FOREX TRADING

• USD: Higher, jobless claims unexpectedly rise, manufacturing sector improves
• JPY: Higher, industrial production revised higher, Reuters Tankan mfg. index highest since April 2008
• EUR: Lower, cost of funding Greek debt rises, skepticism about the viability of the Greek rescue package
• GBP: Higher, Conservatives expand their lead over Labor, consumer confidence drops
• CAD and AUD: AUD & CAD lower, accelerating Chinese growth may encourage China to hike rates

Overview

The USD traded higher Thursday supported by concern about Greek fiscal troubles and in reaction to strong economic data from China. EUR traded sharply lower pressured by widening of Greek bond spreads and in reaction to report that Greece may cancel its latest bond issue. GBP outperformed supported by the latest UK election polls which show the Conservatives have expanded their lead over Labor. GBP gains were limited by report of a sharp fall in UK consumer confidence. China reported a sharp acceleration in growth with Q1 GDP rising by 11.9%, retail sales up 18% industrial production rose by 18.1%. The acceleration of growth in China may prompt China to tighten monetary policy and revalue the Yuan. Commodity markets and equities traded lower pressured by the threat of a tightening of monetary policy in China. AUD and CAD traded lower tracking the decline in commodities and pressured by the Chinese rate hike speculation. JPY traded higher supported by gains in cross trade to the EUR and Yuan revaluation speculation. US economic data was mixed with jobless claims posting an unexpected sharp rise and the Empire Manufacturing survey improving by nine points. The Labor Department said the unexpected rise in jobless claims may reflect the impact of the Easter holiday. It may take a couple more weeks before seasonal factors are no longer impacting the jobless claims data and the trend becomes clearer. Industrial production came in below expectation and capacity utilization was a slightly above expectation. The Philly Fed survey posted a modest improvement. Focus turns to Friday’s release of US housing starts and Michigan consumer sentiment.

Today’s US data:

Initial jobless claims for week ending 04/10 rose by 24k to 484k, a reading of 451k was expected. March industrial production rose by 0.1%, a 0.4% rise was expected. March capacity utilization came in at 73.2, a reading of 73.1 was expected. Empire State manufacturing index rose by 9 points to 31.86. April Philly Fed came in at 20.2, a reading of 20 was expected.

Upcoming US data:

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 gains in cross trade to the EUR and by Yuan revaluation speculation. A widening of Greek bond spreads revives concern about funding of the Greek debt and sparked selling of the EUR.EUR/JPY cross traded about 1% lower. China’s Q1 GDP growth accelerated by 11.9%. The acceleration in China’s growth may prompt China to drop its USD peg and revalue the Yuan. JPY sometimes trades as a proxy for Yuan revaluation. A revaluation of the Yuan would help make Japans exports more competitive. Today’s Japanese economic data confirm improved outlook for the Japanese economy. Japan’s February industrial production was revised up to -0.6% from -0.9% and the April Reuters tankan manufacturing index rose to its highest level since April 2008 reported at even compared to -8 March. The pickup in Japan’s economic activity will make it more difficult for the Japanese government to pressure the BOJ to ease monetary policy. At the March BOJ policy meeting some board members argued that improving Japanese economy made it more difficult to justify additional monetary ease. BOJ Governor Shirakawa said growth may moderate in the near term and the BOJ will maintain very easy monetary policy.

Key technical levels to watch in USD/JPY include support at 92.57 the April 13th low with resistance at 94.27 the April 7th high.

EUR

EUR traded sharply lower pressured by Greek debt worries as Greek bond spreads widened and the cost of funding the Greek debt rose. Greek/German bond spreads widened to 400bps. If the cost of funding the Greek debt continues to rise it will make it more difficult for Greece to finance its debt. There are reports that Greece may cancel its latest bond offering because of the rising cost and poor demand for the issue. There is report on MarketWatch which suggests that investors remain skeptical about the viability of the IMF/EU Greek rescue package. New York University economist Roubini says the Greek crisis is the “canary in the coal mine” for the EU. Roubini is referring to rising fiscal troubles in peripheral European in nations like Spain, Portugal, Italy and Ireland. Investors are also concerned that the measures needed by Greece and other European nations to reduce their deficits could lead to a sharp contraction of growth spark deflationary pressures. The deteriorating fiscal outlook in peripheral European nations will encourage the ECB to maintain accommodative policy and could threaten the existence of European monetary Union. Yield differential is moving in favor of the USD as the ECB is seen on hold for the remainder of 2010 and improving US economic outlook suggests that the Fed is likely to hike rates before the ECB.

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 fails to hold above 1.3600. Expect EUR support at 1.3480 with resistance at 1.3667 the April 15th high.

GBP

GBP traded in a narrow range supported by the latest UK election polls which suggest that the Conservatives have expanded their lead over labor. The UK Daily Telegraph reports that the Conservative party is headed for a convincing victory in the May 6th general election. If the polls are correct and the conservative party wins a majority of the UK Parliament it would likely be a positive for the GBP because the conservative party has pledged to take quick action to reduce the UK budget deficit. If the Conservatives are elected and take quick action to reduce the UK budget deficit it will reduce the risk that the UK AAA sovereign debt rating will be cut. The positive impact of a conservative victory for GBP may be limited by the possibility that the BOE would be more inclined to expand its asset purchases to counterbalance the contractionary impact of less UK government spending for the UK economy. BOE policy outlook may be clouded by recent UK economic data suggest that the UK economy is improving and inflation rising. Tuesday the UK reported a 9.5% jump in exports and 0.9% rise in house prices. Earlier in the week the UK reported a sharp jump in input prices. The improvement in the UK economic outlook and rising inflation may encourage the BOE to end its asset purchases and move towards normalization of monetary policy. GBP gains were limited by report UK March Nationwide consumer confidence declined to 72 from 81 last month.

The technical outlook for GBP is positive as GBP holds above 1.5400. Expect near-term support at 1.5335 the April 13th low with resistance at 1.5575 the February 23rd high.

CAD

CAD traded mixed to lower pressured by a modest decline in equity markets and commodity prices. Today’s report of acceleration of China’s Q1 GDP cuts two ways for CAD trade. Stronger growth in China is positive for the global economic outlook and demand for exports which is good for Canada. Acceleration of growth in China may also encourage China to tighten monetary policy and hike interest rates. The threat of a Chinese rate hike may dampen enthusiasm about the sustainability of global recovery and could reduce some demand for commodities. Commodity prices have been trending higher. The combination of broadening economic recovery in North America and acceleration of growth in China should keep CAD well supported on breaks. The BOC’s quarterly business outlook survey released on Monday showed that 64% of corporate executives expect sales to growth accelerate while 20% expect sales to slow. There were no major Canadian economic reports released in today’s trade. Tuesday Canada reported a surge in its trade surplus as imports and export sales rise. The trade balance report confirms improving outlook for the Canadian economy. Monday Canada reported improvement in housing starts. 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. Goldman Sachs has raised its six-month CAD forecast to 0.98 from1.00 citing stronger than expected economic recovery in Canada and rate hike expectations.

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 positive as USD/CAD breaks below 1.0000. Look for near-term support at 0.9870 the May 30th low with resistance at 1.0105 the April 8th high.

AUD

AUD traded lower as investors digest today’s release of strong economic data from China and what the implications of the Chinese data are for the global economy, China’s monetary policy and the Yuan. Acceleration of growth in China increases the risk that the Chinese economy may be overheating and creating asset bubbles. This may encourage China to take additional measures to curb lending, tighten monetary policy and may prompt China to revalue the Yuan. Yuan revaluation would contribute to a tightening of monetary conditions and could help to slow pace of China’s expansion. Stronger growth in Asia coupled with the Yuan revaluation speculation are positive factors for the AUD and today’s setback is likely to be short-lived. In addition, Australia reported a jump in inflation expectations. Australia’s April Westpac inflation expectations rose to the highest level since October 2008. The rise in Australia’s inflation expectations could revive RBA rate hike speculation. Over the past few weeks there has been growing uncertainty about RBA policy outlook and whether the RBA is nearing a pause in its rate hike cycle. The RBA’s Debelle said interest rates are close to normal levels. Debelle’s comments have encouraged speculation that the RBA may pause. Last week the RBA raised interest rates 25bps to 4.25% and left the door open for future rate hikes. Debelle’s comments and mixed Australian economic data suggest that the RBA may elect to pause in its rate hike cycle. Today’s Australian inflation report may tip the scales back in favor of another 25bps RBA rate hike next month. RBA policy uncertainty has been offset by optimism about the global recovery and improving risk sentiment. Today’s Chinese economic data confirms positive growth outlook for Asia.

The technical outlook for the AUD is positive as the AUD rallies above 9300. Expect AUD support at 9273 the April 14h low with resistance at 9389 the April 12th 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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