Currencies and Equities at Important Technical Levels

* The dollar traded mixed on Tuesday, higher against the euro but lower versus the pound. Federal Reserve Chairman Ben S. Bernanke said “a relapse in financial conditions would be a significant drag on economic activity and could cause the incipient recovery to stall.” The ISM US non-manufacturing index indicated the services sector contracted at a slower pace. The FX market and US stock market are at important technical levels. The greenback, testing support on improving risk sentiment, has not got any benefit from better US economic growth prospects as a massive increase in liquidity pressures the dollar. The US stock market fell modestly today consolidating earlier gains; the Dow declined 16 points to 8,411. The yen traded little changed. Sterling traded above 1.50 on the better-than-expected construction PMI and falling Libor rates indicating less stress in the global banking system. The AUD/USD rose to the highest level since October after the Reserve Bank of Australia held the cash rate target at 3.00%. The USD/CAD was little changed, near a 6-month low.

* The EUR/USD fell following weaker-than-expected eurozone producer-price inflation increasing speculation the European Central Bank will cut interest rates aggressively. The EUR/USD has made a double bottom and broken its long-term downtrend. However, the pair hit resistance from the Bollinger band and there is further resistance from the 200-day moving average at the 1.35 handle. If this resistance is broken, the EUR/USD will turn more bullish. Support exists in the 1.30 area.

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Financial and Economic News and Comments

US & Canada

* The ISM US non-manufacturing index increased more than expected to 43.7 in April from 40.8 in March, indicating the US services sector contracted at a slower pace in a sign the US recession is easing, data from the Institute for Supply Management showed. The key index components improved in April. The business activity index increased to 45.2 from March’s 44.1. The most encouraging sign in today’s ISM report was that the April new orders index jumped to 47.0, the highest level since September 2008, from 38.8 in March. The employment index rose to 37.0 from 32.3. The prices paid index increased to 40.0 from 39.1, signaling the threat of deflation is diminishing.

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Europe

* Eurozone producer prices fell a slightly more-than-expected 0.7% m/m in March after an upwardly revised 0.4% m/m decline in February, according to PPI data from Eurostat. Producer prices fell a more-thananticipated 3.1 y/y, the largest decline since February 1987, following February’s upwardly revised 1.7% y/y fall. The core PPI, which excludes construction and energy, fell 0.4% m/m and 1.7 y/y in March. The falling PPI figures add to deflation concerns, supporting the case for a 25 basis-point rate cut to 1.00% by the European Central Bank this Thursday.

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* The CIPS/Markit UK construction PMI climbed more than expected to a 7-month high of 38.1 in April from 30.9 in March, indicating UK construction contracted at a slower rate and signaling the UK recession is easing, according to data by Markit and the Chartered Institute of Purchasing and Supply.

Asia-Pacific

* The seasonally adjusted Australian AiG/Commonwealth Bank performance of services index for April increased to 39.8 from March’s downwardly revised 35.5, indicating Australia’s services sector contracted for a 13th consecutive month albeit at a slower pace, the Australian Industry Group and Commonwealth Bank reported.

* Australia’s building approvals rose for a second month in March, rising a more-than-anticipated 3.5% m/m, after an upwardly revised 8.0% m/m advance in February, according to data by the Australian Bureau of Statistics. Building approvals fell a less-than-expected 16.5 y/y, following February’s 25.5% y/y drop.

* The Reserve Bank of Australia maintained its benchmark interest rate at a 49-year low of 3.00%, as forecast, after a quarter-point rate reduction last month, the sixth cut in eight months. Government spending, lower borrowing costs and a pickup in China will drive an Australian economic recovery, RBA Governor Glenn Stevens said.

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Source: Hans Nilsson

05.05.2009