery for the UK economy. BOE Chief King says there are pretty solid reasons to question whether the UK recovery can be sustained and inflation will likely be below target. Tuesday the UK reported improvement in manufacturing housing and retail sales. UK April BRC retail sales rise 4.6%. This was the largest rise in three years. April RICS house price balance improved to -59, a reading of about 70 was expected. UK manufacturing and industrial output falls less than expected with manufacturing output -0.1% and industrial output -0.6%. This was the smallest drop in UK factory output in 13 months. GBP was also supported by report a smaller than expected rise in UK claimant count. UK job claimant count for April rose 57.1 K, an 80 K rise was expected. These reports supported the GBP Tuesday by encouraging optimism about the UK economy nearing bottom. The Bank of England Quarterly Inflation report dampened optimism about the UK economy. The Telegraph,, however, reports that the UK economy appears to have gone past its low point. The impact of the BOE report may be limited if equity markets stabilize. Part of today’s GBP decline is attributed to a spike in risk aversion generated by weaker equities. Equity markets were in part pressured by a Financial Times report which suggests that the US AAA bond rating may be at risk and a BBC report which suggests that Japan’s opposition party may avoid buying US bonds if elected. No major UK economic data is scheduled for the remainder of the week. GBP direction will key on equity markets and risk sentiment.
The technical outlook for GBP has improved but the GBP needs to hold above psychological support at 1.5000 to maintain positive bias. Expect near-term support at 1.5070 the May 11th low and 1.4940 the May 7th low with resistance at 1.5370 the January 8th high. Next major resistance for GBP is 1.5500.
CAD
CAD drifted lower pressured by weaker equity markets, a spike in risk aversion and spillover from weaker than expected US retail sales. CAD downside was limited by Tuesday’s report of better than expected Canadian trade data and speculation that the Canadian economy is in a better position to rebound as the global economy recovers. Canada’s March trade surplus widened by 1.11 Billion, the trade was looking for a reading of 0.500 Billion. Improvement in the trade balance was largely a reflection of lower energy prices earlier in Q1. The trade balance improvement reflects lower demand for energy imports which may raise concern about Canada’s domestic demand. The combination of weaker industrial production data from the EU and China, dovish Bank of England quarterly inflation report and concern about US bond rating and demand for US bonds from Japan sparked today’s spike in risk aversion. No major Canadian economic data was released in today’s trade. Crude prices temporarily topped $60 barrel on Tuesday but reversed and traded lower pressured by Energy Department report which says crude demand will be at its weakest level since 2004 and crude prices will average $55 a barrel in 2009. Crude prices firmed Wednesday supported by report a sharp drawdown in crude inventories. CAD is consolidating near six-month high. The CAD rally is likely to stall as uncertainty about the global recovery reemerges and USD/CAD is holding above key technical support at 1.1465 the November 5th low. Monday’s USD/CAD low was 1.1477. A break of this level will be needed to encourage further CAD gains. This week’s Canadian economic calendar is light with manufacturing shipments due for release Friday.
On May 15th, March manufacturing shipments will be released expected at 1.4% compared to 2.2% last month.
The technical outlook for CAD is turning mixed as CAD reaches major resistance at 1.1465. Look for near-term resistance at 1.1677 the May 12th high and 1.1740 with support at 1.1465 the November 5th low. A break 1.1465 may spark speculation that CAD will trade towards parity into year end if this level holds; look for a correction towards 1.1900.
AUD
AUD traded lower pressured by a spike in risk aversion and report of slowing industrial production growth in China. China’s April industrial production rose 7.3%, an 8.3% rise was expected. The slower pace of China’s industrial production growth raises questions about whether the Chinese economy has reached bottom. As noted above risk sentiment was dampened by weaker equity markets and diminished optimism about global recovery. Weaker data from EU and China coupled with concerns about US debt rating and rising US budget deficit sparked selling of global equity markets. A spike in risk aversion and weaker global equities was also attributed to a Financial Times report warning that the US may lose its AAA credit rating. AUD remained on the defensive after report of weaker than expected US retail sales. Today’s AUD price action reverses Tuesday’s gains which were fueled by improving risk sentiment, rising energy prices and better than expected report of fixed investment from China. There were no major Australian economic reports released today. The trade shrugged off a report that Australian AAA debt rating is not at risk. AUD price direction will hinge on equity markets and risk sentiment.
The technical outlook for the AUD is mixed. AUD rally stalled in front of major resistance at 7745. AUD rally stopped ahead of the projected target of the October high at 7745. Monday’s high for AUD was 7715 and today’s high was 7705. Look for AUD support at 7505 the May 8th low with resistance at 7715 the May 11th high. Expect major AUD resistance at 7745 October 6th high.
By Michael J. Malpede
Easy Forex
Michael J. Malpede is Chief Market Analyst with Easy-Forex® and has previously been featured on Bloomberg TV, Bloomberg radio, Reuters, MarketWatch, Wall Street Journal, Chicago Tribune, Chicago Sun Times, Toronto Star and Nikkei press. In analyzing the markets, he draws from 29 years of Foreign Exchange Research as a Foreign Exchange Analyst.
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