• USD : Lower, durable goods beat estimates, new home inventories drop, stocks rise, China diversification
  • JPY : Higher, Japans Financial Service Agency limits leverage on currency margin trading
  • EUR : Higher, supported by report of improving German IFO and gains in cross trade to GBP
  • GBP : Higher, reverses losses, Q1 GDP falls more than expected, contracts at its fastest pace in 30 years
  • CAD and AUD : AUD and CAD higher, CRB and stocks rise, BOC says stimulus is starting to work

Overview

USD traded lower in active trade as equities rally and risk appetite improves. Report of a smaller than expected loss at Ford and a drop in US new home inventories helped to boost demand for US equities. USD was also pressured by a rumor that China may be looking to rebalance its FX reserves. Chinese diversification rumors have surfaced recently as Chinese officials indicated that they may want to see the USD replaced with a global reserve currency tied to the IMF's SDR. Chinese officials have also expressed concern about holdings of US assets fearing that the US may devalue the USD to pay back bonds sold to finance the ballooning US deficit. The G-7 and G-20 finance ministers meet this weekend in Washington. USD traded lower pressured by concern China and Russia may again call for replacing USD as the global reserve currency. GBP initially traded lower pressured by report of weaker than expected UK Q1 GDP and concern about a possible cut in UK debt rating. UK Q1 GDP declined at its fastest pace in 30 years. Moody's says that increased UK borrowing puts UK AAA debt rating at risk of downgrade. GBP downside was limited by report of better than expected UK retail sales and central bank buying from Germany. EUR rallied and firmed in cross trade supported by report of improving German IFO. IFO officials suggest that the worst has passed for the German economy. Commodity currencies firmed supported by improving risk sentiment as equity markets rise and crude prices rise above $50 a barrel. CAD was supported by BOC statement that the Canadian stimulus plan is starting to have impact and the Canadian economy is expected to rebound in the second half of the year. JPY traded higher supported by report that Japan's financial services agency has decided to limit the leverage our currency margin trading. The change in Japan's currency margin limits sparked unwind of short JPY positions.

Today's US data:

US March durable goods fall 0.8%, a 1.5% decline was expected. March new home sales declined 0.6% compared to a 8.2% rise in February. New home inventories fell to a 10 month supply. US equity markets rallied after the release of the US new home sales report and USD remained on the defensive. The decline in new home inventories suggests that lower home prices are starting to help reduce the over supply of new homes in the US. This is an indication that the US housing market may be getting closer to bottom.

Upcoming US data:

Next week's US economic calendar includes the April 28th release of Case Shiller February Home Price index expected at -18 compared to -19 last month. Also on April 28th, April consumer confidence will be released expected at 30 compared to 26 last month. Q1 GDP will be released on April 29th expected at -5% compared to - 6.3% last month. Q1 core PCE deflator will also be released on April 29th expected at 1.4% compared to 0.9% last month. On April 30th, initial jobless claims for the week ending in 4/25 will be released expected unchanged at 640 K. Personal income and personal consumption for March will also be released on April 30th expected at -0.2% and 0.3% respectively. On May 1st, April University of Michigan consumer sentiment will be released expected at 63 compared to 61.9 last month. Also on May 1st, March factory orders will be released expected at - 0.8% compared to 1.8% last month along with April ISM index expected at 38 compared to 36.3 last month.

JPY

JPY traded higher supported by report that Japans Financial Services Agency announced a new limit on the leverage of currency trading margin. The new limit on currency margin has been reduced to 20 to 30 times investor principal from 100 to 600 times. JPY was also supported by rumors that China may rebalance its FX reserves and gains in cross trade to GBP. China has large holdings of USD reserves and if China looks to diversify these reserves it could spark significant selling pressure for the USD. China has about 64% of its estimated trillion foreign reserves in US assets. JPY gains in cross to GBP are attributed to report of weaker than expected UK Q1 GDP and concern that UK debt rating may be cut. Japan's February all activity index falls 2%. March CSPI rises 0.9%. The trade showed little reaction to report that J.P. Morgan analysts see the possibility that the JPY may weaken to 104 by year end as Japan increases government spending and Japanese investors look to buy high-yield assets as the global economy rebounds.

Next week's Japanese economic calendar includes the April 28th release of March retail sales expected at -0.5% compared to -0.3% last month. On April 30th, March industrial output will be released expected at 2% compared to -9.4% last month. March housing starts and construction orders will also be released on April 30th. Housing starts are expected to rise 2% and construction orders are expected to fall 28%. On May 1st, March CPI will be released expected at 0.2% compared to -0.3% last month. March employment and household spending will also be released on May 1st. The unemployment rate is expected to rise to 4.6% from 4.4% last month and household spending is expected down 0.2% compared to 0.3% in February.

Key technical levels to watch in USD/JPY include support at 95.95 the March 30th low with resistance at 98.70 the April 22nd high.

EUR

EUR traded higher supported by report of improvement in German IFO and speculation that China may diversify some of its USD reserves. German April IFO rises to 83.7 from 82.1 last month. IFO officials suggest that the worst is past for German economy and German officials say there is no need for new fiscal stimulus to boost the EU economy. EUR was also supported by sharp gains in cross trade to the GBP after the release of weaker than expected UK Q1 GDP and Moody's warning on UK's debt rating. There are reports that the German central bank was buying the GBP. In the past few months EU officials have expressed concern about the unfair competitive advantage weaker GDP gives to the UK and the rumored German bank buying may be an effort by Germany to limit the GBP decline. EU economic data released this week showed improvement with EU manufacturing and services PMI rising and German ZEW and IFO posted improvement There are reports that EU officials will tell the G-20 finance ministers at this weekend's meeting that the EU economy is nearing a bottom. Speculation that the improving outlook for the EU economy will limit aggressive interest-rate cuts by the ECB adds support to the EUR.

Next week's EU economic calendar includes the April 28th release of German CPI expected at 0.7% compared to 0.5% last month. On April 29th, EU April business climate will be released expected at -3.53 compared to -3.58 last month. On April 30th, March unemployment will be released expected to rise to 8.7% from 8.5% last month

The technical outlook for the EUR is turning mixed as the EUR rises to a one week high. Expect key EUR support at 1.3113 the April 24th low with resistance at 1.3395 the April 13th high.

GBP

GBP opened sharply lower pressured by report of weaker than expected UK GDP and Moody's report that UK debt rating may be at risk. UK Q1 GDP declined 1.9%, the trade was looking for a 1.5% drop. UK Q1 GDP contracted at its fastest pace in over 30 years. Moody's warns that UK finances are deteriorating and the UK balance sheet is deteriorating rapidly due the liabilities that resulted from the UK bank bailouts. Moody's says that UK debt rating remains stable but may be at risk for a possible downgrade because of increased UK government borrowing. Wednesday the UK government announced a sharp increase in UK government borrowing and an increase in UK gilt sales. GBP downside was limited by report of better than expected rise in UK March retail sales and German central bank demand in EUR/GBP cross. UK March retail sales rose 0.3%.

Next week's UK economic calendar includes the April 28th release of April CBI retail sales expected -40 compared to -44 in March. On April 30th, April GFK survey will be released expected to improve to -29 from -30 last month. Also on April 30th, April Nationwide House Price index is due for release expected to fall to -1% compared to 0.9% last month. On May 1st, March consumer credit, mortgage applications and mortgage lending will be released. Consumer credit is expected at 0.2bln compared to 0.245 bln last month. Mortgage applications are expected at 40K compared to 38K in February and mortgage lending is expected to rise to 1.6 bln compared to 1.507 bln last month. UK April manufacturing PMI will also be released on May 1st expected at 39 compared to 38 last month.

The technical outlook for GBP is turning mixed as GBP holds support at 1.4440 the April 3rd low. Expect nearterm support at the 1.4395 the April 22nd low with resistance at 1.4860.

CAD

CAD traded higher supported by yesterday's decision from the Bank of Canada to not implement quantitative ease at this time. The CAD was also supported by improving risk sentiment as equity markets rise, crude oil prices rally above $50 a barrel and the BOC reports that the Canadian government's stimulus plan is starting to have impact. An example of improving economic outlook is yesterday's report of better than expected 0.2% rise in February retail sales. According to the BOC, the Canadian economy is expected to rebound in the second half of 2009 supported by the government stimulus plan and big interest rate cuts from the BOC. CAD is supported by speculation that the Canadian economy is likely to improve faster than its counterparts and that the BOC decision to hold off for now on quantitative ease is a positive sign for Canada's economic outlook. The fact that the BOC did not follow the BOE and FED and adopt quantitative ease is a mild positive for the CAD. The BOC decision to not implement quantitative ease at this time is a vote of confidence by BOC that the actions taken so far will lead to the economic recovery. The preferred strategy is to sell USD/CAD on rallies to 1.2300.

Next week's Canadian economic calendar includes the April 30th release of February GDP expected at -0.5% compared to -0.7% in January. Canada's industrial and raw materials prices will also be released on the 30th with March IPPI expected at 0.6% and RMPI expected at 1%.

The technical outlook for CAD has improved with today's break of 1.2200. Look for near-term resistance at 1.2416 the April 23rd high with support at support at 1.2075 the April 17th low. Expect key USD/CAD support at 1.1875 January 12th low.

AUD

AUD traded higher supported by firming equity markets and higher commodity prices. Report Thursday that China expects 7% to 8% growth in 2009 helps to boost their sentiment and demand for commodity prices. China's PBOC says that the Chinese economy has bottomed. China is a major export destination for Australian goods. AUD is also supported by improvement in Australian credit markets as rates begin to fall on funds loaned between Australian banks. Getting a handle on risk sentiment remains tricky as the trade awaits news later today on US bank stress tests and the possible announcement of bankruptcy for automakers GM and Chrysler. There is rising expectation that the US bank stress test will show that the US major banks have enough capital to withstand future losses. Better than expected US durable goods and new home sales data helped to boost risk appetite in Friday's trade along with report of a smaller than expected loss at Ford. AUD traded lower in overseas trade pressured by report that the RBA may lower rates to 2% to combat deteriorating Australian growth and falling inflation.

Next week's Australian economic calendar includes the May 1st release of March private sector credit expected at 0.3 mln compared to flat last month.

The technical outlook for the AUD is mixed as AUD breaks above resistance at 7200. Look for AUD support at 6950 the April 20th low with resistance at 7240 the April 20th high and 7325 the April 23rd high.