FOREX TRADING

• USD: Higher, refocus on EU debt crisis, weaker equities, existing home sales rise 7.6%
• JPY: Lower, all industry activity declines, Shanghai index rose 3.5%, mixed risk signals
• EUR: Lower, Bank of Spain takes over a regional Spanish lender, EU debt/growth worries
• CHF: Lower, SNB reported selling EUR, business sentiment declines
• GBP: Lower, UK to cut $9bln from the budget deficit
• CAD and AUD: AUD & CAD higher, strong Australian auto sales, Canadian markets closed for holiday

Overview

USD traded higher Monday supported by a spike in risk aversion sparked by fresh worries over the European debt crisis and fear that the debt crisis to may slow the EU and global growth. Report that the Bank of Spain took over a regional bank refocused attention on the EU debt crisis. The EUR was also pressured by a statement from Chinese officials expressing concern about EU sovereign debt crisis. China had been diversifying into the EUR as an alternative to the USD but this diversification appears to have stopped as China was a major buyer of US treasuries last month. GBP outperformed supported by report that the new UK government plans to cut $9bln from the UK budget deficit. CHF traded at a new low for the year versus the USD and gained in cross trade versus the EUR supported by safe haven flows. Cash sources indicate that the SNB may have sold the EUR today to diversify out of some of its recent intervention purchases of the EUR. Commodity currencies traded higher supported by a rebound in the price of metals with AUD supported by report of stronger than expected Australian auto sales a 3.5% rise in the Shanghai index. Canadian markets were closed for holiday. USD was also supported by an NABE report which forecasts above trend US growth for 2010/11 ands strong existing home sales. US existing home sales came in stronger than expected reported up 7.6%. Risk aversion is the main market driver for the Forex trade.

Today’s US data:

April existing home sales rose to 5.77k, reading 565k was expected.

Upcoming US data:

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 mixed initially supported by today’s spike in risk aversion and weaker equity markets. Report that the Bank of Spain had to step in and bailout a regional lender sparked selling of European and US equities and safe haven flows to the JPY.JPY gains were partly limited by strong performance in the Shanghai stock index and in reaction to selling pressure in cross trade to the AUD. The AUD was supported by report of strong Australian auto sales. JPY edged higher in cross trade to the EUR and GBP with the European currencies pressured by EU debt worries and concern EU austerity measures will slow EU growth. News from China was also supportive for the JPY. Chinese officials expressed concern about the EU sovereign debt crisis and there are reports which suggest that China may be closer to loosening the Yuan peg. Japan’s all industry activity for March was reported at -0.8%. Last week’s Japanese economic data was mixed with Q1 GDP rising by less than expected and machinery orders posting stronger than expected gains. Japan’s tertiary index declined to its lowest level of the year. JPY price direction remains closely linked to risk appetite and developments in regard to EU sovereign debt risk.

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 sharply lower as the Bank of Spain’s takeover of a regional lender, CajaSur revives worries about EU debt crisis and shines a negative light on Spanish banks. EUR was pressured by fresh EU debt worries and concerns about EU growth outlook. Analysts at UBS forecast that the USD will emerge as the growth currency over the next decade with the US economy outpacing Europe and Japan. This week’s US economic data includes existing and new home sales, durable goods and consumer confidence. These reports are expected to confirm that the US recovery was expanding before the debt crisis in Europe roiled the global markets. The Chicago Fed National activity Index rose to its highest level since December 2006. One key issue will be how the EU crisis impacts the US recovery and Fed policy outlook. The ECB is widely expected to hold policy steady through the remainder of the year. A number of analysts expect the Fed to begin to raise rates at the end of Q4. Yield and growth differential should continue to move in favor of the USD. Bloomberg reports that analysts at Tokai Tokyo say that the EUR could fall to 1.17 pressured by speculation the EU debt crisis will send the EU economy into recession.

This 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 negative as EUR trades below 1.2400. Expect EUR support at 1.2296 the May 20th low with resistance at 1.2539 to May 24th high.

CHF

CHF traded at a new low for the year versus the USD and firmed versus the EUR. The main focus of CHF trade is the EUR/CHF cross and SNB intervention. Last week the SNB intervened aggressively to support the EUR/CHF cross as the cross traded to a record low with the CHF supported by safe haven demand fueled by outflows from the EU debt crisis. According to cash sources, Monday the SNB so far has refrained from intervention and may have actually been selling the EUR reducing some of its EUR holdings accumulated via recent interventions. The Swiss president warned that the Greek debt crisis and slower EU growth will likely encourage safer haven demand for the CHF. Last week’s announcement that Germany will ban naked short selling sparked the latest safe haven demand for the CHF. The SNB has been aggressively intervening near the 1.40 level in the cross. Recent Swiss economic data has been mixed with inflation rising and business confidence weakening. Swiss consumer prices rose by 1.4% in April. This was the fastest rise in Swiss CPI since November of 2008. April ZEW business confidence declined to 40.5 from 53.4. Analysts expect the SNB to begin tightening monetary policy before year-end in reaction to rising Swiss inflation and general improvement in the Swiss domestic economy. The weak ZEW report may force the SNB to delay its tightening cycle The IMF says that current SNB monetary policy is appropriate and the CHF rise mainly reflects strong fundamentals. Improving fundamental outlook for the CHF is a challenge to the SNB intervention. This week’s Swiss economic calendar includes the May 27th release Q1 payrolls expected at 3.99 compared to 3.96 last quarter. On May 28th May KOF index will be released expected at 2.01 compared to 1.99 last month. Expect USD/CHF support at 1.1419 the May 19th low with resistance at one 1.1740 April 20th high.

GBP

GBP traded mixed to lower pressured by spillover from weaker EUR and today’s spike in risk aversion. GBP was also pressured by a statement from the BOE’s Barker downplaying the recent rise in UK inflation. Barker said that it’s incorrect to overplay the UK inflation rise. Her comments suggest that the BOE is unlikely to change monetary policy because of the recent spike in UK inflation. Last 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. GBP outperformed supported by positive news in regard to the UK budget deficit. The UK Chancellor Osborne says the UK will cut $9bln from the UK budget deficit. UK deficit reduction is key to the UK sovereign debt outlook and investors will look to see whether the cuts are enough to satisfy the ratings agency and help the UK keep its AAA sovereign debt rating. Last week the UK reported a record monthly rise in net public-sector borrowing. The continued rise in UK government borrowing illustrates the difficult fiscal outlook facing the new UK government. This week’s main focus for GBP will be the release of UK Q1 GDP. Recent UK economic data have generally pointed towards improving UK domestic growth outlook. A strong GDP reading could boost demand for the GBP.

This week’s UK economic calendar includes the May 25th 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 1.4317 the May 21st low with resistance at 1.4545 the May 17th high.

CAD

Canadian markets were closed for Victoria Day holiday and the CAD drifted higher. CAD was supported by a rebound in metal prices, firmer crude prices and recovery from earlier lows in European and US equity markets. CAD continues to benefit from last week’s report higher than expected Canadian inflation and stronger retail sales. 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. The EU debt crisis and slowing growth in China clouds the outlook for BOC policy. Reuters reported Friday that despite EU debt crisis and Chinese growth worries all the Canadian dealers expect the BOC to hike rates 25bps in June. The next BOC policy meeting is June 1st.

This 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 1.0423 the May 20th low with resistance at 1.0780 the February 5th high.

AUD

AUD traded higher supported by report of strong Australian auto sales and mixed risk sentiment as the Shanghai index closed 3.5% higher. April new vehicle sales rose by 8.4%. Strong Australian auto sales suggest that the domestic recovery remains on track. The vehicle sales report contrasts with last weeks report that Australian consumer confidence declined to a seven month low. AUD was also supported by 1% rally in cross trade to JPY. Late last week there were rumors that the RBA intervened in the AUD/JPY cross. The cross had fallen as much as 8% earlier in the week 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. Last 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.

This week’s Australian economic calendar includes the May 27th release of Q1 capital expenditure expected at 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 struggles to hold above 8300. Expect AUD support at 8166 the May 24th low with resistance at 8496 the May 20th high.