Forex - Data Disappoints & Challenges Near Term Recovery Hopes

Forex News and Events:

It was only a matter of time before the economic data wouldn’t hold up to the hype and “green shoots” theory trampled on. And yesterday was such a day, quickly reversing risk takers growing optimism. Actually, yesterday started off very well, with China's retail sales posting a 14.8% y/y jump and recoveries champion continued to make headway. However, in the Eurozone industrial production dipped more than expected at -2.0%m/m but it was the US retails sales that really sent investors to the exist and noticeable shift in risk appetite. Sales contracted by 0.4% vs. 0.0% exp, and the previous reading was revised lower to -1.3%, illustrating that consumption data has less momentum optimistically forecast. While perhaps the worst is over, evidence of an actually recovery is thin. Wall Street headed south with the S&P closing down -2.68% and yields slipped with the 30yr trading around 4.10%. Financial stock absorbed a disproportionately amount of selling, as Geithner comments that the banking sectors has begun to heal and systemic risks have diminished, spooked traders.

Today, Chinese industrial profits in the first quarter in 22 Chinese provinces fell -32.2% y/y. Not a great signal from the world's engine of growth. Asian equity market closed lower, while commodities prices continue to soften. USD and JPY have been the beneficiary of this rapid change, as risky assets have been sold off (USDJPY selling is at the front of the recent JPY strength). Speaking of JPY, BoJ's Governor Shirakawa's commented that excessive volatility in the FX markets is not desirable. Shirakawa's comments came as USDJPY is headed towards 95.15 and threatening to break daily cloud cover.

Yesterday, the dovish BoE inflation report said that inflation would drop to 0.5% y/y later this year before rising to just over 1% y/y two years hence (well short of the 2% medium target). With the BoE steering clear for additional easing in the official bank rate, it suggests that further quantitative easing is around the corner. Sterling fell sharply on the report trading to 1.5090 against the USD by days end. In Europe, the rift in the ECB has appeared again regarding the banks strategy to buy EUR60bn worth of covered bonds. Council Member Weber stated that covered bond purchases would be capped while Kranjec said purchases are "likely" to surpass that level. In addition, Weber said he saw no need to buy more private debt in contrast to Kranjec's statement that the ECB cannot exclude purchases of corporate bonds and commercial paper. Neither comment contradicted Trichet's earlier remarks but is does warn traders of further pubic disagreements by members ahead of the June 4th meeting. The sudden turn in sentiment has been palatable, with media outlets quickly singing a different tune. By there are less subtle signals that traders should brace themselves for a short term leg down in risk appetite. Strong bear trends in EM Asian currencies such as USDSGD are stalling, while commodity such as copper is well off the month's high (and trending lower). With only US initial jobless claims and PPI ahead today, markets will be watching asset prices vigilantly.

Today's Key Issues (time in GMT):

12:30 USD Initial Jobless Claims (May 9th) 610k exp, 601 prior
12:30 USD Producer Prices (Apr) +0.2%(-3.7%) exp, -1.2%(-3.6%) prior
12:30 USD Core Producer Prices (Apr) +0.1%(+3.4%) exp, 0.0%(+3.8%) prior
16:00 TRY Turkey Interest Rate Announcement 9.25% exp, 9.75% prior
16:20 EUR ECB Executive Board member Starks speaks
22:45 NZD Retail Sales 0.2% prior

The Risk Today:

EurUsd Rapid shift in risk appetite has turned the fate of this pair. Break of 1.3350 today suggest the uptrend has lost momentum near term. Trading above pervious range high 1.3400 will keep hope of 1.3740 (march peak) test alive.

GbpUsd Intraday divergences warn of a temporary pullback while staying above 1.4940. As long has this resistance holds focus will remain on 1.5374 jan high.

UsdJpy Yen continued to gain against the dollar. Strong move below 95.63 now casts a heavy shadow and exposes 94.95 (base of the daily cloud) then further weakness to the 93.55 march lows. Intra-day upside capped at 96.69 (neckline resistance).

UsdChf Pair is trading a perfect mirror image to the EURUSD pair, EURCHF holding steady in 1.5040 – 1.5160 range with a bias for the downside would indicate USDCHF is set for further declines (strong recommendation for 3 graph comparison). Yesterday’s peirce of 1.1000 support didn’t hold, but another test will put the focus on 1.0670 (for monthly forecast) via 1.0960.

Resistance and Support: