FOREX TRADING

• USD: Mixed, trade deficit widened more than expected, import prices rise less than expected
• JPY: Flat, BOJ may revise up its CPI forecast, corporate goods prices post a modest rise
• EUR: Lower, strong demand for today’s Greek T- bill auction
• GBP: Higher, trade deficit narrows as exports surge, retail sales and house prices rise
• CAD and AUD: AUD & CAD lower, Australia’s business conditions rise, Canada’s trade surplus improves

Overview

The USD traded mixed Tuesday with downside limited by report that the Fed may change its policy guidance. GBP traded higher supported by report of a narrowing of the UK trade deficit and a surge in UK exports. GBP was also supported by report of stronger UK retail sales, rising house prices and a pledge from the Conservative party to take quick action to reduce the UK deficit. EUR traded mixed with downside limited by strong demand for today’s Greek T-bill auction. The Greek bill auction was oversubscribed which is seen as an endorsement of yesterdays announcement of an IMF/EU rescue package for Greece. AUD opened higher supported by report that Australia’s March NAB business conditions rose to their highest level since January 2008. CAD traded mixed initially supported by report of a larger than expected improvement in Canada’s trade surplus. JPY traded higher supported by report that the BOJ may revise up its CPI forecast. US economic data was mixed. The US trade balance widened by slightly more than expected and import prices rose by slightly less than expected. Excluding oil prices import prices declined. US bond yields and the USD drifted lower after the release of the import price report. US trade gap with China held to its lowest level since March 2009. The narrowing of the trade gap with China may help to reduce some of the tensions over the value of the Yuan. USD downside was limited by weaker equity markets and weaker commodity prices. USD turned higher for the day in reaction to a Reuters report that an influential US think tank says the Fed may soon change its policy guidance. Focus turns to Wednesday’s release of US CPI and retail sales. (more…)

• USD: Mixed, EU/ IMF Greek bailout plan calms investor fears
• JPY: Lower, diminished Yuan revaluation speculation as China posts its first trade deficit in six years
• EUR: Higher, trades at a three week high in reaction to IMF/EU Greek aid plan
• CHF: Lower, threat of SNB invention limits gains, consumer prices rise
• GBP: Lower, election polls point to no majority in the UK Parliament
• CAD and AUD: AUD lower & CAD higher, diminished RBA hike speculation, Canada’s housing starts slow

Overview

The initial euphoria generated by report of an IMF/EU $45bln aid plan for Greece gave way to uncertainty as German officials indicate that summit may be required to activate the aid plan. EUR initially rallied 1% in reaction to the announcement of the IMF/EU Greek aid plan but EUR gains were limited by uncertainty about how the plan will be activated. Uncertainty about the activation and lack of details of how the aid plan for Greece may be implemented sparked fresh selling of the EUR and USD demand. USD was also supported by report that China posted its first trade deficit in six years. The Chinese trade deficit may dampen Yuan revaluation speculation and raise concern about the strength of the global recovery. GBP traded lower pressured by the latest UK election polls which show that the Conservatives are unlikely to reach a majority in parliament increasing the risk of a hung of Parliament. AUD traded lower pressured by report of weaker than expected Australian housing finance data and in reaction to a statement from the RBA’s Debelle that interest rates are close to normal levels. CAD traded mixed initially pressured by report of weaker than expected Canadian housing starts. Focus turns to this week’s release of US retail sales, industrial production, housing starts and consumer sentiment to gauge the strength of the US recovery and developments in regard to the Greek aid plan.

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Today, the U.K. will release trade balance for January in a calm day in Europe that lacks fundamentals. The British economy has shown improvement, according to the data released last week which showed that consumer confidence surged in February to a two-year high and services expanded at the fastest pace in three years.

Britain expanded 0.3% in the fourth quarter boosted by exports which jumped to 3.7% from 0.1%, while imports rose to 4.1% from 1.3%. Besides, services and manufacturing sectors are showing growth in the first quarter of 2010. However, the economy is suffering from a trade deficit, where it widened in December to the most since January 2009 as imports soared faster than exports.

Trade deficit reached 7.3 billion pounds where imports inclined 5.2%, while exports jumped 4.5% on the month. The trade gap in January is predicted to narrow to 7.0 billion pounds. Trade deficit non EU is estimated to narrow to 3.3 billion pounds from 3.5 billion pounds, while the total trade deficit to retreat to 3.0 billion pounds from 3.2 billion pounds.

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U.S. Review

Growth & Credit: On the Road to Singapore (Recovery)

• Economic growth and finance are both in recovery mode as evidenced by the gradual upturn in jobs and the gains in leveraged loan issuance. Yet, like Bing Crosby and Bob Hope, the economy never seems to be able to reach the happy land of Singapore.
• This recovery is still subpar for housing and the consumer as the pace of recovery still leaves many homeowners underwater in certain areas and many workers underemployed or unemployed. Skies are getting clearer but we remain far away from a sunny day.

On the Road to Singapore

In their most famous “road picture,” Bing Crosby and Bob Hope vow never again to repeat past mistakes and head off to Singapore. Of course, they do repeat their past mistakes and never do get to Singapore. For the U.S. economy the pace of improvement appears maddeningly slow and yet there is improvement.

Employment losses have steadily declined over the past six months. In fact, private sector jobs (ex-construction) have risen over the past two months. There is a cyclical recovery in private sector jobs while the structural problems in real estate limit the recovery. Job gains have also appeared in manufacturing sectors such as machinery, primary metals and electrical equipment. Meanwhile the index of hours worked has risen over the last three months, consistent with sustained economic growth. Combining hours worked and average hourly earnings, our income proxy has broken into positive growth territory. This suggests positive income and therefore spending gains in the months ahead.

Structural – Not Cyclical – Challenges to Employment

While the employment data suggest cyclical recovery, there are also suggestions of structural challenges that will limit our progress on the road to Singapore. We see this clearly in the unemployment rate by education and the duration of unemployment data. The stark reality of the unemployment situation is that higher education levels are associated with lower unemployment – and vice versa unfortunately. Unemployment for college graduates is 5 percent – for high school drop outs the rate is 15 percent. Meanwhile, the average duration of unemployment remains high at 30 weeks. There is a significant skills mismatch in the U.S. economy. It is not as though there are no jobs. More precisely, there are no jobs for many willing workers who do not have the skills to compete in the 21st century workplace.

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The Cable held on to the 1.65 level versus the Greenback after coming off the late NY-session high in overnight trading ahead of a report that is set to show Retail Sales grew for the second consecutive month in July. Switzerland’s Trade Balance and ZEW survey of investor confidence are also on tap.

Key Overnight Developments

• Australia Recalls Ambassador to China for ‘Urgent Meeting’
• RBA Sold A$705 Million into Currency Markets in July

• Euro, British Pound Yield Flat Result After Choppy Session (more…)

Japan came out from recession in the second quarter, but much of this was due to government spending with private-sector demand continuing to dwindle. Equities in the Asian country took notice, shedding 2.57% at 00:07 EST. Euro price action lost for a second day, touching upward sloping support dating back to May 6.

Key Overnight Developments

• Japan Comes Out From Recession, But Private Spending Contracts
• Foreign Direct Investment Into China Worse-Than-Expected (more…)

The boost from Australia’s A$12 billion in cash handouts to consumers may be losing steam as sharp drops in sales and new orders led the service sector to shrink in July following yesterday’s unexpected drop in retail sales. UK Industrial Production and Euro Zone Retail Sales are on tap in European hours.

Key Overnight Developments

• Australia’s Trade Deficit Unexpectedly Shrank on Exports Rebound
• AiG Says Australian Service Sector Shrank in July as Sales, New Orders Fell

• UK Consumer Confidence Rose to Highest in a Year, Says Nationwide (more…)

The Australian Dollar pushed higher to challenge the 0.83 level against its US counterpart in overnight trading after a speech by RBA Governor Glenn Stevens struck a hawkish tone, hinting that the central bank is now actively trying to time a return to higher interest rates.

Key Overnight Developments

• Australian Leading Index Fell for First in Four Months, Says Conference Board
• National Australia Bank Says Business Confidence Rose to 15-Month High in Q2
• Australian Dollar Surges as RBA’s Stevens Talks Up Economy, Hints at Rate Hikes

Critical Levels

The Euro advanced in overnight trading, testing 1.4270 ahead of the opening bell in Europe. The British Pound followed suit, adding 0.2% against the greenback.

Asia Session Highlights

New Zealand’s Trade Balance sank into deficit in June, revealing a monthly shortfall of –NZ$417 million. In annual terms, the deficit widened to –NZ$3.2 billion. The discouraging result came as exports fell 11% from a year before, the largest annualized decline since July 2007. We had forecast the outcome in our New Zealand Dollar Weekly Outlook, noting that outbound shipments were likely to take a beating after the local currency gained nearly 1% in June after jumping 8% in the previous month, making New Zealand’s goods comparatively more expensive for overseas buyers while boosting domestic purchasing power of foreign products. The release may weigh on the currency in the days ahead as it reminds the markets of New Zealand’s credit outlook downgrade by Fitch, which cited the “persistently large current account deficit” as a reason for concern about the country’s medium-term growth outlook.

In Australia, Conference Board’s Leading Index fell for the first in four months in May, dropping -0.1%. April’s reading was also revised downward to 0.3% from the originally reported 0.7% result. The metric tracks a number of leading indicators including rural goods exports, building approvals and stock prices to gauge the short- to medium-term trajectory of the overall economy. Perhaps the most important takeaway from the report is that the sales-to-inventory ratio, the largest component of the index, fell for the sixth consecutive month to reveal companies continue to suffer from lackluster demand. This underscores an increasing disparity between market sentiment and the underlying fundamentals of the economy. Buoyant stock markets and money supply growth had catalyzed the most recent run-up in the index, a dynamic that may be repeated in the forthcoming release considering Australia’s S&P/ASX 200 benchmark equity index added 3.6% in June. However, the equity rally seems hardly sustainable if sales growth remains lifeless, robbing firms of the kind of earnings that will not disappear once cost-cutting invariably reaches its natural limits.

Separately, National Australia Bank’s measure of Business Confidence printed at -4 in the second quarter, the highest reading since the three months ending March 2008. The forward-looking component of the report points to continued improvement in overall business conditions in the third quarter, albeit at a much slower pace than this time around. Employment and orders are both expected to improve, though firms’ profitability is forecast to decline.

Reserve Bank of Australia Governor Glenn Stevens struck a decidedly hawkish tone at a speech in Sydney, driving home the point that going forward the central bank is now actively trying to time a return to higher interest rates. Stevens said Australia is faring better through the global downturn than other developed economies, noting that “confidence has recovered ground” and boasting that “unemployment is rising slower than expected”. He went on to stress that central banks should not relax their commitment to keep inflation anchored through the recession, a clear hint that global tightening of monetary policy should now be on the table. That said, Stevens conceded that some stimulus needs to remain in place for now and conceded that the timing of unwinding expansionary policy presents a challenge. The market greeted the RBA chief’s comments, with the Australian Dollar surging 50 pips in a mere 30 minutes.

Euro Session: What to Expect

The UK CBI Distributive Trades report will offer insight on short-term trends in the retail and distribution sector. Retail Sales surged in June but the metric have exhibited extraordinary volatility since the beginning of this year so traders will be eager to look for any signs that a discernable trajectory is being established. On balance, cues from the labor market seem to point to subdued retail activity for the time being, with the jobless rate to approach 9% by the end of next year for the first time since 1994, trimming disposable incomes and weighing on spending.

In Switzerland, the UBS Consumption Indicator that aims to forecast the trend in private spending in the coming 3-4 months is likely to fall to a fresh 5-year low in June as the pace of unemployment continues to push higher, ticking up to a seasonally-adjusted rate of 3.8% in the same period for the first time since September 2005.

Written by Ilya Spivak, Currency Analyst
Article Source – Australian Dollar Surges as RBA Chief Talks Up Economy, Hints at Rate Hikes (Euro Open)