• USD: Higher, existing home sales and inventories rise, upside limited by concern about US debt
  • JPY: Higher, report of possible Yuan revaluation offsets impact of escalating North Korean tensions
  • EUR: Lower, pressured by ECB rhetoric, ECB officials cannot rule out further rate cuts, may expand QE
  • GBP: Higher, mortgage approvals rise, gains in cross trade to the EUR ,CBI says UK contraction has slowed
  • CAD and AUD: AUD & CAD mixed, touched 2009 highs tracking rising crude prices, profit taking limits gains

Overview

USD traded mixed with numerous cross currents impacting volatile USD price action. Safe haven demand sparked by escalating tensions with North Korea, speculation that the worst of the global recession has passed, positive housing data from the UK, negative ECB rhetoric, crude prices rising above $63 a barrel were some of the major cross currents impacting today's FX trade. JPY opened lower in reaction to North Korean threats against South Korea and report that North Korea has restarted its plutonium plant. JPY downside was limited by rumors of possible Yuan revaluation. Global equity markets continue to rally fueling improving risk appetite. Tuesday's release of much better than expected US consumer confidence, a narrowing of the US two-year, tenyear note spread to its best level in six years and report that business economists expect the US recession to end in the third quarter fuel risk appetite. GBP traded above 1.6000 for first time since last November supported by improving UK housing data and optimism about that the UK recession is nearing an end. EUR traded lower pressured by ECB rhetoric. ECB officials suggested that more rate cuts may be needed and that the outlook for the EU economy remains negative for 2009. CHF was pressured by an IMF report which forecasts significant contraction for the Swiss economy. CAD and AUD rally to new highs for 2009 supported by improving risk appetite and a rally in crude prices to new highs for 2009. CAD and AUD failed to hold their gains as the crude rally stalled and geopolitical tensions continued to escalate. The trade showed limited reaction to a Financial Times report warning that exploding debt in America could be a huge risk to the USD. The Financial Times report warns that the USD value could be cut in half. In addition, Mark Farber warns that US could see hyperinflation because the Fed is reluctant to raise interest rates. The USD remains vulnerable to diminishing safe haven attraction as the global economy stabilizes and focus shifts to rising US debt and threat of US inflation. If global equity markets continue to rally and crude prices continue to firm we would expect continued investor diversification out of USD. The trade will be monitoring the level of foreign demand in today's five-year and Thursdays seven-year US note auction.

Today’s US data:

US April existing home sales rise 2.9% to 4.68 mln units compared to a 3.4% decline in February. A 1.4% rise was expected. The US has an inventory of a 10.2 months supply of existing homes. The USD extended its gains after the release of the existing home sales report. FHFA home prices fell 1.1% in March and 0.5% in Q1. This marks the largest fall in FHFA house prices since last November.

Upcoming USD data:

On May 28th, initial jobless claims for the week ending in 05/23 will be released expected at 625K compared to 631K last week. Also on May 28th, April durable goods will be released expected at -0.2% compared to -0.8% last month along with April new home sales expected at 360K compared to 356K last month. On May 29th Q1 GDP will be released expected at -5.6% compared to -6.1% last quarter. Chicago PMI and Michigan consumer sentiment will also be released on May 29th. Chicago PMI is expected to rise to 42 from 40.1 last month and the University of Michigan sentiment is expected at 67.9 compared to 65.1 last month.