The markets continue to ditch the greenback in the wake of yesterday’s FOMC meeting, when the Fed extended its concerns about the economic recovery to include the outlook for inflation. The dollar index fell below the crucial 80.0 mark during the NY session, the lowest level in 5 months. The next major support level is 79.50 – the March lows.

The euro was the chief beneficiary of weakness in the greenback, enjoying a respite from sovereign debt concerns. It ended the NY session broadly higher against the major currencies, including sterling, where it broke above 0.85 – a former key resistance level. However, the euro stalled at the 1.3450 level against the dollar and is currently hovering just below 1.34. This suggests rallies in the single currency will be limited as concerns continue to mount about the financial positions of the peripheral Eurozone economies.

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Sunrise Market Commentary

• Bonds move higher for second session in a row
  Global bonds continued to move higher yesterday in a technical inspired move. The BOJ interventions in the FX markets may have some impact on bonds. Will they push equities higher or increase the market expectation that the Fed will do some more QE?
• BOJ steps into the market
  Yesterday, EUR/USD made quite an impressive break higher as the pair cleared the 1.2923 resistance area. There was no big story behind the move, but global dollar weakness was obviously part of the explanation. This morning the BOJ finally intervened into the currency market to stop the rise of the yen. USD/JPY gained two yen.

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Dollar Sold Aggressively

U.S. Dollar Trading (USD) market speculation that the FED may introduce new Quantitative Easing as early as November. August Retails Sales were strong at 0.4% vs. 0.3% forecast m/m. Stocks struggled to extend gains though as profit taking set in towards the close. In US stocks, DJIA -17 points closing at 10526, S&P -1 points closing at 1121 and NASDAQ +4 points closing at 2289. Looking ahead, August Industrial Output is forecast at 0.2% vs. 1.0% previously.

The Euro (EUR) was the biggest beneficiary of the USD weakness surging past 1.3000 in New York. September German ZEW Current jumped to 59.9 vs. 44 previously. EUR/AUD and EUR/GBP are bouncing off month trend lows and is helping the major outperform. EUR/USD traded with a low of 1.2828 and a high of 1.3035 before closing at 1.2990. Looking ahead, August Inflation is forecast at is forecast at 0.2% vs. -0.3% previously. (more…)

Today’s FOMC statement reflected a cautious view on the economy with an emphasis on modest gains in household and investment spending. “Subdued” inflation remains. Dissent continues.

Economic Outlook: Downgraded Again

Economic activity “has slowed” according to the FOMC statement. We agree. Household spending is increasing gradually but remains constrained by “high unemployment, modest income growth, lower housing wealth, and tight credit.” Real positive momentum in the economy is reflected in business spending on equipment and software. Nonresidential construction spending continues to be weak and housing starts “remain at a depressed level.” We agree. (more…)

European finance ministers have today backed Estonia’s bid to become a member of the eurozone. Estonia will become the 17th member of the euro area on 1 January 2011. The positive decision was made despite the ECB’s concerns that the inflation criterion is not sustainable. The ECB said on 12 May that in its opinion the current low inflation rates in Estonia reflect mainly temporary factors and once output growth resumes, it will be very difficult to maintain low inflation rates, especially given the limited room for manoeuvre for monetary policy.

Estonian euro adoption is, in our view, primarily a political decision rather than an economic one and we would stress that the euro is not a panacea for all economic diseases and euro membership will bring challenges as well as benefits. Ultimately, this will increase confidence in the Estonian economy, but it is also clear that it will not solve the structural economic problems. Estonia should continue with implementation of structural reform and maintaining fiscal discipline, the latter would preserve financial stability in the country and avoid imbalances. As already mentioned, there remain significant upside risks to inflation, which could adversely affect the country’s international competitiveness.

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The main story in currency markets from overnight was the resignation of the Japanese Prime Minister. The news weakened the Yen as the political instability dents the safe-haven appeal of the currency. The likely replacement will be the Finance Minister Kan, though that wont be known until Friday when the Democratic Party of Japan holds its leadership election. Six months ago, when assigned to the post Kan stated that he preferred a weaker Yen, and that makes the change at the top of the Japanese government a Yen negative story.

As we see from this month-long look at the USD/JPY using 4-hour candles, the Dollar continued to extend its gains following its break of the 90.60 level last week, and the move above 91.60 in overnight trading. In the early NY session the pair had moved above the 92 level with the next clear level of resistance at the 93 area (where we stalled in mid-May) and above that at 93.50. (more…)

GBP still struggling to find its feet

HEADLINES – PREVIOUS SESSION

• US Mar. Trade Balance out at -$40.4b vs. -$40.5b expected and revised -$39.4b prior
• US Apr. Budget out at -$82.7b vs. -$57.9b expected and -$20.9b prior
• NZ Apr. Business PMI out at 58.9 vs. revised 56.7 prior
• NZ Apr. Food prices out at -0.5% m/m vs. +0.2% prior
• UK Apr. Nationwide Consumer Confidence out at 74 vs. 73 expected and revised 73 prior
• JP Mar. C/a Balance out at ¥2534.2b vs. ¥2173.6b expected and ¥1470.6b prior
• JP Mar. Trade Balance out at ¥1074.7b vs. ¥1077.2b expected and ¥778.0b prior
• JP Apr. Bank Lending out at -1.8% y/y, unchanged from prior
• AU Apr. Employment Change out at +33.7k vs. +22.5k expected and revised 27.7k prior
• AU Apr. Unemployment Rate out at 5.4% vs. 5.3% expected and revised 5.4% prior
• JP Apr. Economy Watchers Survey: Current out at 49.8 vs. 47.5 expected and 47.4 prior
• JP Apr. Economy Watchers Survey: Outlook out at 49.9 vs. 47.0 prior

THEMES TO WATCH – UPCOMING SESSION

• EU ECB Monthly Report (0800)
• UK Visible Trade Balance (0830)
• UK DCLG House Prices (0830)
• EU ECB’s Gonzalez-Paramo to speak (1115)
• EU ECB’s Weber to speak (1220)
• US Import Price Index (1230)
• US Initial Jobless Claims (1230)
• US Fed’s Kohn to speak (1300)

Market Comments

The EUR started the overnight session on a stronger footing, helped along by a modest rise in Euro-zone Q1 GDP (0.2% /q, 0.5% y/y) and announcements from Spain regarding a host of cost-cutting initiatives intending to reduce the country’s budget deficit to 6 percent of gross domestic product in 2011 from 11.2 percent in 2009. However, as has often been the case of late, EUR strength was seen as another opportunity to short the single currency and the foray above 1.27 proved short-lived and by the NY close we were back to levels where Asia left them yesterday. (more…)

Risk aversion crept back into markets today, putting pressure on global bourses. Ongoing concerns regarding European sovereign debt and policy tightening in China weighed on risk appetite, boosting demand for safe haven assets like the greenback and the yen. The RBA increased Australia’s benchmark rate for the 6th time since October but hinted to a slow in the pace of monetary tightening, sparking a sell-off in the aussie. The greenback benefitted with the dollar index re-testing the April 28th high, at 82.71. Commodity prices were softer on dollar strength, with gold dipping to $1181 and crude oil falling back below $86 per-barrel.

Bail-Out Provides No Support

Euro pressure persisted amid lingering fears over Greece, as today marked the start of a 48 hour nationwide public sector strike in protest to the recent implementation of strict austerity measures. The single currency fell early in the London session, triggering our medium-term limit at 1.3130. The euro’s next target lies at the figure. Subsequent floors are eyed at the 100% Fibonacci extension taken from the April 26th and May 2nd highs at 1.3060, followed by 1.3020 and the 1.30 handle. Long-term targets extend as low as 1.2880. To the topside, resistance is seen at 1.32, backed by our risk limit at 1.3260, and the 1.33 figure. Upside potential gains momentum with a break above the monthly pivot at 1.3340, with additional ceilings eyed at 1.34 and 1.3450. (more…)

• Fed keeps policy measures unchanged, with minimal alterations to statement.
• Growth assessment marginally upgraded, but outlook maintained.
• No changes to inflation paragraph.
• ‘Extended period’ paragraph left unaltered.
• We still expect the Fed to begin removing its accommodation later this year.

Details

The committee was slightly more upbeat in its assessment of growth. Language on consumption, the labour market and housing was upgraded. However, in all cases changes were incremental and came with a cautionary note attached. (more…)

FX Highlights

• The USD is trading lower with the EUR rebounding from a one-year low versus the USD supported by report that the EU/IMF plan to take quick action to increase aid to Greece and German officials pledge solidarity with Greece, GBP trades lower pressured by concern about UK sovereign debt rating post UK election, commodity currencies trade higher with the AUD supported by higher Australian CPI and a statement from the RBA assistant governor that EU sovereign debt troubles are not impacting Australia, JPY trades lower pressured by a shift in risk appetite sparked by rumor of larger Greek aid with selling noted in cross trade to EUR and AUD, US stocks set to buck the overnight downturn in European and Asian equities supported by strong earnings at Dow and Shell and anticipation of steady Fed policy (more…)

News and Events:

Pressure continues to mount on Greece as markets remained unconvinced that the EU and IMF aid package will come in time. Greek 2-year bond yields jumped to 13.53% and 1-year CDS rose to 1078. Worryingly Portugal ‘s and Spain CDS prices are now being pulled higher, increasing the markets concern over EU contagion. As to be expected the EUR remained choppy as news, analysis and comments hit the wire with regular frequency. In Asian sessions, risky assets sold off as an article in FT Deutschland reported that the Netherlands would support Germanys call for tougher austerity measure in return for financial aid. Yesterday German Chancellor Merkel said Germany would support Greece if preconditions were met as Germany was obligated to insure the stability of the EMU. Recent IMM data has shown that EUR short positions have increased and the longer the Greece situation goes without a resolution, the harder it will be for the EU and EUR to pull out of what G. Soros’ referred to as a ‘Death Spiral.’ (more…)

U.S. Dollar Trading (USD) very strong US data sent stock markets higher and helped the USD/JPY regain the Y94 level. Risk currencies though did well as the Euro led the rest of the market higher against the safe haven Dollar. March New Home Sales jumped over 20% to 411k vs. 330k forecast. March ex-Trans Durable Goods surged 2.8% vs. 0.7% expected. In US stocks, DJIA +69 points closing at 11204, S&P +8 points closing at 1217 and NASDAQ +11 points closing at 2530.

The Euro (EUR) was well supported when Greece Activated its Aid package in Early Europe although initial gains were limited and the market waited for supportive comments from France and Germany before pushing higher into the US close. April IFO was very strong at 101.6 vs. 98.8 expected. Overall the EUR/USD traded with a low of 1.3202 and a high of 1.3400 before closing at 1.3370. Looking ahead, ECB President Trichet Speaks.

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Wakeup Call: SEC Charge Against Goldman Sachs Makes Risk Retrace

Clearly this will negative for risk sentiment in the short term, but if earnings continue to outperform and macro data also continues to show progress markets will retrace back

Calendar

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Housing starts rose in March, and February’s 5.9% decline was revised to show a 1.1% monthly increase. In March, starts were 626,000 at an annualized rate while the level of February starts was revised to 616,000 annualized units, from an earlier reported 575,000. The March increase bested expectations that starts reached 610,000 annualized units. Permits were also firmer than expected, rising to 685,000 at an annualized rate, the highest since October 2008.

Starts of single-detached homes dipped 0.9% to 531,000 while multiple-units starts rose to 95,000 from 80,000 in February. In the first quarter, single-family starts increased at a 10.4% annualized rate and were running 37.7% higher than in the first quarter of 2009. Multiple-unit starts were still running 45% slower than in the same quarter a year earlier. A large gain in the South (+18.2%) was partially offset by widespread declines in the Midwest (-28.4%), the West (-2.1%) and the Northeast (-8.3%).

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Asia Pacific markets were stronger today after a stellar rally in US equities. The Nasdaq led the rally, advancing more than 1.5% to close at 2504.86. The Dow and S&P were also firmer, gaining .94% and 1.12% respectively. The recent boost in global equities comes on the heels of better than expected retail sales and earnings reports as well as improving market sentiment. At yesterday’s congressional testimony, Fed Chairman Ben Bernanke re-affirmed the Fed’s commitment to keep rates "very low, extremely low " for an "extended period", easing investor’s concerns of a possible rate hike in the near term. The Chairman did however hint to lagging improvements in the housing and labor markets, noting that "in March 44% of the unemployed had been without a job for six months or more." The dollar was slightly higher early in the session but remains subdued on improving risk appetite, with the dollar index hovering just above the 80 handle. Commodities relinquished gains early in London trade with crude oil dipping below the $86 figure and gold falling to $1153.60.

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