GBPUSD trades close to high for the year. USD flailing for support on risk appetite and commodity price rise.
MAJOR HEADLINES – PREVIOUS SESSION
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UK Apr. RICS House Price Balance out at -59.9% vs. -70.0% expected and -72.1% in Mar.
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Australia Mar. Home Loans rose 4.9% vs. 4.5% expected
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China Apr. Fixed Asset Investment rose 30.5% YoY vs. 29.1% expected
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New Zealand Apr. REINZ House Sales rose 39.6% YoY vs. 30.5% in Mar.
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China April Wholesale Prices fell -7.7% YoY vs. -6.6% in Mar.
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China April Trade Balance out at $13.14B vs. $20.3B expected
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Germany Apr. Wholesale Price Index rose 0.1% MoM vs. 0.0% expected and vs. -0.9% in Mar.
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Japan Apr. Machine Tool Orders fell -80.4% YoY vs. -85.2% in Mar.
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Sweden Apr. CPI out at 0.2% MoM as expected and Underlying Inflation out at +0.3% vs. 0-.4% expected
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UK Mar. Visible Trade Balance out at £6589 vs. -£7200 expected
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UK Mar. Industrial and Manufacturing Production out at -0.6%/-0.1% MoM vs. -0.9%/-0.9% expected respectively.
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Canada Mar. International Merchandise Trade out at 1.1B vs. 0.5B expected * US Mar. Trade Balance out at -$27.6B vs. -$29.0B expected
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UK Apr. Jobless Claims Change out at 57.1k vs. 85.0k expected
THEMES TO WATCH THIS WEEK
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US Weekly ABC Consumer Confidence (2100)
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Japan Mar. Current Account (2350)
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China Apr. Retail Sales (0200)
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China Apr. Industrial Production (0200)
Market Comment:
The market has decided that the glass is half full after all in the wake of yesterday's swoon in risk appetite as the focus was on massive Chinese fixed asset investment rather than on the shrinking Chinese exports due to collapsing world trade. The idea that China will continue to snap up commodities around the world while prices are low saw a rally almost across the board in key commodities, including oil, which hit 60 dollars a barrel for the first time since November. Oil prices have almost doubled from the spike low in spot market in December/January (at least for NYMEX crude) and provide a more than interesting input for the deflation/inflation picture, as shrinking demand and wages are being greeted with rapidly inflating prices. This is not a recipe for booming growth. Still, the news that China would allow overseas firms to offer credit to Chinese consumers and that a large stimulus package aimed at consumers was greeted with a large rally in all risky assets. China is looking inward for customers to shrink its painful industrial production overcapacity. Let's see if the April Chinese Retail Sales number give reason for further hope that this great experiment is succeeding. We have our doubts and think it is likely that this process will take far more time than the market is pricing in at the moment. On another note, JPMorgan Chase was also out with a report saying that Chinese deflation would soon end due to government buying of food commodities and through a rise in utility prices.
Sterling came roaring back from its recent weakness on a hat trick of positive economic developments. First, the RICS House Price Balance - by far the best and most forward looking of the many UK housing surveys - showed a far better reading than expected, with only about 60% of agents reporting falling prices. This will likely lead to a sharp slowdown in the drops in prices for year-on-year comparisons in the coming months (with the broken-record caveat that an improvement in the second derivative does not mean that we should project a permanent parabolic recovery for the future.). Second, the retail sales data showed a sharp rebound from recent months' sluggishness and finally, the trade balance also rolled in far better than expected. The development in recent months in the trade balance is begin to suggest a turn for the better in terms of trade if the UK posts another couple of months of shrinking deficits. EURGBP followed up on yesterday's reversal with another move lower and GBPUSD vaulted close to its highest level on the year above 1.5300. To complete the "improving" picture in the UK, the Jobless Claims Change increased far less than expected, though the official unemployment rate did rise to 4.7% from 4.5% - the highest rate in 10 years. Watch out for the quarterly inflation report tomorrow. Judging from the BoE's evident dour outlook at the last meeting, we shouldn't expect a hawkish talk of green shoots and imminent inflation.
The reaction in forex to developments across markets has been largely as expected, with the possible exception of the JPY. The JPY is getting mixed signals from other key macro inputs. On the one hand, US treasury yields dove lower over the last couple of days after pushing up through 3.25%, punishing USDJPY for more than a 2% drop, but rallying equities and commodity prices are making the action less convincing in other JPY crosses, which have bounced back since the ugly New York close yesterday. More sustained negativity and a more convincing rise in bond yields are needed for the JPY to put in a more stable base. We are eyeing EURJPY with the most interest at the moment for a technical turn to the downside - it flirted with a failure back through the 200-day moving average late yesterday and a close below there could jeopardize the recent rally. Important for any EURJPY sell-off would also be a drop in the German 10-year bund benchmark yield, which has been flirting with the 200-day moving average just below 3.50% for a couple of days now. See more on EURJPY below in charts.
The US Trade Balance was little changed in March from the previous month, but is still close to the best levels since 2001. The coming couple of months of this data point will be interesting to watch to see if this trend can continue since oil prices rose rather sharply in April and so far May. For now, the USD continues to rise and fall with the ebb and flow in risk appetite. We have our eyes out for signs of a reversal this week in the highest beta crosses, like AUDUSD and USDCAD.
Chart: EURJPY EURJPY is resting close to its 200-day moving average, which it crossed above recently. A sell-off through there and through the Ichimoku cloud level currently around 130.80 would be key developments that could suggest the rally in EURJPY is over and that we should expect an extension of the sell-off.
