- USD: Lower, risk sentiment improves as China's industrial output and lending rise
- JPY: Lower, wholesale prices drop sharply in March, downside limited as US equities decline
- EUR: Higher, supported by improving risk sentiment and gains in cross trade to the JPY, technical buying
- GBP: Higher, supported by improving risk sentiment and gains in cross trade
- CHF: Higher, supported by optimism that the global economy may be nearing bottom
- CAD and AUD: AUD higher, CAD mixed, tracking risk sentiment ,BOC business survey sees weak outlook
Overview
USD edged higher versus the JPY and weakened against Europe and the high-yield currencies in quiet trade Monday with much of Europe closed for holiday. Japan reported a sharp fall in wholesale prices. The drop in Japanese wholesale prices generates concern about deflation risk in Japan. The decline in the USD and JPY is attributed to growing sense that the global crisis may be easing as economic data from China shows improvement. China's March industrial output rises 8.3% and a lending rise to record high. In addition, Japan announced a 154.4 Billion stimulus package. The high-yield currencies continue to outperform as risk appetite improves. Focus turns to this week's release of US Bank earnings with reports from Goldman Sachs Tuesday, J.P. Morgan Thursday and Citigroup Friday. Better than expected earnings at Wells Fargo, a sharp drop in US trade deficit and better than expected US jobless claims set the tone for last week's improvement in global equity markets and risk sentiment. The first-quarter earnings from the major US banks will be key to whether risk sentiment will continue to improve. The close correlation between the direction of equity markets and Forex markets continues to break down. The trade initially shrugged off news GM is preparing for possible prepackaged bankruptcy in June but the GM news appeared to spark selling of US equities, along with Q1 warning from Boeing. For most of the first quarter weaker equities would translate to stronger USD. Today the equity market/ FX correlation appears to have broken down. What this means for the direction of the USD is not clear as optimism about the global recovery may still be met with skepticism if this week's US earnings reports disappoint. It is also not clear if today's USD decline reflects Friday's report of much bigger than expected US budget deficit for the month of March. According to the New York Times China has slowed its purchases of US bonds. Funding of the US deficit at some point may become a major negative for the USD.
Today's US data:
No major US economic data was released in today's trade. Friday, the US Treasury Department reported a $193.3 bln deficit for March, a $150 bln deficit was expected.
Upcoming US data:
This weeks US economic calendar includes the April 14th release of March retail sales expected at 0.3% compared to -0.1% last month. March PPI will also be released on April 14th expected flat compared to 0.1% last month along with February business inventories expected at -1% compared to -1.1% last month. On April 15th, March CPI is due for release expected at 0.2% compared to 0.4% last month. April Empire State Manufacturing index will be released on April 15th expected at -35 compared to -38.2 last month along with March industrial production and capacity utilization. March industrial production is expected to fall 0.8% compared to -1.5% last month and capacity utilization is expected at 70.1 compared to 70.9 last month. Finally on April 15th, April NAHB index will be release expected at 10 compared to 9 last month. On April 16th, initial jobless claims for the week ending 04/11will be release expected at 650 K compared to 650 K last week. March housing starts will also be released on April 16th expected at 560 K compared to 560 4K last month along with the April Philly Fed survey expected at -31.5 compared to -35 last month. On April 17th, April University Michigan sentiment will be released expected at 59 compared to 57.3 last month.
US earnings season begins this week with Goldman Sachs, Intel JPMorgan and Citigroup.
JPY
JPY traded lower pressured by improving risk sentiment and report of falling Japanese wholesale prices. The improvement in risk sentiment is generated by report of better than expected Chinese industrial output and a record rise in Chinese new lending. Japan's March wholesale goods prices fall 0.2% and falls 2.2% y/y. This was the biggest fall in Japanese wholesale prices in seven years. The fall in Japanese wholesale prices raises concern about deflation risk in Japan. In response to the Japanese economic downturn and deflation risk, the Japanese government has announced 154.4 Billion new stimulus package and the Bank of Japan may consider boosting capital. The Nikkei closed marginally lower. JPY was also pressured in cross trade with the EUR/JPY and GBP/JPY trading over 1% higher and AUD/JPY about 1% higher. JPY weakness in cross trade is attributed to improving the risk sentiment and the fall in Japans wholesale prices. JPY price direction will hinge on a risk appetite and the direction of global equity markets. JPY traded near unchanged midsession supported by weaker US equity markets.
Revised February industrial output will be released on April 15th expected at 9.4% and February tertiary activity will be released on April 17th. The tertiary activity report is expected at -0.5% compared to -3.9% last month.
Key technical levels to watch in USD/JPY include support at 99.46 the April 8th low and 98.40 the April 1st low with resistance at 101.10 the April 7th high and 102.40 the October 20th high.
EUR
EUR traded higher mainly supported by gains in cross trade to the JPY and demand sparked by improving risk sentiment. Last week the EUR traded over 2% lower versus the USD despite improving risk sentiment. There has been debate over whether the close correlation to the direction of equities and the EUR has broken down. Many analysts last week were arguing that the EUR decline was related to speculation that the US economy will lead the way to global rebound and the European economy has more downside. With most of Europe closed for the holiday there was little news to move European currencies save for a statement from the German Finance Minister Steinbrueck that he is concerned over possible inflation crisis once the current crisis ends. His comments may reduce speculation ECB will soon follow other major G-7 central banks and move to quantitative ease. Despite Steinbrueck comments, deflation remains a major risk to the EU economy. This week's CPI figures will be a key focus for EUR trade. Friday, the ECB's Wellink said he sees room to cut rates and use other measures to boost the economy. EUR price direction will key on risk sentiment and the outlook for ECB policy. The preferred strategy is to sell the EUR on rallies to 1.3450.
This week's EU economic calendar includes April the 16th release of February industrial production and March HICP inflation. February industrial production is expected at - 2.5% compared to -3.5% last month. March CPI is expected unchanged at 0.6%. On April 17th February foreign trade balance is due for release. February trade balance is expected at –3.5 bln compared to -5.5bln last month. Also on April 17th, EU construction output is due for release expected at 1% compared to 1.3% last month.
The technical outlook for the EUR is mixed with the EUR failing to break above 13400. Expect key EUR support at 1.3127 the April 13th low with resistance at 1.3397 the April 7th high. Look for major resistance at the downtrend line near 1.3580 trendline.
CHF
CHF traded higher tracking improvement in risk sentiment. Last week the CHF traded lower pressured by diminished safe haven demand as global equity markets rally and optimism about global economic recovery is rising. It's difficult to explain how the improvement in risk sentiment is impacting CHF positively Monday and this was the main catalyst for the CHF decline last week. The outlook for the CHF remains negative. One of the key factors that the trade is watching is that the SNB continues to threaten intervention if the CHF rises. The new head of the SNB Hildebrand is a strong voice warning that the central bank will take action to weaken the CHF. This week's Swiss economic calendar includes Thursday's release of producer prices expected to fall 2.4% compared to 1.8% decline last month. On Friday, retail sales are due for release expected to fall 0.2% compared to a 1.2% rise last month. Last week Switzerland reported that unemployment rose to a two-year high of 3.3%. USD/CHF traded in the broad range last week weakening to 1.1242 and rising to 1.1625. Based on Mondays price action USD/CHF may retest 1.1250. Expect USD/CHF support at 1.1345 the April 7th low with resistance at 1.1625.
GBP
GBP traded higher supported by improving risk sentiment and gains in cross trade to the JPY. Last week, the Bank of England elected to hold policy unchanged as expected and said they will continue quantitative ease. Steady BOE policy may be adding some support to the GBP. GBP price direction has been the most sensitive to the direction of equities and risk sentiment. As noted above better than expected earnings at Wells Fargo and improving economic data from China helped spark improving risk sentiment. GBP cross gains to the JPY are attributed to report of a sharp drop in Japans whole sale prices. Focus turns to this week's release of UK RICS house price balance Tuesday and April BRC retail sales Thursday. RICS house balance is expected at -77% compared to -78% last month. BRC sales are expected -1.3% compared to -1.8% last month.
The technical outlook for GBP is improving with today's break above resistance at 1.4740. Look for key GBP support at 1.4585 the April 9th low with resistance at 1.4985 February 9th high and 1.5155 the January 12th high.
CAD
CAD opened higher supported by improving risk sentiment as China's industrial output and lending rises in March. The Chinese economic data generates hope that the Chinese and global economy may soon bottom. CAD turned lower midsession pressured by a sharp decline in the price of crude, weaker US equity market trade and in reaction to BOC Q1 Business outlook survey. BOC Q1 Business Outlook survey sees weak outlook and sentiment still negative. Some indicators show slight improvement but firms expect sales growth to slow over next 12 months. BOC Senior Loan Officer Survey sees more tightening in lending. Last week Canada reported that unemployment rose to its highest level in eight years. Similar to the reaction to US bleak unemployment data markets are looking beyond unemployment as unemployment tends to continue to rise even as economies emerge from recession. There are patchy signs of improvement in the US economy as US trade balance improved and jobless claims were less than expected. Canada posted a 126 Million trade surplus for February compared to a 652 Million deficit last month. The trade was looking for a 1.25 Billion decline in the trade balance. Imports rose 1.1% and exports were up 5.2%. The fact that both imports and exports were up may be an indication of improving economic outlook in the US and Canada. CAD price direction continues to track equities, risk sentiment and the price of crude but the correlation to crude and equities is less strong.
This week's Canadian economic calendar includes the April 16th release of February manufacturing shipments. February manufacturing shipments are expected at 1.1% compared to -5.4% last month. On April 17th, March CPI will be released. March CPI is expected unchanged at 1.4% with core inflation at 0.2%.
The technical outlook for CAD is improving with USD/CAD trading below 1.2300. Look for near-term resistance at 1.2402 the April 9th high and 1.2606 the April 2nd high with support at 1.2190 the February 9th low. Look for major USD/CAD support 1.2090 the January 29th low.
AUD
AUD traded at a new 2009 high despite last weeks report of rising Australian unemployment, RBA rate cut and weaker US equity market trade Monday. Australia's March unemployment rate rises to 5.7% from 5.2% last month and 34.7K jobs were lost. The headline unemployment rate rise was more than market expectation of 5.4%. The trade was looking for 25K in employment loss. The Australian unemployment data confirms that the Australian labor market is deteriorating. The RBA cut interest rates 25 basis points to 3% last week. AUD was supported by speculation that the RBA is unlikely to cut interest rates much more and by hope the global economy is nearing a bottom. AUD price direction continues to key on risk sentiment. As noted above, report of improving industrial output and lending in China generates hope the global economy will soon bottom. In addition, report that China plans a new fiscal stimulus and Japan announced 154.4 Billion stimulus package helps to improve risk sentiment. AUD continues to firm trading above the 2009 high of 7276. Despite the rise above the 2009 high, AUD lacked upside follow through demand. AUD remains an attractive buy on dips but may be ripe for a setback if today's high is not soon breeched.
This week's Australian economic calendar includes the April 14th release of Westpac leading index and April 17th release of import and export prices for the first quarter. Westpac leading index expected unchanged at -0.2%. Export prices are expected at -5% and import prices are expected at -2.2.
The technical outlook for the AUD is improving with AUD breaking above support at 7200. Look for AUD support at 7175 the April 10th low with resistance at 7267 the April13th high and 7360. A close above 7267 is needed to set the stage for a possible test of 7400.
By Michael J. Malpede
Michael J. Malpede is Chief Market Analyst with Easy-Forex® and has previously been featured on Bloomberg TV, Bloomberg radio, Reuters, MarketWatch, Wall Street Journal, Chicago Tribune, Chicago Sun Times, Toronto Star and Nikkei press. In analyzing the markets, he draws from 29 years of Foreign Exchange Research as a Foreign Exchange Analyst.
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