FOREX TRADING

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…)

• USD: Higher, pending home sales rise, Challenger says job cuts back to pre-recession levels
• JPY: Lower, Japan’s PM resigns, Finance Minister Kan is the likely successor
• EUR: Lower , EU inflation rises more than expected, Iran to sell EUR reserves
• GBP: Lower, mortgage approvals rise, construction PMI at a three-year high, King expects inflation to fall
• CAD and AUD: AUD lower & CAD higher, speculation more BOC rate hikes are in the pipeline

Overview

USD traded in a narrow range Tuesday against most of the major currencies with the main focus on a sharp decline in the JPY and a strong rally in the CAD. JPY traded lower pressured by news that Japan’s PM Hatoyama has resigned. European currencies opened higher supported by gains in cross trade to the JPY with upside progress limited by positive US employment and housing data. EUR struggled to hold overseas gains that were sparked by report of higher than expected EU inflation rise and comments from a number of central bankers reaffirming commitment to the EUR. EUR was pressured by report that Iran plans to covert its EUR reserves to USD. GBP traded lower despite report of rising UK mortgage approvals and stronger construction PMI pressured by BOE King’s statement that he expects inflation to fall back to target. Commodity currencies traded mixed with AUD finding limited support from report that Australia’s GDP rose by 0.5% in Q1. CAD traded higher with gains attributed to speculation the BOC will raise interest rates again before year end. Today’s US economic data was positive with the Challenger Gray employment survey showing little change from last month. This suggests that employers are becoming more optimistic about the strength of the recovery and are shedding fewer jobs. April pending home sales rose by 6%, a 4% rise was expected. (more…)

U.S. Review

“He Was Never the Same”

• In sports, this refrain often accompanies the attempted recovery of an athlete after a serious injury. Today, we can say much the same for the U.S. and European economies.
• Moderate growth and low inflation remain the hallmarks of the outlook in the post-stimulus era. Yes, we have growth, but the pace of gains remains short of the political promises. Moreover, moderate recovery and limited private-sector job gains suggest continued large public-sector deficits and a continued need to restructure all levels of government—both here and abroad.

“He Was Never the Same”

In sports, this refrain often accompanies the attempted recovery of an athlete after a serious injury. Today, we can say much the same for the U.S. and European economies.

“We sense the convergence process to a new economic equilibrium has been more difficult than policymakers estimate. Job growth has been non-existent. Credit growth has been restrained and the recovery in housing far less significant than expected. Still inflation remains subdued as unemployment limits the acceleration in wages and unit labor costs.”

(Annual Outlook, Dec. 9, 2009, for 2010).

This week’s data highlight the change in the U.S. recovery that confirms our suspicions back in December. Housing starts jumped 5.8 percent in April as homebuyers and builders rushed to get contracts signed prior to the April 30 deadline of the homebuyer credit. Yet, building permits fell, thereby suggesting that the rebound in housing will fall short of prior business cycles. Why? For one, consumer confidence numbers indicate that plans to buy a home dropped to the second-lowest level in more than 25 years. Why? Our view is that home values remain uncertain, and there has been a shift in the way households view a home, from an investment opportunity to a shelter. The investment premium in housing is gone. Second, household income growth remains limited once the impact of transfer payments is removed. The Leading Economic Index fell in April. This was the first decline in 12 months. While such a drop is not a signal for panic, it does suggest that forward momentum in the economy may be more modest. There are two components of the leading indicators we find troubling. Building permits fell sharply, which suggests a drop-off in residential construction post-first-time homebuyer credit. This brings into question the sustainability of the housing recovery and its new equilibrium pace of housing starts. Our outlook is for 670,000–710,000 in the fourth quarter. Also, the rise in jobless claims suggests to us that private-sector job growth will remain subpar. (more…)

The minutes of the April 27-28 FOMC meeting provided the details of the discussions on the economic outlook and prospective changes to policy. In all, the minutes highlight that the Fed is more optimistic about the economy with participants expecting that the recovery will continue. Importantly, members indicated that they were seeing signs that growth was being supported by improving domestic demand and “not just fiscal stimulus and a slower pace of inventory decumulation.” This sentiment was reflected in the updates to the Fed’s central tendency forecast with the range for growth in 2010 boosted to 3.2-3.7% from 2.8-3.5% in January.

The forecast update also included a mild downward revision to the range for the unemployment rate (9.1-9.5%) this year. In 2011 and 2012, the unemployment rate is expected to trend lower with the 2012 range at 6.6-7.5% as in the January report. Inflation forecasts were trimmed back with the headline PCE rate forecasted at 1.2-1.5% and the core PCE deflator expected to be in a 0.9-1.2% range in 2010. While there were tweaks to the forecasts, the story on the outlook remained generally intact. The risks to the inflation outlook were considered mixed. (more…)

Consumer Prices in United Kingdom Unexpectedly Decline

Today, we have full support that inflation is indeed inline with the Bank of England expectations as Governor of the central bank, Mervyn King stated before that the rise in inflation rates is temporarily and a result of APF program, higher energy prices and the reversal of the VAT.

CPI for the year ending in February today we saw ease from the 14-month high of 3.5% to 3.0% which is lower than the projected 3.1% while on the month rose to 0.4% from the prior decline of 0.2%, which is worse than the expected 0.5%.

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USD Higher, Consumer Prices Flat, Continuing Claims Rise

• USD: Higher, Greek fiscal worries and tensions with China over Yuan revaluation, Philly Fed rises
• JPY: Mixed, manufacturing sentiment improves, gains limited as US equities rally
• EUR: Lower, Greece may seek IMF aid as EU aid to Greece appears less likely
• GBP: Lower, February budget deficit smaller than expected, CBI orders decline
• CAD and AUD: AUD & CAD lower, Canadian net foreign investment flows rise

Overview

The USD traded higher Thursday supported by concern about the Greek fiscal outlook and in reaction to increasing tensions between the US and China over the value of the Yuan. EUR was pressured by a Dow Jones report that Greece may seek IMF aid as aid from the EU seems less likely. Greek PM says it will give the EU one month to decide on an aid plan. US officials tell China that the value of the Yuan is a real concern. There is a movement in U.S. Congress to name China as a currency manipulator. Chinese officials continue to push back against pressure to revalue the Yuan and state that a rise in the Yuan would be a disaster for Chinese exports. US and Chinese rift over the Yuan dampens risk appetite and sparked selling of the commodity currencies. CAD outperformed supported by report of strong net foreign investment flows to Canada and diminished threat of BOC intervention. JPY traded higher in reaction to today’s drop in risk appetite and by report of improving manufacturing sentiment in Japan. GBP traded lower in reaction to a decline in UK CBI orders with downside limited by report of smaller than expected UK February budget deficit. Today’s US economic data was mixed with February CPI unchanged and jobless claims came in slightly higher than expected. Continuing claims unexpectedly rose by 12k. The US current account deficit widened by less than expected in the fourth quarter. LEI was reported a bit weaker than expected and the Philly Fed came in above expectation. Today’s US economic data points to a slow US recovery with low inflation and USD consolidated early gains.

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Risk-Aversion Drags Euro Lower

The dollar and yen were higher in early Thursday trading amid speculation that Greece may seek help from the IMF — sparking fears that next week’s EU Summit meeting will provide little support to the sovereign-debt crisis. Heightened risk aversion pushed the euro lower, relinquishing the 1.37-handle against the dollar and sliding beneath the 123-level versus the yen. Gains in crude oil stalled in the overnight session, drifting back toward the $82-per barrel level and lower by almost 1% to $82.16.

Data from the US will remain in focus in the New York session with the calendar consisting of several key gauges on the economy. The reports include February consumer prices, weekly jobless claims, the Q4 current account deficit, the March Philadelphia Fed survey and the February index of leading economic indicators.

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USD Lower, Inflation Subdued

• USD: Lower, PPI falls the most in seven months, steady Fed policy
• JPY: Lower, BOJ expands quantitative ease and raised its lending auctions to ¥20trln
• EUR: Lower, annual rate of labor cost rise the slowest in four years
• GBP: Higher, UK claimant count posts biggest drop in 13 years, BOE minutes note increased inflation risk
• CAD and AUD: AUD & CAD higher, strong Australian housing data, easy money from the Fed and BOJ

Overview

The USD traded mostly lower Thursday pressured by the Fed’s decision to hold monetary policy steady and signal that interest rates will remain low for an extended period. GBP surged in reaction to report that UK jobless claims declined the most in 13 years. GBP was also supported by the minutes from the BOE’s March policy meeting which state that the central bank is growing more concerned about inflation risk. EUR traded lower with gains limited by report of slowing rise of labor costs in the EU and selling pressure in cross to the GBP. The commodity currencies traded higher in reaction to firmer equity market trade with the AUD supported by hawkish comments from the RBA’s Debelle and strong Australian housing. Debelle said rates may have to rise a bit more. CAD was supported by report of a surge in Canada’s whole sale trade. JPY traded lower in reaction to the BOJ’s decision to expand quantitative ease from ¥10trln to ¥20trln. Today’s US economic data was mixed with PPI posting a bigger than expected decline. The PPI report supports the Feds forecast that US inflation pressures will likely remain subdued. With the US economic recovery uneven and inflation subdued the Fed will be in no hurry to tighten monetary policy. Focus turns to Thursday’s release of US CPI.

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