Dollar mixed to lower

The dollar was mixed to lower this morning, gaining vs NZD, NOK, AUD (three commodity currencies) and slipping vs CHF, SEK, EUR, CAD and JPY. It was largely stable vs GBP. CAD initially moved lower with the other commodity currencies, but recovered along with oil prices. The gyrations in the Chinese stock market caused some tensions in EM markets (see below) but that calmed down overnight. US economic indicators were generally encouraging; although jobless claims rose a bit, pending home sales rose even more significantly, indicating a solid housing market. But longer-term Fed funds rate expectations fell nonetheless.

NZD plunges NZD was the standout currency over the last 24 hours, falling about 1.3% vs USD as commodity currencies in general were weak (except CAD). Most of the fall occurred yesterday at the beginning of the New York day. It may have been connected to a Reserve Bank of New Zealand paper arguing that “while international economic factors help explain the vast majority of why inflation in New Zealand is currently low, they do not shed additional light on the small portion of low inflation that is difficult to explain. Instead, domestic specific factors likely help account for the unexplained component of CPI inflation…” Such reasoning would suggest that the RBNZ should take a more accommodative stance since domestic factors may be depressing inflation in ways that they don’t fully understand. The currency rallied somewhat in New Zealand trading but then fell back as the ANZ business confidence index for May plunged to a two-year low. NZD seems to be the “short du jour” and I expect it to continue to decline.

JPY gains on Aso statements JPY on the other hand was somewhat stronger after Finance Minister Aso said at the G7 meeting that the currency’s recent fall was “rough” and that the government will continue to monitor FX movements carefully. This is basically the boilerplate official statement and means absolutely nothing. What do you want him to say – we don’t care about the currency and we’re going to ignore the FX market? They are always monitoring the FX market carefully. They have people whose entire job it is to monitor the FX market, 24 hours a day. That doesn’t mean they’re going to do anything about it. Maybe right now while the Trans-Pacific Partnership (TPP) is still going through the US Congress they want to avoid a major fall in the yen that might get some Congressmen upset, but after that’s passed, I think they will be happy to see it lower. I remain bullish USD/JPY (bearish yen).

Japan nearing deflation…still Japan issued the usual slew of end-of-month data today. The focus is on the National CPI rate for April and the Tokyo CPI rate for May. As expected, the national CPI declined to 0.6% yoy from 2.3% yoy, reflecting the fact that the consumption tax hike in April 2014 has now fallen out from the year-on-year comparison. The May Tokyo CPI was down to 0.5% yoy from 0.7% in April. The authorities can argue that this is because of the fall of oil prices etc. etc., but excluding oil and fresh foods, the “core of core” CPI was an even lower 0.4% yoy. So since Mr. Kuroda became BoJ Governor in March 2013 they’ve spent JPY 175tn ($1.4tn) to double the size of the BoJ’s balance sheet, and for what? Inflation has gone from -0.9% yoy to +0.6% yoy. That’s about $100bn per 0.1 percentage point of inflation. At that rate, it will take another two years and another JPY 175tn to reach their 2% target. The low rate of inflation increases expectations of further BoJ easing, although as we have mentioned several times, this isn’t likely to come for several months at the earliest. Meanwhile, the jobless rate declined to 3.3% from 3.4% and the job-offers-to-applicants ratio rose further, so why isn’t Japan seeing accelerating wage growth, a closing output gap, and rising inflation?

China stocks stabilize After Thursday’s 6.5% plunge in Shanghai stocks, the market fell another 4% in early trading today but stabilized and is up almost 1% at the time of writing. The key will be what happens Monday. The weekend newspapers will be filled with stories about the market – the question is, will they be warning people of further declines to come, or touting the decline as offering a new chance to get in? Another “Black Monday” or a buying opportunity? This is important for the outlook for EM currencies and the AUD and NZD, which are likely to suffer if China is seen as going into a slump.

Today’s highlights: The European day started with German retail sales for April rising 1.7% mom, beating expectations of a +1.0% mom rise. Eurozone’s M3 money supply is forecast to have risen 4.9% yoy in April, a slight acceleration from 4.6% yoy previously. The 3-month moving average is expected to accelerate if the forecast is met.

In Sweden, Q1 GDP is expected to show that the economy slowed in early 2015, which coming on top of the dip of the CPI back to deflation in April, raises the probability of further action by the Riksbank.

From Norway, the official unemployment rate for May is expected to decline, while retail sales for April are forecast to remain unchanged in pace from March. The market may pay more attention to retail sales. A surprise in either direction could determine the near-term bias of NOK.

The main event today is the second estimate of US Q1 GDP. The forecast is for the growth rate to be revised down to show that the US economy contracted 0.8% at a qoq SAAR, a downward revision from the already disappointing +0.2% qoq expansion seen in the first estimate. That’s even worse that the Atlanta Fed’s GDPNow forecast of 0.1% growth and way below the San Francisco Fed’s estimate of 1.8% after proper seasonal adjustment. Overall, I wouldn’t trust the Q1 growth rate as we had several distortions in the economy and we cannot rely on this figure to indicate the underlying path of the US economy in early 2015. I would take the soft Q1 results with reservations and would mainly rely on the data showing any improvement in the economic activity in Q2. As I’ve noted before, significant positive data surprises are needed for the USD to remain supported. The Chicago Purchasing managers’ index for May and the final University of Michigan consumer sentiment for May are coming out along with the surveys of 1-year and 5-to-10 year inflation expectations.

From Canada, the monthly GDP for March is expected to accelerate from the previous month. Nonetheless, that would not be enough for Q1 GDP as a whole to accelerate. A weak quarterly growth rate could put further selling pressure on CAD.

The meeting of the G7 finance ministers and central bank chiefs in Dresden finishes. There will be an official press conference following the meeting, plus many of the participants are likely to talk to the press afterwards.

The Market

EUR/USD trades somewhat higher

EUR/USD continued its rebound on Thursday and during the early European morning Friday is trading near the resistance barrier of 1.0960 (R1). Although the rebound may continue for a while, the short-term outlook remains negative in my view. A clear break below 1.0800 (S2) is likely to confirm a forthcoming lower low on the 4-hour chart and perhaps pave the way for the 1.0665 (S3) zone. Our momentum studies though support the case that the corrective rebound may not be over yet. The RSI continue to race higher and now looks ready to move above its 50 line, while the MACD, although negative, stands above its trigger line, and is headed towards its zero line. On the daily chart, the move below the 1.1045 (R2) barrier increases the likelihood that the 13th of April – 15th of May recovery was just a corrective move and that the prior downtrend could now be resuming.

• Support: 1.0865 (S1), 1.0800 (S2), 1.0665 (S3).

• Resistance: 1.0960 (R1), 1.1045 (R2), 1.1100 (R3).

AUD/USD rebounds from near 0.7620

AUD/USD traded higher on Thursday, after hitting support at 0.7620 (S1). The price structure on the 4-hour chart still suggests a short-term downtrend, hence I would expect a clear and decisive dip below the aforementioned hurdle to open the way for our next support at 0.7550 (S2). Nevertheless, taking a look at our short-term oscillators, I would stay cautious that further rebound could be in the works before the next negative leg. The RSI appears ready to exit its oversold zone, while the MACD has bottomed and could move above its trigger soon. As for the bigger picture, on the 19th of May the rate fell below the uptrend line taken from the low of the 14th of April. This confirmed the negative divergence between the 14-day RSI and the price action and supports that the recovery of the 14th of April until the 14th of May was just a corrective phase and that the prevailing longer-term downtrend is regaining momentum.

• Support: 0.7620 (S1) 0.7550 (S2), 0.7500 (S3).

• Resistance: 0.7690 (R1), 0.7760 (R2), 0.7800 (R3).

EUR/JPY hits resistance at 135.80

EUR/JPY continued to trade higher, but yesterday the advance was halted by the prior short-term uptrend line. Having that in mind and taking a look at our short-term momentum studies, I would expect the forthcoming wave to be negative, perhaps for a test at the support obstacle of 134.60 (S1). The RSI hit resistance twice near its 70 line and turned down, while the MACD, although positive, shows signs of topping. On the daily chart, the break above 131.40 on the 29th of April signaled a possible trend reversal in my view. This keeps the medium-term picture somewhat positive. Therefore, I would consider any declines that stay limited above 131.40 as corrective moves.

• Support: 134.60 (S1), 133.80 (S2), 133.00 (S3).

• Resistance: 135.80 (R1), 136.90 (R2), 137.70 (R3).

Gold rebounds 1180

Gold declined yesterday, hit our support of 1180 (S2) and rebounded to trade again marginally above the support zone of 1185 (S1). The break below 1200 (R2) on Tuesday has turned the short-term picture negative in my view, but taking into account our oscillators I would be careful that further rebound could be looming before the bears prevail again. The RSI edged higher after exiting its overbought condition, while the MACD has bottomed and crossed above its trigger line. A clear dip below 1180 (S2) is now needed to confirm a forthcoming lower low on the 4-hour chart and signal further declines. Such a break is likely to open the way for our next support at 1170 (S3). On the daily chart, gold has been trading in a non-trending mode since the last days of March. Therefore, although I see a negative near-term picture, I would maintain my neutral stance as far as the overall picture is concerned.

• Support: 1185 (S1), 1180 (S2), 1170 (S3).

• Resistance: 1195 (R1), 1200 (R2), 1209 (R3).

DAX hits resistance at 11800

DAX futures slid on Thursday after hitting resistance at 11800 (R1), but the decline was stopped by the 11600 (S1) support hurdle. Given that the index failed to move above 11920 (R2) to confirm a forthcoming higher high, I would switch my stance to neutral for now. A break above the 11920 (R2) barrier is the move that could restore the short-term positive picture, which could prompt extensions towards our next hurdle of 12100 (R3). On the daily chart, the index rebounded from the long-term uptrend line taken from back at the low of the 16th of October. This keeps the longer-term path to the upside in my view. Therefore, I believe that any short-term downside extensions are likely to provide renewed buying opportunities.

• Support: 11600 (S1), 11420 (S2), 11200 (S3).

• Resistance: 11800 (R1) 11920 (R2), 12100 (R3).

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