FOREX TRADING

• USD: Lower, risk aversion, de-leveraging continues
• JPY: Lower, Japan’s finance minister expressed concern about JPY strength
• EUR: Higher, German parliament approves EU rescue plan, German GDP slows, business sentiment dips
• GBP: Higher, net public sector borrowing rose at a record pace, mortgage approvals at one year low
• CAD and AUD: AUD & CAD higher, RBA intervention, rise in Canada’s inflation rate, retail sales strong

Overview

Market volatility continues sparked by fears about global debt and growth. Intervention or the threat of intervention contributed to a degree of stability in the EUR and wild price swings in JPY cross trade. EUR traded higher supported by report that the German lower house of parliament has voted in favor of the EU rescue package. EUR gains were limited by weaker equity markets, report of slower than expected Q1 growth in Germany and a dip in German business sentiment. GBP underperforms pressured by report that UK public-sector borrowing rose at a record pace last month. Commodity currencies were mixed with the AUD posting a sharp rebound versus the USD and JPY supported by rumors of RBA intervention. Part of the EUR recovery Thursday was attributed to SNB Intervention in the EUR/CHF cross. CAD traded higher supported by report of faster than expected rise in Canada’s inflation rate and strong retail sales. JPY traded lower pressured by a statement from Japan’s Finance Minister Kan warning that excessive JPY rise is undesirable. Although Kan said that the market should determine FX levels his statement about excessive JPY rise increases the risk of intervention from Japan. Risk aversion, deleveraging and threat of intervention remain the main market drivers for the Forex trade.

Today’s US data:

No major US economic data was released in today’s trade. BLS reported that mass layoffs rose sharply in April.

Upcoming US data:

Next week’s US economic calendar includes the May 24th release of April existing home sales expected at 559k compared to 559k last month. On May 25th March Case Shiller Home Price Index will be released expected unchanged at 0.6 along with May consumer confidence expected 59.1 compared to 57.9 last month. On May 26th April durable goods will be released along with April new home sales. Durable goods are expected to rise by 0.9% compared to -0.6% last month. New home sales are expected at 420k compared to 411k last month. On May 27th preliminary Q1 GDP will be released expected unchanged at 3.2% along with initial jobless claims for the week ending 05/22 expected as 460k compared for 471 last week. On May 28th April personal income and consumption will be released expected at 0.4% and 0.3% respectively along with April core PCE deflator, final May University of Michigan sentiment and May Chicago PMI. The PCE deflator is expected unchanged at 1.3%. Michigan sentiment is expected at 73.5 compared to 73.3 last month and Chicago PMI is expected at 63 compared to 63.8 last month.

JPY

JPY traded lower pressured by selling in cross trade sparked by comments from Japan’s Finance Minister Kan and rumors of RBA intervention. Kan said that FX level should be set by the markets but excessive JPY rise is undesirable. His comments suggest that the BOJ would consider intervention if the JPYY rise becomes excessive. Kan went on to say that there no additional steps needed in regard to current market moves. JPY has appreciated sharply in cross trade to European and commodity currencies during the course of this weeks trade mainly supported by safe haven demand and deleveraging of higher risk assets. The RBA was reported intervening in support of the AUD Friday and this helped spark a corrective bounce in the JPY crosses. The BOJ concluded its policy meeting Friday and left monetary policy unchanged. The BOJ upgraded its economic assessment and said the recovery will continue. The BOJ also noted risks of the impact of the EU debt crisis and reaffirmed its commitment to maintaining accommodative policy. JPY price direction remains closely linked to risk appetite and developments in regard to EU sovereign debt risk.

Next week’s Japanese economic calendar includes the May 24th release of March all industry activity expected -1.7% compared to -2.3% last month. On May 27th April trade balance will be released expected at ¥610bln compared to ¥949bln last month. On May 28th April CPI will be released expected at 0.2% compared to 0.3% last month along with April household spending and unemployment and retail sales. Household spending is expected to fall by 0.6% compared to 4.4% last month, the unemployment rate is expected unchanged at 5% and retail sales are expected to fall by 0.5% compared to a 0.8% rise last month.

Key technical levels to watch in USD/JPY include support at 88.95 the May 6th low with resistance at 91.88 the May 20th high.

EUR

EUR traded higher supported by report that the German parliament approved the EU rescue package and by short covering sparked by threat of intervention. There had been some speculation that Germany would not approve the rescue plan because the country will bear a large amount of the cost. Although there has been no confirmation that the ECB or Fed intervened in the Forex markets in support of EUR there are worries that intervention could emerge. With the trade extremely short of the EUR the current EUR rebound is mainly attributed to short covering. ECB’s Nowotny says that the current EUR/USD exchange rate is no cause for concern and that weaker EUR will help boost EU export growth. His comments may dampen the risk of ECB intervention. Thursday the SNB was rumored to have intervened supporting the EUR in cross trade to the CHF. The SNB intervention is partly responsible for the current recovery of the EUR.EU economic data was disappointing with German Q1 GDP growth slowing and business sentiment posting a modest decline. German Q1 GDP rose by 0.2% and German May IFO declined to 101.5 from 101.6 last month EU April services PMI declined to 56.2 from 57.3 in April. Today’s EU economic data suggests that the recovery remains uneven and this will likely encourage the ECB to maintain accommodative policy. EUR gains were limited by ongoing worries about the debt crisis and uncertainty about the impact of Germany’s new regulations banning naked short selling.

Next week’s EU economic calendar includes the May 25th release of March EU industrial orders expected at 0.9% compared to 1.5% last month. On May 26th German GFK index for June will be released expected at 3.9 compared to 3.8 last month. French May business climate and April consumer spending and housing will be released on May 26th. The business climate is expected at 96 compared to 97 last month, consumer spending is expected at 0.8% compared to1.2% last month and housing starts are expected to decline by 2% compared to 3.3% last month. On May 27th German May CPI will be released expected at 0.2% compared to -0.1% last month.

The technical outlook for the EUR is mixed as EUR will rallies above 1.2500. Expect EUR support at 1.2471 the May 21st low with resistance at 1.2685 to May 13th high.

GBP

GBP traded mixed to higher with gains limited by report of a record monthly rise in UK net public-sector borrowing and weaker UK mortgage approvals. UK April public-sector borrowing increased by 10bln. This marked the biggest monthly rise since 1993. The UK’s sovereign debt rating may be at risk to downgrade if the new UK government fails to take quick action to reduce the budget deficit. Today’s report of the rise in UK net public-sector borrowing illustrates the difficult fiscal environment facing the UK government. As the UK government addresses the budget deficit and takes measures to reduce spending the BOE is likely to maintain steady policy. April mortgage approvals declined to one year low at 47k. Weak UK mortgage approvals will encourage speculation that the BOE will maintain steady policy. GBP was pressured in Wednesday’s trade by dovish BOE policy minutes for the May. The May BOE policy minutes state that the BOE voted unanimously to maintain the current level of interest rates and asset purchases. The BOE minutes also state that there is substantial spare capacity in the UK economy and this should bring down inflation in the months ahead. The BOE minutes noted that UK inflation has been rising lately and the rise was likely a result of weak GBP and rising energy prices. The BOE minutes also noted uncertainty about the impact of UK deficit reduction for the EU economy and inflation. Tuesday, the UK reported that UK inflation rate rose 3.7%. This is well above the BOE’s 2% inflation target. BOE Governor King said that the rise in UK CPI was likely temporary reflecting higher energy prices. King expects the UK inflation rate to fall below 2% within the coming year. King’s comments suggest that rising UK inflation will not encourage the BOE to consider earlier normalization of monetary policy or restrict the BOE from consideration of additional quantitative ease if necessary.

Next week’s UK economic calendar includes the May25th release of release of Q1 GDP expected at 0.4%. On May 27th May CBI distributive retail trade will be released expected at 14 compared to 13 last month.

The technical outlook for GBP is negative as GBP trades below 1.4500. Expect near-term support at 1.4110 the March 30th low with resistance at 1.4522 the May 18th high.

CAD

CAD opened lower pressured by weaker equities, a spike in risk aversion and falling commodity prices sparked by ongoing concern about the EU debt crisis. CAD downside was limited by report of faster than expected Canadian inflation rise and stronger retail sales growth. Canada’s April CPI rose by 0.3% and the core annual rate rose by 1.9%. March retail sales rose by 2.1% and 1.7% ex-autos, a 1.8% rise was expected for headline retail sales. Prior to the emergence of the EU debt crisis the BOC was widely expected to hike rates at the June policy meeting. BOC rate hike speculation coupled with strong Canadian domestic growth had supported the CAD. Despite todays report of above expectation Canadian inflation and strong retail sales growth the BOC is unlikely to hike rates because of the risk of fallout from the EU debt crisis. Worries about the recent slowdown in China’s economy generate additional fears about global recovery and reduces the risk of near-term tightening policy by the BOC.CAD turned higher for the day as US equities rally.

May 24th is Victoria Day holiday in Canada. Next week’s Canadian economic calendar includes the May 28th release of Q1 current account expected at – 8.6bln compared to -9.7bln last month.

The technical outlook for CAD is negative as USD/CAD trades above 1.0600. Look for near-term support at 1.0431 the May 20th low with resistance at 1.0780 the February 5th high.

AUD

AUD traded higher supported by what appears to be RBA intervention. There are rumors that the RBA intervened to support the AUD in the cross versus the JPY. This cross dropped 8% in the last few days. The AUD and the AUD/JPY cross have tanked pressured by massive deleveraging by investors from high yield and growth related currencies. RBA officials would neither confirm nor deny whether the central bank intervened. The combination of slower growth in China and uncertainty about the fallout from the EU debt crisis generates fear about the risk of a global slowdown. A significant deleveraging of commodities coupled with a sharp selloff in equities forced recent liquidation of long AUD positions. Additionally, the current fears gripping the financial markets will likely force the RBA to delay plans for another rate hike. Tuesday the RBA released its minutes for the May 4th policy meeting. The RBA minutes state that recent rate hikes leave policy well placed for now and that the inflationary effects of resource price gains is outweighed by EUR concerns. The minutes suggest that the RBA plans a pause in its tightening cycle and is likely to hold rate policy steady for the next few months. Fear of EU contagion and recent tightening of credit conditions in China may also encourage the RBA to pause in its rate hike cycle.

Next week’s Australian economic calendar includes the May 27th release of Q1 capital expenditure expected 4.8% compared to 5.5% last quarter and March leading index expected at -0.1% compared to -0.3% last month. On May 31st April retail sales will be released expected to rise by 0.8% along with Q1 current account, Q1 company profits and April private sector credit.

The technical outlook for the AUD is negative as the AUD trades below 8300. Expect AUD support at 8162 the May 21st low with resistance at 8496 the May 20th high.