FOREX TRADING

USD Lower, ADP Employment Unexpectedly Declines

• USD: Lower, ADP employment posts unexpected decline, Chicago PMI drops
• JPY: Lower, housing starts and construction orders decline, Postal Bank to buy less JGB’s
• EUR: Higher, EU inflation rises more than expected, Irish government plans to recapitalize Irish banks
• GBP: Higher, consumer confidence dips, election polls suggest Conservative victory
• CAD and AUD: AUD lower & CAD higher, Australian retail sales decline, Canada’s GDP beats expectations

Overview

USD traded mostly lower in Wednesday’s trade pressured by speculation that an unexpected drop in ADP employment will encourage the Fed to maintain a dovish policy bias. EUR was supported by report of above expectation EU inflation and announcement that the Irish government plans to recapitalize Irish banks. GBP traded higher despite report of weaker UK consumer confidence. CHF traded higher supported by report of above expectation Swiss KOF index. CAD traded higher supported by firmer energy prices as crude trades above $83 a barrel and metals prices are firmer. Canada’s GDP came in above expectation. AUD traded lower and underperformed pressured by report of a sharp drop in Australia’s February retail sales. The decline in Australia’s retail sales may dampen RBA rate hike speculation. JPY traded at a three month low versus the USD pressured by liquidation ahead of Japan’s fiscal year end. US economic data was mixed. March ADP employment posted an unexpected decline. The ADP report suggests that the US recovery has not yet strengthened enough to create jobs. The unexpected decline in the March ADP report suggests that Friday’s US nfp may not be as strong as anticipated. Estimates for March nfp have been rising all week with some analysts looking for a number as high as 200k. Consensus for Friday’s March US NFP may not be significantly altered by today’s ADP report. The ADP said that the report does not include the impact of bad weather in February or an estimate of the addition of new government census workers that were hired in February. Chicago PMI came in weaker than expected and factory orders were in line with expectations.

Today’s US data:

March ADP employment declined by 23k, a 40k rise was expected. The Chicago PMI declined to 58.8, a reading of 61 was expected. March factory orders rose by 0.6%, a 0.5% rise was expected.

Upcoming US data:

On April 1st initial claims for the week ending 3/27 will be released expected at 438k compared to 442k last week along with February construction spending, the March ISM index and March domestic auto sales. Construction spending is expected to fall by 1.1% compared to a 0.6% decline last month. The ISM index is expected unchanged at 56.5. On April 2nd the March unemployment rate and nonfarm payrolls will be released. Nonfarm payrolls are expected to rise by 200k compared to -36k last month and the unemployment rate is expected unchanged at 9.7%.

JPY

JPY traded lower in volatile trade with initial selling pressure attributed to fiscal year end and speculation that tomorrow’s Tankan report and Friday’s US unemployment report will confirm that the global recovery is gaining momentum. US bond yields traded at their highest level since last June Tuesday. The rise in US bond yields may partly reflect optimism about the recovery. In light of recent BOJ monetary policy ease yield differential is moving in favor of the USD reducing the attraction of the USD is a funding currency. JPY downside was limited by today’s report an unexpected decline in US ADP March employment and weaker US equity market trade. US bonds yields dropped in reaction to the weaker ADP report. The decline in the ADP employment report may dent optimism about the strength of the US recovery and encourage speculation that the Fed will maintain low yields for an extended period. A lot is riding on this Friday’s US March unemployment report. Prior to today’s release of the March ADP report a majority of analysts were looking for a sharp improvement in US nonfarm payrolls. A sharp improvement in US nonfarm payrolls could encourage the Fed to drop its extended period language in April policy statement setting the stage for an eventual tightening of monetary policy. Today’s ADP report muddies the outlook for the US nfp report and Fed policy. Japan’s economic data was mixed with the March manufacturing PMI posting a modest decline to 52.4 and 52.5 last month, exports however rose to six year high. February housing starts declined by 8% and construction orders declined by 20.3%. There was limited reaction to report that Japan’s Postal Bank plans to buy less JGB’s. JGB futures traded at a 4 1/2 month low in reaction to this announcement from Japan’s Postal Bank. This week’s main focus will be the release of Japan’s tankan business sentiment Thursday survey and US March unemployment report Friday.

On April 1st March tankan survey will be released expected -16 compared to -24 last month with CAPEX spending expected -11.5% and -13.8% last quarter.

Key technical levels to watch in USD/JPY include support at 92.04 the March 29th low with resistance at 94.30 the August 27high.

EUR

EUR traded higher supported by report of above forecast EU inflation and in reaction to report that the Irish government plans to recapitalize Irish banks. EU March inflation rose to 1.5% compared to 0.9% last month. This marked the fastest rise in EU inflation since December 2008. Much of the rise in the EU inflation is attributed to higher energy costs but because the ECB mandate is price stability the inflation rise may force ECB to reconsider the timing for its exit strategy. The ECB is thought to be on hold for the foreseeable future because of concern about the impact of sovereign debt risks in peripheral Europe on the EU recovery. EUR rallied despite report that the EU unemployment rate rose to 10%. This is the highest level for EU unemployment since the birth of the EUR in 1999. The rise in EU employment was partly offset by report of the decline in German unemployment. The German unemployment rate declined 0.1% to 8%. Concern about sovereign debt risk in Europe continues to limit demand for the EUR but the EUR appeared to benefit from today’s report that the Irish government plans to recapitalize Irish banks. EUR consolidated early gains after the release of today’s report of disappointing US ADP employment. The ADP employment report may dampen speculation of an earlier Fed rate hike. This Friday’s release of US March unemployment report will be key to the outlook for the US recovery and interest rates.

On April 1st EU March manufacturing PMI will be released expected 54.2.

The technical outlook for the EUR is negative as EUR trades below 1.3400. Expect EUR support at 1.3384 the March 31st low with resistance at 1.3537 the March 30th high.

GBP

GBP traded higher despite report of a dip in UK consumer confidence. UK March GFK consumer confidence came in at -15 compared to -14 last month. Today’s GBP rally is attributed to end of quarter position squaring and support from Tuesday’s release of an upward revision in UK GDP,firmer house prices and a narrowing of the UK current account gap. These reports suggest that UK recovery is gaining momentum. GBP was also supported by the latest UK election polls would suggest that the Conservative party has expanded its lead. The UK general election is expected to be called on May 6th. It remains unclear whether either the Conservatives or the Tory party will gain enough of a majority of control of the UK Parliament. The Conservative party has pledged to take quick action on budget reform. The Tory party has expressed concern that too soon a reduction in government spending will hurt the recovery. The UK AAA sovereign debt rating may be subject to a downgrade if the new UK government does not take quick action to reduce the UK budget deficit. GDP direction will be linked to UK debt and election outlook.

On April 1st March CIPS manufacturing PMI will be released expected at 56.8 compared to 56.6 last month.

The technical outlook for GBP is mixed as GBP traded above 1.5000. Expect near-term support at 1.5000 with resistance at 1.5382 the March 29th high.

CAD

CAD traded higher supported by rising commodity prices and report of above expectation Canadian GDP. Crude oil traded above $83 a barrel and metals markets were firmer in Wednesday’s trade. Canada’s January GDP rose by 0.6%, a reading of 0.5% was expected. A stronger Canadian GDP confirms that the Canadian domestic recovery is gaining momentum. Today’s Canadian GDP report may encourage speculation that the BOC will move the timetable for a rate hike forward, possibly as early as June. CAD traded higher last week supported by hawkish comments from BOC Governor Carney. Carney said that the Canadian recovery was faster than expected and he suggested that he was open to consideration of possible rate hike as early as June 1st. The BOC has pledged to maintain low yields through June of 2010 conditional on inflation remaining in check. Canada’s core inflation rate rose to its highest level in 16 months. Canada’s February CPI rose by 0.4%, a 0.3% rise was expected. The core inflation rate rose by 2.1%. The core inflation rate is above the BOC’s 2% inflation target. The above target CPI increases the risk of an earlier BOC rate hike. CAD has been outperforming supported by improving Canadian domestic economic outlook and speculation that rising Canadian inflation will encourage the BOC to make an earlier rate hike. CAD should remain well supported on breaks by speculation that the BOC will hike rates before the Fed. Today’s report of weaker than expected US ADP employment sent US bond yields lower. The ADP report may dampen Fed rate hike speculation.

On March 31st January GDP will be released expected unchanged at 0.5%.

The technical outlook for CAD is positive as USD/CAD trades below 1.0100. Look for near-term support at 1.0062 the March 19th low with resistance at 1.0273 the March 29th high.

AUD

AUD traded lower pressured by report of a sharp decline in Australian retail sales and weaker building approvals. Australia’s February retail sales declined by 1.4%, a 0.2% rise was expected. February buildings approvals dropped by 3.3%. The unexpected decline in Australia’s retail sales and building approvals may dampen RBA rate hike speculation. The RBA will hold a policy meeting on April 6th. Recent statements from RBA officials suggest that the RBA is leaning towards a rate hike. Today’s Australian economic data clouds outlook for the RBA policy decision. In contrast to the retail sales decline February home prices rose by 1.4% and private sector credit rose by 0.4%. Tuesday the RBA’s Debelle said that rate policy will be tied to mortgage rates and home prices. Australia’s February home prices rose to a record level. RBA officials may become more concerned about the risk of the formation of a housing price bubble in Australia. RBA watcher McCrann said that it would be extraordinary if the RBA did not hike rates next week. McCrann’s comments follow yesterday’s statement by the RBA Governor Stevens that interest rates are too low and cannot remain at prior levels. His comments fuel speculation that the RBA will hike rates at the April RBA policy meeting. AUD downside was limited by firmer commodity prices and report of an unexpected decline in its US ADP employment.

On April 1st February trade balance will be released expected at -1.63bln compared to -1.18bln last month.

The technical outlook for the AUD is positive as the AUD rallies above 9100. Expect AUD support at 9035 the March 29th low with resistance at 9253 the March 17th 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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