News and Events:

While the USD selling eased yesterday, concerns over the long term direction are still apparent. Yesterday, the S& P climbed to a 6 month high, while 10yr Treasuries closed at 3.67% up significantly from Friday. While Credit default swaps are stable the 10yr TIP spread have widen (signaling inflation concerns), so it seems that the risk of US default is less of an issue, but higher inflation is clearly a core driver. We can derive for this that markets are expecting the US to show a combination of stronger growth (yesterday's ISM manufacturing index, new orders at 51.1 versus 47.2 in April) with higher inflation and a weaker dollar. On a side note, GM filed for bankruptcy as was universally expected and didn't see any meaningful reaction from the markets as most believe the proceedings will be completed relatively quickly. Treasury Secretary Geithner seems to have temporality appeased Chinese officials with recycled rhetoric such as Chinese's USD-denominated assets were “safe” (a comment that induced some laughter in the university audience) and that he personally still believes in a “strong USD”. His core talking points was that in the short term China must stomach a higher US budget deficit but in the longer term would become fiscal conservative. We wonder if these statements are credible and if the US really wants or needs a strong USD. As was widely expected, the RBA left its policy rate unchanged at 3.00%. However, accompanying statement was more dovish than the market expected. In particular, the RBA stated that scope remains for some further easing, if needed, and that the Board will continue to monitor how economic and financial conditions unfold. We believe this is an attempt by the RBA to rein in further rate cut expectations and avoid a sudden steeping in the yield curve. The next challenge for the AUD will be tomorrow's Q1 GDP release, where the market expect the domestic economy to just evade a technical recession by releasing 0.1% q/q real GDP growth. Today's data calendar is devoid of top tier data or events – UK mortgage approvals, US pending homes sales and a speech from Dallas Fed President Fisher are the highlights.


Today's Key Issues (time in GMT):

08:28 GBP Construction PMI, index May 38.0 prior

08:30 GBP BoE mortgage approvals, K Apr 41 exp, 39 prior

08:30 GBP BoE net mortgage lending, £ bn Apr 1.0 exp, 0.8 prior

08:30 GBP BoE net consumer credit, £ bn Apr 0.1 exp, 0.1 prior

08:30 GBP BoE sectoral breakdown of M4 and M4 lending Apr

09:00 EUR Unemployment rate, % Apr 9.1 exp, 8.9 prior

00:00 USD Total vehicle sales, mn (saar) May 9.3 exp, 9.3 prior

13:30 SGD PMI, index May 49.2 exp,

14:00 USD Pending home sales, % m/m (y/y) Apr 0.3 (-3.0) exp, 3.2 (1.1) prior

18:20 USD Fed Fisher speaks

The Risk Today:

EurUsd Pair fails to break higher and fails at 1.4249 level despite comfortably pushing past previous cap at 1.4151. This would suggest that while continued trading above 1.4000 can be deemed constructive we aren't quite ready for mid term target for 1.4860. Initial resistance at 1.4177 with daily target at 1.4250. On the downside a floor is in at 1.4000 with 1.4103 as initial support. A break below the 1.4103 will broaden the current range but only 1.4000 will refocus lower.

GbpUsd Massive gains seen yesterday points to retracement moves today – chart shows a semblance of a Head and Shoulders formation with a neckline at 1.6348 (initial support) which corresponds with the 50% retracement level on the 1.6183 – 1.6499 move. A test and confirmation of the 1.6348 level would test the 1.6304 support with 1.6183 as the floor. On the upside a crucial level at 1.6416 will prove as test for continued bullish trend – mid-term target at 1.6851 (50.00% retracement level on move that took us from 2.0187 to 1.3516).

UsdJpy Pair reacted to the rattling in risk sentiment yesterday brought on by the GM debacle. Pair is an indicator of risk taking and we see the GM issue took some weight off the markets and the Yen gave way to the dollar. 95.80 stands as initial resistance with a strong bias for the upside as risk sentiment improves – further gains will reign in 97.24. History says that such a large move will warrant a retracement which sees 96.25 as initial support.

UsdChf correction in downtrend seems to have hit a resistance at the 38.20% Fib level at 1.0747 – trend for parity continues and we see the bias to the downside. Next target at 1.0698 (23.60% Fib level) and 1.0616 (6 month low) in as the floor. A push past current lows will reign in 1.0540.

Resistance and Support:

S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot