USD index hits 5 month lows but caution may be creeping in


MAJOR HEADLINES – PREVIOUS SESSION

  • CA Apr. CPI out at -0.1% m/m vs. +0.2% expected and +0.2% prior

  • CA Apr. Core CPI out at +0.1% m/m, +1.8% y/y, both as expected, vs. +0.3%, +2.0% prior resp.

  • CA Apr. Leading Indicators out at -1.1% vs. -1.0% expected and revised -1.5% prior

  •  NZ Apr. Visitor Arrivals out at 2.4% vs. revised -0.2% prior

  •  JP Mar. Tertiary Industry Index out at -4.0% m/m vs. -1.5% expected and revised -1.3% prior

  • AU May Consumer Inflation Expectation out at 2.3% vs. 2.4% prior

  • AU RBA Apr. FX Transactions out at A$512m vs. A$718m prior

  • AU Feb. Avg. Weekly Wages out at +1.2% q/q, +5.6% y/y vs. +1.7%, +5.5% prior resp.

  • AU Apr. New Vehicle Sales out at +0.9% m/m, -20.3% y/y vs. -3.3%, -22.6% prior resp.

  • NZ Apr. Credit Card Spending out at +1.6% y/y vs. revised -4.8% prior

  • NZ Apr Non-Resident bond holdings out at 71.3% vs. 73.2% prior


THEMES TO WATCH – UPCOMING SESSION

  • EU Euro-zone PMI Manufacturing/Services/Composite (0800)

  • UK Business Investment (0830)

  • UK Retail sales (0830)

  • UK Money Supply (0830)

  • UK Public Finance data (0830)

  • UK BOE publishes May Lending Trends survey (0830)

  • CA Int’l Securities Transactions (1230)

  • CA Wholesale Sales (1230)

  • US Initial Jobless Claims (1230)

  • US Leading Indicators (1400)

  • US Philly Fed Index (1400)

  • US Geithner testifies (1400)

  • US Fed’s Plosser speaks (2300)

  • US Fed’s Rosengren speaks (2345)

Market Comment:

Minutes of the April 29 FOMC meeting helped galvanize USD bears into further action in the latter stages of the US session. A downgrade to US economic forecasts, with growth for 2009 down to -2 to -1.3% from -1.3% to -0.5% previously, and unemployment up to 9.2-9.6% from 8.5-8.8% previously. In addition, Fed officials were open to further increasing its buying of securities beyond the $1.75 tln it had already committed to buying, in order to spur a more rapid pace of recovery. This helped undermine the greenback which was already under pressure amid a growing sense of risk appetite. However, this sentiment did not transfer across to equities, with Wall St finishing around 0.5% in the red after some late selling across financials. Earlier gains, after US Treasury Secretary Geithner announced that the PPID program would start up within the next six weeks, were easily wiped out.

The broadly weaker USD helped other currencies reach certain milestones for the year. EURUSD peeped above the 1.38 lvl for the first time since January 5 while GBPUSD easily took out the 200-day MA at 1.5550, triggering stops and an aggressive rally to new 2009 highs just below 1.58. Asia was happy to follow through this trend, pulling GBPUSD to 1.5815 and EURUSD to 1.3808 as the USD slumped to its lowest level in 5 months, down 0.22% and marginally below 80.90.

Following yesterday’s GDP data, the JPY continues to be in the spotlight today, not least of all because it is performing very well despite the numbers and appetite for risk. The Tertiary Activity Index, basically a measure of activity in the service sector, slumped by 4.0% from a month earlier, worse than expected and a steeper decline from February’s -1.3% drop. This morning’s release of Japanese investment flow data showed that Japanese investors remain cautious about investing in overseas securities. Data for the first 2 weeks of May show a net selling of Y1 bln of foreign stocks in the first week and a net buy of Y2 bln in the second week. Activity in bond markets was also muted, Y219 bln buying followed by Y25 bln respectively. The size of the net buying has been unusually small for the early days of the financial year, and may be a contributing factor to the recent downward pressure on the USDJPY.

The BOJ starts its 2-day meeting to review interest rates today and, while no change in rates is expected, markets will be on the lookout for the BOJ’s current assessment of the state of the economy. Certainly previous statements have made depressing reading and, following yesterday’s dire Q1 GDP data one might expect more of the same. However, today’s Nikkei newspaper reports that the Cabinet office may be about to upgrade its overall assessment of the economy for the first time in 39 months. The monthly report, slated for release next Monday, may contain a modified tone to suggest that the rapid rate of deterioration may be slowing. While a downgrade to employment conditions is on the cards, the article suggests a more buoyant view of exports and production may be forthcoming.