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Equities Stabilize, USD and JPY Drift Lower

  • USD: Lower, pressured by report on US bank stress tests, tracking risk sentiment
  • JPY: Lower, Japan will cut 09/10 growth forecast to 3% contraction, plans to issue bonds to fund stimulus
  • EUR: Higher, German ZEW index turned positive, gains limited on doubts about the German economy
  • GBP: Higher, RPI turned negative for the first time since 1960, BOE's Fisher warns of intervention
  • CAD and AUD: AUD higher, CAD lower, RBA says long term growth prospects good, BOC cuts rates 25 bps

Overview

USD traded lower pressured by report on US bank stress tests and a positive German ZEW report. A report Tuesday suggests that most of the US banks will pass the stress test and USD drifted lower. Monday, US equity markets tumbled and USD rallied in reaction to rumors that a number of US large banks will fail the Treasury's stress test. EUR edged higher and firmed in cross trade supported by report that the German ZEW business confidence index turned positive for the first time since July of 2007. The report on US bank stress tests and the German ZEW release appeared to help dampen the sharp spike in risk aversion that emerged in Monday's trade. GBP firmed despite report that UK RPI declined for the first time since 1960. GBP was supported by threat of intervention as the BOE's Fisher says intervention is always available if needed. GBP was also supported by report of an uptick in UK retail sales. JPY traded lower and weakened in cross trade pressured by report that Japan will cut its 09/10 growth forecast to 3% contraction. AUD traded higher despite dovish RBA minutes for the April 7 policy meeting. AUD was supported by report of a rise in March merchandise imports. The RBA minutes suggest that the Australian economy will continue to decline throughout 09 and that there is room to lower interest rates. The BOC elected to cut rates 25 basis points to .25% and CAD traded marginally lower.

Today's US data:

No major US economic data was released in today's trade. The IMF estimates that $2.7 Trillion of write-downs are expected through the year 2010 mainly because apportioning economic growth outlook.

Upcoming US data:

On April 23rd, initial jobless claims for week ending in 4/18 expected at 600K. Existing home sales will also be released on April 23rd expected 4670K compared to 4720K last month. On April 24th, March durable goods will be released expected at 1.5% compared to 3.5% last month.

JPY

JPY drifted lower pressured by report that Japan will cut its growth forecast and issue bonds to fund its planned stimulus package. Japan will cut its 09/10 growth forecast to 3% contraction. Japan will issue $110 Billion in bonds to fund its stimulus package. There is some question about whether the size of the bond issue is enough to cover the cost of the stimulus package. Japanese government borrowing is likely to increase to more than 8% of GDP as Japan tries to boost growth. JPY traded lower despite a sharp selloff in Asian equity markets. Monday, JPY traded higher supported by safe haven flows sparked partly by rumors that major US banks will fail the Treasury's stress test. As noted above, a report today suggests that most of the US banks will pass the stress test. This report dampened safe haven demand for the JPY. JPY was also pressured in cross trade with EUR/JPY supported by report of better than expected German ZEW index, GBP/JPY supported by comments from the BOE's Fisher that intervention is a tool always available for the BOE, and AUD/JPY traded higher supported by report of rising Australian imports. JPY price direction will continue to key on risk sentiment and the direction of equities. Focus turns to Wednesday's release of Japan's trade balance. A further widening of Japan's trade deficit is expected because of declining Japanese exports.

This week's Japanese economic calendar includes the April 23rd release of March trade balance expected at - ¥200bn compared to ¥82bn last month. On April 24th, all industry activity is due for release expected unchanged at -2.1%.

Key technical levels to watch in USD/JPY include support at 97.20 the March 30th low with resistance at 99.40 the April 20th high.

EUR

EUR rebounded from a one-month low supported by report of better than expected German ZEW business confidence. German April ZEW index improved to 13 from -3.5 last month. This marked the first rise to positive for the ZEW index since July of 2007. The report generates hope that the German economy is about to recover. ZEW officials said the German economy is likely to recover slowly in H2 0/9. EUR gains were limited by skepticism about German economic outlook as the ZEW current condition indicators continued to fall to -91.6 from -89.4 last month. The trade will be looking at the April 24th release of German IFO for further indication of German economic outlook. EUR gains were also limited by comments from ECB's Ordonez that interest rates may be cut further. The EUR remains vulnerable to speculation that the ECB will cut interest rates in May and announce plans to implement unconventional measures to boost EU growth. EUR price direction is re-linking to the direction of equities and risk sentiment. Global equity markets may continue to weaken pressured by concern about this week's US earnings reports and upcoming US bank stress tests. The preferred strategy is to sell the EUR on rallies to 1.3100.

On April 23rd, EU April manufacturing and services PMI will be released. Manufacturing PMI is expected to show modest improvement to 34. 4 from 33.9 last month. The services PMI is expected to show slight improvement to 41.2 from 40 last month. February industrial orders will also be released on April 23rd expected to fall 2% compared to -3.4% last month. On April 24th, April German IFO index is due for release expected at 82.4 compared to 82.1 last month.

The technical outlook for the EUR is turning negative with Monday's breakout below 1.3000. Expect key EUR support at 1.2835 the March 16th low with resistance at 1.3049 the April 20th high. Look for major EUR downside support at 1.2730 the January 12 th low

GBP

GBP traded higher supported by report of improving UK retail sales, threat of intervention and an unexpected rise in UK core CPI. Retail sales at UK stores rose 3.4% in the last six weeks since the end of February. The BOE's Fisher said that intervention is a tool always available to the BOE if needed. GBP firmed despite report that UK RPI declined for its first time since 1960, falling 0.4%. The RPI decline increases the risk of deflation in the UK. UK March CPI rose 0.2% and 2.9% y/y. Core CPI rose 1.7%, a reading of 1.5% was expected. The headline CPI report was right in line with market expectations but the core CPI came in higher than expected. UK CPI is expected to continue to fall sharply in the months ahead. UK Chancellor Darling will announce the UK budget on Wednesday. GBP traded lower Monday pressured by concern that the increased spending for the UK bank bailout may be announced in the UK budget. Apart from focus on the direction of equities, GBP price direction will hinge on this week's UK economic calendar which includes reports on employment and MPC minutes for the last policy meeting and GDP. The UK budget report and Friday's release of Q1 GDP are this week's key economic reports for GBP trade. The budget is not expected to include more new stimulus. The UK budget is expected to focus on jobs and investments. UK Q1 GDP is expected to fall 1.4%. The GDP report will be important to investor perception of whether recent actions taken by the UK government and Bank of England to boost UK growth are having any impact.

On April 22nd, February unemployment will be released expected at 6.7% compared to 6.5% last month, with claimant count expected at 100K. PSNBR for March will also be released on April 22nd expected at 17 bln. MPC minutes for the April 8/9 BOE meeting and UK budget will also be released Wednesday.

The technical outlook for GBP is turning negative as GBP breaks support at 14600. Look for key GBP support at 1.4450 the April 2nd low with resistance at 1.4850 the April 17th high.

CAD

CAD traded lower as the Bank of Canada lowers interest rates 25 basis points to 0.25%.The BOC cited declining inflation and intensifying global recession as the primary reasons for lowering the interest rate. The BOC commits to holding rate policy steady for the remainder of the year. The rate cut was not widely expected. The BOC did not commit to taking on conventional measures to boost growth. Thursday when the BOC releases its Monetary Policy Report update, the Bank of Canada is expected to outline details of a series of measures to boostCanadian growth and achieve the BOC's inflation target. The BOC statement however did not indicate the Bank of Canada is ready to implement these measures. The BOC looks for continued deterioration of growth. If the BOC does take action to implement unconventional measures, then the CAD may weaken on concern about Canadian growth outlook. The BOC expects the Canadian economy to contract by 3% in 2009 and revised its growth forecast for 2010 to 2.5% from 3.8%. The BOC expects core inflation to remain low and return to the 2% target in Q3 2011. Canadian wholesale sales fell 0.6% in February; the trade was looking for a 1% rise. The data had limited impact on the CAD trade. CAD downside was limited by a rebound in US equities.

On April 22nd, March Leading Index will be released expected at -0.3% compared to -1.1% last month. On April 23rd, February retail sales are due for release expected at 1.1% compared to 1.9% last month. Thursday the BOC will announce its quarterly policy statement. The BOC's quarterly policy statement may address the issue of quantitative ease.

The technical outlook for CAD is turning mixed as the rally corrects sharply from the 1.2000 level and the trendline breakout of 1.2090 failed to attract fresh CAD demand. Look for near-term resistance at 1.2650 with support at 1.2340 the April 21st low.

AUD

AUD traded higher rebounding from yesterday's sharp losses. AUD rebound is attributed to report of improving merchandise imports, gains in cross trade to the JPY and more stable US equity market trade. AUD price direction is also closely tracking the direction of the EUR. EUR traded higher supported by report of better than expected German April business confidence. Australia's March merchandise imports rose 4.6%. The rise in the March merchandise imports points to improving domestic demand. AUD firmed despite comments from the RBA Governor Stevens that the Australian CAPEX spending will continue to decline sharply. Stevens went on to say that the long-term prospects for the Australian economy are good and Australian households are optimistic about the future. The RBA minutes for the April 7th policy meeting indicated that there is room for more rate cuts, that economic outlook was weaker than thought to be and growth continues to deteriorate this year and improve in 2010. AUD/JPY cross gains are attributed to Japan's downgrade of its 0/9 growth forecast and anticipation that tonight's Japanese trade data will show continued deterioration and falling exports.

AUD traded sharply lower Monday pressured by weaker equity market trade, falling commodity prices, report of weak Australian inflation data and selling in cross trade to JPY. Australia's Q1 final goods PPI falls 0.4%, a 0.6% rise was expected. This marked the first drop in Australian PPI in almost 6 years as construction costs decline. The decline in Australia PPI generates risk of deflation and the data may revive RBA rate cut speculation. AUD came under pressure last week in reaction to report of slowing growth in China. China is a major export destination for Australia. Weakening Chinese growth may mean a more prolonged global slowdown. Risk sentiment has re-emerged as the main market driver for the AUD. The trade will look to the direction of equities and this week's Australian inflation data as key market drivers for AUD direction.

On April 22nd, Q1 CPI will be released expected at 0.4% compared to -0.3% last month. On April 23rd, March new car sales are due for release expected at -3% compared to -18.6% last month.

The technical outlook for the AUD is mixed on today's break of key support at 7000. Look for AUD support at 6950 the April 20th low with resistance at 7240 the April 20th high.