• USD : Lower, equities extend gains after release of better than expected construction and housing data
  • JPY : Lower, risk sentiment improves boosted by improving PMI data from China and the EU
  • EUR : Higher, EU cuts growth forecast, tracking improving risk sentiment as equity markets rise
  • CHF: Higher, Swiss PMI improves in April, threat of intervention continues
  • GBP: Higher, UK markets closed tracking equities, political turmoil for PM Brown
  • CAD and AUD : AUD & CAD higher, China's PMI rises in April fueling risk appetite, US data improves

Overview

Choppy trade continues with USD trading inversely to the direction of equities. With markets closed in Japan and the UK the USD opened higher versus the EUR and JPY and traded lower versus high yield currencies. USD gains versus the JPY are attributed to firmer global equity market trade. Global equity markets were supported by report of improving PMI data from China and Europe and report from Mexico that the number of swine flu cases has declined. China's manufacturing PMI expanded for the first time in nine months. The risk of swine flu pandemic appears to have dropped and the outbreak may have peaked. EUR and GBP traded lower in overseas trade pressured by report that the EU commission cut EU growth forecast and comments from the ECB's Weber that Germany will not see growth until H2 2010. The European currencies reversed to trade higher supported by improving risk sentiment as US equity markets surge in reaction to report of better than expected US construction and pending home sales. Commodity currencies traded higher supported by improving risk sentiment. AUD traded higher despite report of weak Australian job ads and falling Q1 house prices. Improving PMI data from China supported the AUD. The trade showed limited reaction to a Financial Times report that suggests that Citibank and Bank of America may need to raise more than 10 Billion each new capital. US Bank stress tests will be released on Thursday. The bank stress tests may spark a drop in risk appetite but the trade is pricing global recovery.

Focus turns to this week's central bank policy meetings in Australia and Europe and US unemployment report due for release Friday. The RBA is expected to hold rates steady but there is a moderate chance of a 25 bps rate cut. The ECB is expected to cut rates 25 bps and announce the details of non standard policy measures. The BOE is expected to hold rate policy steady. The ECB policy meeting has the potential to set a new trend for the EUR if the ECB adopts quantitative ease. US unemployment is expected to rise to 8.8% with another 665K loss of non farm payroll jobs. If the US employment report shows stability or improvement it will add additional support to optimism that the worst of global recession has passed. The USD may be supported by a shift in focus to growth differential and speculation that the US economy will recover before the EU. The counter argument to this analysis is that improving risk sentiment will spark selling of USD as investors search for higher yields and unwind safe haven positions in the USD.

Today's US data:

March construction spending rises 0.3%, 1.3% decline was expected. March Pending Home sales rise 3.2%, a flat reading was expected. USD trades lower as equity markets extend gains in reaction to better than expected construction spending and pending home sales reports. Risk appetite is the main market driver for FX trade.

Upcoming US:

On May 5th, April and manufacturing ISM will be released expected at 42 compared to 40.8 last month. On May 7th, initial jobless claims for week ending in 05/02 due for release expected at 610 K, along with Q1 productivity expected at 0.4% compared to -0.4% last quarter. Also on May 7th, March consumer credit is due for release expected at -2.5bln compared to -7.48 bln last month. On May 8th, April nonfarm payrolls be released expected at -665K compared to -631K last month, along with the unemployment rate expected to rise to 8.8% from 8.5% in March.

JPY

Markets are closed in Japan until Thursday. JPY drifted lower versus the USD pressured by improving risk sentiment and firmer global equity market trade. JPY traded over 2% lower versus the USD last week pressured by improving risk sentiment as global equity markets closed at a three-month high. A decline in the number of reported cases of swine flu in Mexico and strong improvement in China's PMI supports global equity markets and risk sentiment. Positive US data fuels US equity market gains. China's April PMI rises to 50.1 from 44.8 in March. There is a growing sense that the worst of the global recession has passed. JPY traded mixed in cross versus the EUR and GBP with European currencies initially supported by improving PMI data in the EU and Switzerland. European currency gains were limited by report that the EU commission cut EU growth forecast to -4% for 2009. AUD/JPY traded higher with the AUD supported by improving PMI data from China. Signs of recovery in China's economy fuels demand for higher yield currencies and reduces the safe haven flows to the JPY. Golden week holidays begin in Japan on Monday. The next scheduled economic release from Japan is the May 8th release of March leading indicators.

Key technical levels to watch in USD/JPY include support at 98.50 with resistance at 99.75 the April 17th high and 100.75 the April13th high.

EUR

EUR initially rallied in response to report of improving SENTIX index and PMI. EUR reversed early gains and traded lower after comments from the ECB's Weber and a cut in EU growth forecast. EU May SENTIX index improved to -34.3 from -35.3 last month. EU April PMI rises to 36.8 from 33.9 last month. The ECB's Weber says that Germany would not see growth until H2 2010. The EU commission cut EU growth forecast to -4% for 2009 and expects flat growth in 2010. EUR was also pressured by report the German retail sales declined 1%. EUR traded higher after the release of better than expected US March construction spending and pending home sales tracking a surge in US equities and improving risk sentiment.

This week's main focus will be the May 7th ECB policy meeting. The ECB is expected to cut rates 25 basis points to 1% and layout its agenda for unconventional monetary policy measures. Today's comments from Weber that the EU commission growth forecast cut may increase pressure on the ECB to adopt non-standard policy measures. The trade will be looking to see whether the ECB sets a floor for a low limit on interest rate cuts and if the ECB is prepared to implement nonstandard monetary measures at this time. If the ECB stops short of implementing new non standard policy measures at the May meeting the EUR may experience a modest rally similar to demand that emerged in the CAD when the BOC presented the details of its quantitative ease but delayed implementation of these measures. If the ECB elects to implement non-standard policy measures, then the EUR may experience near-term selling pressure as the action by the ECB would confirm concerns about EU economic outlook.

On May 5th, March PPI will be released expected unchanged at -0.5%. On May 6th, EU April services PMI will be released expected at 43.1 compared to 40.9 last month, along with March retail sales expected at 0.1% compared to -0.6% last month. German March trade balance and April industrial production will be released on May 8th. The German trade balance is expected to narrow to 8 Billion from 8.9 Billion last month. The German industrial production is expected to fall 1.3%. The preferred strategy for EUR is to buy the dips into support at 1.3130 and sell rallies into resistance at 1.3400. EUR rallies will likely be limited by ECB rate cut speculation.

The technical outlook for the EUR has turned mixed as EUR struggles to hold above 1.3300. Expect EUR support at 1.3130 the April 29th low with resistance at 1.3395 the April 13th high.

CHF

CHF traded mixed despite report of improving Swiss PMI. Swiss April PMI rose to 34.7 from 32.6 last month. CHF weakness is attributed to selling in cross trade to the EUR, ongoing threat of SNB intervention and continued concern about Swiss economic outlook. Last week, Switzerland reported that Swiss KOF leading indicator declined to a record low in April. CHF has been confined to a narrow range and ended last week marginally higher versus the USD and weaker against the EUR. The SNB is expected to defend the 1.5100 level in EUR/CHF cross. This week's Swiss economic calendar includes Thursday's release of April CPI expected at -0.6 compared to -0.4% last month. On Friday, April unemployment will be released expected at 3.4% compared to 3.3% last month. These reports may contribute to ongoing concern about deteriorating economic outlook in Switzerland and the risk of deflation. SNB officials have pledged to intervene to weaken the CHF to combat the deflationary impact of strong CHF. Expect USD/CHF support at 1.1165 the March 19th low with resistance at 1.1450 the April 29th high.

GBP

GBP traded mixed in holiday thinned trade with markets closed in the UK. The main catalyst for early GBP selling was a spillover from weaker EUR and the cut in EU growth forecast. GBP was also pressured by report that UK Chancellor Brown may be forced out of office because of the continued recession in the UK. Political uncertainty in UK weighed on the GBP. GBP was one of the better performing currencies last week trading over 1.5% higher versus the USD supported by UK data which points towards possible bottoming for UK economy. UK CBI retail sales hit a 15 month high and UK manufacturing PMI posted improvement in April. GBP turned higher in US trade after the release of better than expected US March construction spending and pending home sales data as US stocks extend gains. The Bank of England meets on Thursday and are expected to leave rate policy unchanged at 0.5%. The Bank of England MPC board voted unanimously to continue quantitative easing at the April policy meeting. The MPC board indicated they would consider either expansion or contraction of their bond purchases. The trade will be looking to see if the MPC makes any changes in the current amount or timing of bond purchases at the May policy meeting. If the MPC were to increase the size of the quantitative ease it may spark selling of the GBP. The trade will also be looking at this week's UK economic calendar for further signs of possible stabilization of the UK economy.

This week's UK economic calendar includes the May 5th release of April construction PMI expected at 32 compared to 30.9 last month. On May 6th, April consumer confidence will be released expected at 43 compared to 41 last month. April services PMI will be released as well on May 6th expected at 46 compared to 45.5 last month. On May 8th, UK April PPI will be released expected unchanged at 0.2%.

The technical outlook for GBP is improving as GBP holds above 1.4900. Expect near-term support at the 1.4755 the May 1st low with resistance at 1.5060 the April 16th high. Key GBP resistance is expected at 1.5155 the January 12th high.

CAD

CAD was one of the best performing currencies last week supported by improving risk sentiment and the BOC decision to hold off on quantitative ease. CAD traded over 2.5% higher versus the USD last week. CAD traded higher Monday supported by improving manufacturing PMI in China and improving risk sentiment as global equity markets rally. The improvement in China's manufacturing PMI suggests that the global economy may be stabilizing. Canada is an export based economy and the CAD will be supported if the global economy begins to recover. CAD continues to benefit from last week's decision by the Bank of Canada to hold off on implementation of quantitative ease. The fact that the BOC did not follow the BOE and FED and adopt quantitative ease is a positive for the CAD. The improvement in risk sentiment and firming equity markets encourages demand for commodity currencies as investors expect improvement in global demand. Better than expected US construction spending and housing data add to speculation that the worst for the global economy has passed. As noted in Fridays report, CAD price direction is closely correlated to the S & P. Further CAD gains will hinge on whether global equity markets can build on recent gains.

This weeks key focus will be Friday's unemployment report in the US and Canada. The CAD has rallied despite mixed Canadian economic data. Another Jump in unemployment could slow demand for the CAD. Canada's unemployment rate is expected to top 8% with an additional 40K loss of jobs. The preferred strategy is to sell USD/CAD on rallies to 1.2000.

This week's Canadian economic calendar includes the May 6th release of April Ivey Manufacturing PMI expected at 45 compare to 43.2 last month. On May 8th, April unemployment and housing starts will be released. The unemployment rate is expected to rise to 8.1% from 8% and employment growth expected at -40K compared to - 61.3K last month. Housing starts are expected at 155 K compared to 134.7 K last month.

The technical outlook for CAD has improved with today's break of 1.1800. Look for near-term resistance at 1.1900 the May 4th high with support at support at 1.1760 the January 6th low and 1.1655 the November 10th low.

AUD

AUD traded higher despite report of weaker than expected Australian house price and job ads data. Australia's April job ads fall 7.5% and Q1 house price index falls 2.2%. AUD was supported by rising global equities; report that China's PMI rose to 50.1 and gains in cross trade to the JPY. Firmer global equity markets boost risk appetite and demand for high-yield currencies. The improvement in China's PMI generates speculation that the worst is over for the global economy. China is a major export destination for Australian goods. The RBA meet Tuesday and the general consensus is that they will hold rate policy steady. If the RBA elects to hold rate policy steady, steady rate policy should support the AUD on yield outlook as long as risk appetite continues to improve. In light of Thursday's rate cut from New Zealand and today's weak Australian jobs and house price data survey, the RBA may conclude that a rate cut is needed. Analysts are split as to whether the RBA will cut 25 basis points or remain on hold at 3%. RBA rate cut speculation may have limited impact on AUD trade because RBA is not likely to implement quantitative ease at this time. AUD price direction will continue to key off risk sentiment and equity markets. The preferred strategy buy dips into support above 7250.

On May 5th, March building approvals are due for release expected at 2.3% compared to 7.8% last month. On May 6th, March retail sales and international trade will be released. March retail sales are expected to rise 0.5% compared to -2% last month. March trade balance is expected to narrow to 1.85 bln compared to 2.11 bln last month. On May 7th, April unemployment will be released expected to rise to 5.9% from 5% last month, with jobs loss in -25K compared to -34.7K last month.

The technical outlook for the AUD has improved as AUD trades above support at 7300. Look for AUD support at 7235 the May 1st low with resistance at 7470.