FOREX TRADING

• USD: Higher, FOMC may sell assets, new home sales rise 26.9%, durable goods rise ex. transports
• JPY: Lower, widening yield differential, improving risk sentiment, concern about Japan’s debt
• EUR: Higher, Greece seeks to activate EU/ IMF aid, German IFO rose by more than forecast
• GBP: Lower, Q1 GDP comes in below expectation, BOE seen on hold
• CAD and AUD: AUD & CAD lower, dovish RBA comments, weaker Canadian inflation and retail sales

Overview

A report that Greece seeks to activate the EU/IMF aid package and a surge in the German IFO business sentiment index sparked a short covering rally in the EUR. The EU commission said that Greek aid will be as soon as possible. The cost of financing the Greek debt dropped after the announcement that Greece seeks aid. USD traded mainly higher versus the majors with GBP pressured by report of weaker than expected UK Q1 GDP, AUD pressured by dovish comments from RBA Governor Stevens and CAD pressured by report of weaker than expected Canadian inflation and retail sales. Lower Canadian inflation may ease BOC rate hike pressure. USD was also supported by a CNBC report which says that a growing bloc of the Fed board members favor selling of assets. The selling of assets by the Fed would signal the beginning of withdrawal of monetary stimulus. JPY traded to a two-week low versus the USD in reaction to strong US economic data and Thursday’s warning from Fitch that the Japanese sovereign debt rating is at risk of downgrade because of the rising Japanese budget deficit. US economic data was positive with durable goods posting solid gain ex. transportation and new home sales surged. Today’s US economic reports follow yesterday’s report of stronger than expected existing home sales and drop in jobless claims. These data fuel hope that the US recovery is gaining momentum. Focus turns to next week’s FOMC policy meeting with investors looking for confirmation that the Fed is seeking to start its exit strategy.

Today’s US data:

March durable goods declined by 1.3%, a reading of 0.3% was expected. Durable goods ex-transportation rose 2.8%. March new home sales rose 26.9% to 411k, a reading of 32k was expected.

Upcoming US data:

Next week’s US economic calendar includes the April 27th release of February Case Shiller Home Price Index expected to rise by 0.5% compared to the 0.7% decline last month. April consumer confidence will also be released on the 27th expected to rise to 54.2 from 52.5 last month. FOMC policy meeting will be held on April 27/28th. No policy change is expected. On April 29th initial jobless claims for the week ending 4/24 will be released expected at 448k compared to 456k last week. On April 30th Q1 employment cost index, GDP, core PCE index, Chicago April PMI and April University of Michigan final consumer sentiment will be released. The Q1 employment cost index is expected unchanged at 0.5%. Advanced Q1 GDP is expected at 3.5% compared to 5.6% last quarter. Q1 core PCE is expected at 1.4% compared to 1.8% last quarter. Chicago PMI is expected at 60 compared to 58.8 last month and the Michigan consumer sentiment is expected unchanged at 69.5.

JPY

JPY traded lower pressured by report that some of the FOMC board members want to begin selling of assets and in reaction to Thursday’s warning from Fitch of possible downgrade of Japan’s sovereign debt rating because of rising Japanese government debt. JPY remains vulnerable as low yield currency because the BOJ has pledged to maintain accommodative policy to combat deflation. Recent improvement in US economic data and rising US inflation encourages speculation that the Fed may be moving towards a shift in its policy bias. Today’s report that some of Fed board members want to begin selling assets would begin the beginning of withdrawal liquidity and shift yield differential in favor of the USD. Earlier in the week the IMF raised its global GDP forecast but warned that the global recovery is vulnerable to rising sovereign debt risks. Japan faces a record budget deficit and the Fitch warning of a possible downgrade of Japan’s sovereign debt rating limits demand for the JPY. JPY was also pressured by a 1% surge in the EUR/JPY cross with the EUR supported by report that Greece seeks to activate EU/IMF aid. There was limited reaction to the statement from BOJ Governor Shirakawa that is inappropriate to use FX as a tool to narrow trade deficits. Shirkawa was referring to China’s Yuan policy. Shirakawa also warned against focus on inflation. His comments suggest that the BOJ is less inclined to take additional easing measures. This may partly reflect the fact that recent Japanese economic data points to improving growth with report Thursday of a jump in Japan’s export sales. In addition to BOJ is expected to raise its CPI and growth forecast in its semiannual report due for release on April 30th.JPY remains vulnerable to its low yield status as interest rates are set to rise in many of the industrialized nations and to concern about Japan’s sovereign debt rating. JPY traded to the day’s lows as US durable goods and new home sales data fuel speculation that the US economy is gaining momentum.

Next week’s Japanese economic calendar includes the April 28th release of March retail sales expected to fall by 1.1% compared to 0.9% rise last month. On April 30th March CPI will be released expected to rise by 0.3% compared to -0.1% last month. March household spending, unemployment, industrial output, housing starts and construction orders will also be released on April 30th. Household spending is expected to decline by 0.7% compared to a 0.5% decline last month. The unemployment rate is expected unchanged at 4.9% with the participation rate rising to 59.1 from 58.9 last month and employment growth to decline by 100k. Industrial output is expected to rise by 1% compared to a 0.6% decline last month. Housing starts are expected to rise by 3% compared to 8% fall last month and construction orders are expected to decline by 6.4% compared to 20.3% last month.

Key technical levels to watch in USD/JPY include support at 93.31 the April 23rd low with resistance at 94.78 April 5th high.

EUR

EUR traded higher rebounding from a one-year low versus the USD supported by report that Greece has asked to activate the EU/IMF aid package and in reaction to above expectation German IFO business sentiment report. Greek/German 10 year bond spreads dropped to 534bps as the cost of financing the Greek debt eased a bit in reaction to the news that Greece wants to tap EU/IMF aid. The Greek fiscal situation is complicated and seeking to activate the EU/IMF aid package may offer only temporary relief from concern about the Greek budget deficit. The EU commission says there is no deadline for decision on Greek request for aid. It remains to be seen how quickly the EU acts on the aid package and how effective aid package will be. It’s not yet clear how much aid Greece plans to ask for or if all EU members will agree to aid Greece. A unanimous agreement is needed from all EU members to activate aid to Greece. Wire reports suggest that the EU wants the IMF to be the first to give Greece funds. Investors are also concerned about the potential contagion from the Greek fiscal troubles and the IMF says the Greece needs more structural reforms to help restore credibility. The Greek bailout process is likely to be rocky and uneven and the USD may continue to benefit from safe haven demand. Today’s EU economic data was positive. EU February industrial orders rose by 1.5% and the German April business sentiment index rose to 101.6 compared to 98.2 last month, a reading of 98.6 was expected. German IFO is at a two year high. The IFO current conditions index also jumped to 99.3 from 94.5 last month and the expectations index rose to 104 from 102. The strengthening of the EU recovery complicates the ECB’s policy outlook as the ECB must balance the risks to the EU recovery from the Greek debt crisis and the potential inflationary risk that could result from maintaining low yields as the recovery gains momentum. Uncertainty about the efficacy of the Greek aid plan and ECB policy outlook should limit the EUR rebound. Analysts at CMC markets said that the EUR may fall to 1.27 pressured by EU disagreements over the Greek financial aid plan. We are entering the next chapter in the Greek tragedy but the story is far from over.

Next week’s EU economic calendar includes the April 29th release of EU business climate expected at 99.8 compared to 99.6 last month. On April 30th EU March unemployment will be released expected unchanged 10% along with April HICP expected at 1.5% compared to 1.4% last month.

The technical outlook for the EUR is negative as EUR fails to hold above 1.3300. Expect EUR support at 1.3206 the April 23rd high with resistance at 1.3422 the April 22nd High.

GBP

GBP traded lower pressured by report that UK Q1 GDP came in weaker than expected. UK Q1 GDP rose by 0.2%, a reading of 0.4% was expected. The weaker than expected UK GDP report generates concern about the strength of the UK recovery and may dampen speculation that the BOE will soon end its asset purchases. Earlier in the week the UK reported stronger mortgage approvals and higher inflation but retail sales came in below expectations. GBP has been supported by speculation that the BOE was shifting to a less dovish policy bias. The BOE monetary policy minutes state that some of the board members are becoming concerned about rising UK inflation. The concern about rising UK inflation coupled with the BOE’s more upbeat outlook for the UK recovery hints at a shift to a less dovish BOE policy. Today’s UK GDP data suggest that he UK recovery remains uneven and will raise questions about the probability of the shift in BOE policy bias. GBP focus will shift back to the UK May 6th general election. UK press reports that the Liberal Democratic candidate and Conservative Party candidate were the main winners of last night’s UK election debate on foreign policy. The debate results may generate continued fears that the UK election will result in a hung parliament. A hung parliament is less likely to take quick and aggressive steps to reduce the UK budget deficit. Ratings agencies have warned that if the UK does not take quick action to reduce its deficits that the UK may lose its AAA sovereign debt rating. UK PM Brown warns that cutting the deficit could increase the risk that the UK economy would return the recession. If Brown’s party were to secure a majority in parliament it could be perceived as a negative for the GBP. Brown does not support quick action on the UK deficit. Next week the UK will hold a third and final pre election debate Thursday. The topic of the debate will be the economy.

Next week’s UK economic calendar includes the April 25th release of April Hometrack housing prices expected at -0.2% compared to -0.8% last month. On April 29th April GFK consumer confidence will be released expected at -12 compared to-15 last month.

The technical outlook for GBP is mixed as GBP struggles to hold 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 lower pressured by report of weaker than expected Canadian inflation and retail sales. Canada’s annual inflation rate slowed to 1.4% from 1.6% last month with the core inflation declining by 0.2%. Canada’s retail sales rose by 0.5% in February, a 0.8% rise was expected. These reports may dampen 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 Monetary Policy Report released Thursday confirmed that Canada’s economy grew faster than expected in Q1 and that withdrawal of stimulus will depend on output and inflation. Today’s Canadian inflation and retail sales data suggest that the BOC may not be in a hurry to withdraw stimulus.

Next week’s Canadian economic calendar includes the April 30th release of Q1 GDP expected to rise by 0.8% compared to 0.6% last quarter. April raw material prices will be released on April 30ht expected at 0.6% compared to 0.4% last month.

The technical outlook for CAD is positive as USD/CAD trades below 1.0000. Look for near-term support at 0.9969 the April 23rd low with resistance at 1.0164 the April 20th high.

AUD

AUD traded lower pressured by dovish comments from RBA Governor Stevens. Stevens said that interest rates are close to the average and the future course of rates is an open question. His comments may dampen speculation that the RBA will raise interest rates again next month. Thursday Australia reported weaker than expected vehicle sales with March new vehicle sales declining by 2.7%.The decline in vehicle sales may dampen enthusiasm about the strength of the Australian economic recovery and also dampen RBA rate hike speculation. AUD price direction is closely tracking risk appetite with recent gains attributed to RBA rate speculation. AUD traded sharply higher Tuesday in reaction to hawkish RBA policy minutes. 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. 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 to hike rates. Today’s comments from RBA Governor Stevens cloud the outlook for RBA policy and may tip the scales in favor of a steady rate decision in April.

Next week’s Australian economic includes the April 27th release of Q1 PPI expected at 0.7% compared to -0.4% last month and the April 28th release of Q1 CPI expected to rise by 0.8% compared to 0.5% last quarter. On April 29th February leading Index will be released expected at 0.1% compared to -0.2% last month and Q1 business conditions expected it 14 compared to 13 last month. On April 30th March private sector credit be released expected unchanged at 0.4%. Next RBA policy meeting will be held on May 4th.

The technical outlook for the AUD is mixed as the AUD fails to hold above 9300. Expect AUD support at 9157 the April 19th low with resistance at 9304 the April 22nd 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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