FOREX TRADING

• USD: Mixed, IMF warns rising sovereign debt levels pose biggest threat to the global economy
• JPY: Lower, BOJ says Japan to eventually escape deflation, stops short of endorsing an inflation target
• EUR: Lower, Greek/German 10 year bond spread widens to record level, Greek aid talks begin today
• GBP: Higher, labor market improves as jobs claimant count falls more than expected, BOE more upbeat
• CAD and AUD: AUD & CAD mixed, Australia’s leading index rises, BOC rate hike speculation

Overview

USD traded mixed with the EUR pressured by ongoing concern about the Greek fiscal debt, GBP supported by report that the UK labor market is improving, commodity currencies trade higher supported by rate hike speculation with AUD supported by report of sharp rise in Australia’s leading index and the JPY traded lower with downside limited by comments from BOJ deputy governor that Japan will eventually escape deflation. Greek/ German 10 year bond spread rose to a 12 year high fueling concern about the cost of financing the Greek debt. Greek aid talks begin today and are expected to last two weeks. The German opposition party has threatened to block the government’s approval of a fast track of Greek aid. The IMF says that sovereign debt levels pose the biggest threat to the global economy. Persistent EUR selling pressure limits USD downside versus the majors. Growth led currencies continue to outperform supported by optimism about the global recovery as the Bank of India hikes interest rates and the BOC signals rates may soon rise. Rising interest rates are seen as confirmation that the markets are returning to normal. No major US economic data was released in today’s trade. Investors will continue to monitor news concerning the Greek debt. Focus turns to Thursday’s release of US initial jobless claims and existing home sales.

Today’s US data:

No major US economic data was released in today’s trade.

Upcoming US data:

On April 22nd initial jobless claims for week ending 4/17 will be released expected at 460k compared to 484k last month. March PPI and existing home sales will also be released on April 22nd.PPI is expected to rise by 0.3% compared to 0.6% last month. Existing home sales are expected at 528k compared to 502k last month. On April 23rd March durable goods and new home sales will be released. Durable goods are expected to rise by 0.3% compared to 0.9% last month and to rise by 0.8% ex-transports. New home sales are expected at 320k compared to 308k last month.

JPY

JPY drifted lower pressured by a recovery in risk appetite as Asian equity markets trade higher and India hikes interest rates. The Nikkei closed 183 points higher. The rate hike in India confirms growing confidence in the global recovery and contributes to improving risk appetite. JPY downside was limited by the comments from BOJ deputy governor Nishimura. Nishimura said that Japan will eventually escape deflation and that the economy will continue to recover. His comments reduce the likelihood of additional ease by the BOJ. Members of Japan’s ruling party are calling for BOJ to set a 2% inflation target. Nishimura stopped short of endorsing an inflation target but said that the BOJ will try to bring its price view closer to the governments. JPY remains vulnerable to its low yield status as interest rates are set to rise in many of the industrialized nations. JPY cross activity was mixed with the JPY gaining versus the EUR as Greek/German by spreads widened to a record level and JPY weakened versus the GBP with GBP supported by report of improvement in the UK labor market. AUD/JPY drifted lower pressured by profit-taking. The direction of equity markets and risk appetite are the main drivers for JPY trade.

March trade balance and February all industry activity will be released April 22nd. March trade balance is expected at ¥750bln compared to ¥651bln last month. All industry activity is expected to decline by 0.4% compared to the 3.8% rise last month.

Key technical levels to watch in USD/JPY include support at 92.40 the April 20th low with resistance at 93.53 April 15th high.

EUR

EUR traded lower pressured by Greek debt worries as the cost of financing the Greek debt rises to a 12 year high. Greek ten year bond yield rose above 8% and the spread to Germany widened to a record 502 bps. Greek aid talks begin today and the outcome of those talks will be key to the direction of the EUR. The talks may last as much as two weeks. EU officials have expressed confidence that they will not let Greece fail. Investors remain skeptical about the efficacy of the Greek aid plan. Tuesday the ECB’s Weber said that Greece may need up to €80bln in aid and that he €30 billion aid pledge to Greece may not be enough. There is an interesting report on Bloomberg citing analysts at Citicorp warning that the EUR could be doomed without fiscal and political unity. EUR was also pressured by selling in cross trade with JPY supported by report of EU bond redemption and GBP trading at a two month high versus the EUR supported by report of better than expected UK labor data. EUR remains vulnerable to uncertainties about the Greek debt outlook.

On April 22nd EU manufacturing and services PMI for April be released. The manufacturing PMI is expected to improve to 56.7 from 56.3 and the services index is expected to improve to 54.5 from 53.7. On April 23rd German April IFO business climate survey will be released expected at 98.6 compared to 98.1 last month along with EU February industrial orders expected that -1% compared to -2% last month.

The technical outlook for the EUR is negative as EUR fails to hold above 1.3600. Expect EUR support at 1.3341 the April 9th low with resistance at 1.3523 the April 21st high.

GBP

GBP traded higher supported by report of better than expected UK labor market data. UK claimant count dropped by 32,900, a 10k drop was expected and the unemployment rate fell for the second month in row. The improvement in the UK labor market follows yesterday’s report of higher than expected inflation. The monetary policy minutes for the BOE’s April meeting show that the board voted unanimously to leave interest rates unchanged at 0.5% and the level of asset purchases unchanged at £200bln. The BOE policy statement was a bit more upbeat on the economic outlook and there was a debate over how best to deal with rising inflation and growth risks. Some MPC members expressed concern about above target inflation. Based on today’s UK employment report and building inflationary pressures there may be increased speculation that the BOE may soon elect to end quantitative easing and begin to normalize monetary policy. GBP upside was limited by the latest UK election polls which point to the potential for a deadlock in parliament. A You/GUV poll has the Liberals at 34%, Conservatives at 31% and labor at 26%. The UK general election is just two weeks away and a deadlocked parliament could put the UK AAA sovereign debt rating at risk for downgrade. A deadlock or hung parliament is less likely to take quick action to reduce the UK budget deficit. Ratings agencies have warned the UK government that failure to take action to reduce its spending could lead to a downgrade of the UK sovereign debt rating. Focus turns to Thursday’s release of UK retail sales, net public sector borrowing and Friday’s Q1 GDP. Investors look to these reports for further confirmation that the UK economy is recovering and insights to the UK budget. UK public-sector borrowing is expected to surge to 24bln in March.

On April 22nd March retail sales will be released expected to rise by 0.8% compared to 2.1% last month along with March net public-sector borrowing expected to rise by 24bln compared to 12.3bln last month. On April 23rd Q1 GDP will be released expected at 0.5%.

The technical outlook for GBP is positive as GBP trades will above 1.5400. Expect near-term support at 1.5290 the April 20th low with resistance at 1.5482 the April 16th high.

CAD

CAD traded mixed continuing to find support from BOC rate hike speculation. Tuesday the BOC elected to hold rate policy steady, raised its 2010 GDP forecast to 3.7% ended its commitment to maintain low rates. The BOC policy statement says that the Canadian recovery was somewhat more rapid than expected and the BOC dropped the language in its policy statement that interest rates would remain low through June 2010 conditional on inflation. Dropping the conditional inflation language in its policy statement is a shift in BOC policy and a signal that interest rates will soon be raised. The BOC policy statement was seen as more aggressive than expected and could lead to an earlier than expected rate hike. BOC rate expectation sparked a CAD rally through parity versus the USD. The increase of the BOC 2010 forecast and the dropping the language from its policy statement that rates will remain on hold through June 2010 conditional on inflation opens the door for a June rate hike. Focus turns to Thursday’s BOC Monetary Policy Report for further clues to the outlook for BOC policy and possible timing of a rate hike. CAD upside was limited by report of weaker than expected wholesale trade. February wholesale trade declined by 1.2%, a 0.5% rise was expected. Inventories rose by just 0.1% which could be a red flag to the BOC’s upbeat assessment of the economic outlook for Canada. The wholesale trade report had limited impact on CAD trade as some analysts suggest that the report may have been distorted by the Olympics and bad weather. The main focus for CAD trade will be Friday’s release of retail sales and CPI. These reports should give a better reading of the strength of the Canadian recovery and inflationary pressures.

On April 22nd March leading indicators will be released expected at 1% compared 0.8% last month. On April 23rd March CPI will be released expected to rise by 0.9% compared to 0.7% last month along with February retail sales expected to rise by 1.2% compared to 0.7% last month.

The technical outlook for CAD is positive as USD/CAD trades below 1.0000. Look for near-term support at 0.9830 the May 30th low with resistance at 1.0164 the April 20th high.

AUD

AUD traded mixed initially supported by report that Australia’s leading index rose to its highest level in 13 years. Australia’s February leading index rose by 7.2%. March imports rose by 4%. These reports are seen as confirmation of improving outlook for the Australian domestic economy and the data may intensify RBA rate hike speculation. AUD traded sharply higher Tuesday in reaction to hawkish RBA policy minutes and a rate hike in India. The April RBA policy minutes state that interest rates are still below average and need to rise more. According to the RBA minutes the boom in exports meant that the RBA could not delay further rate hikes. The RBA hiked rates by 25bps to 4.25% earlier this month. The Reserve Bank of India raised interest rates 25bps to 3.75%. This is the second consecutive monthly rate hike by the RBI and reflects the central bank’s view that the Indian recovery is firmly in place. The strength of the Indian recovery and RBA minutes may increase pressure on the RBA to hike rates at next month’s policy meeting. Last Thursday, Australia reported that inflation expectations rose to the highest level since October 2008. The rise in Australia’s inflation expectations could add pressure on the RBA hiked rates. Australian inflation report and RBA minutes may tip the scales back in favor of another 25bps RBA rate hike next month. AUD gains were limited by a report from Freeport that they expect China’s H2 copper demand to slow. AUD direction remains tied to risk appetite and RBA policy.

This week’s Australian economic calendar includes the April 22nd release of March new car sales expected to rise by 3% compared to -1.9% last month. On April 23rd Q1 export and import prices will be released. Export prices are expected to rise by 0.7% compared to a 1.7% decline last quarter and imports prices are expected to fall by 0.6% compared to a 4.3% decline last quarter.

The technical outlook for the AUD is positive as the AUD trades above 9300. Expect AUD support at 9246 the April 19th 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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