Greenback Mostly Lower Ahead of Stress Test

* The dollar traded mostly lower on Wednesday ahead of the European Central Bank and the Bank of England policy meetings, the release of US bank stress test results on Thursday and US unemployment data on Friday. ADP data indicated US private-sector payrolls fell a less-than-expected 491,000 in April. The US stock market rallied in the afternoon; the Dow rose 102 points to 8,512. The yen advanced as the Golden Week holiday is coming to an end. The euro was little changed ahead of the ECB policy meeting tomorrow. The ECB is expected to cut its benchmark rate 25 basis points to 1.00% and may announce quantitative easing measures. We do not think the ECB will implement its quantitative easing policy. The Australian and Canadian dollars rose to the highest level since last fall. The Australian dollar gained on better-than-expected Australian retail sales and the Canadian dollar rose on better-than-expected building permits and PMI data. The dollar has been pressured by better risk appetite and higher equity prices recently. The stock market is at important resistance and may need more time to penetrate the resistance; thus, we are raising our stops to look in profit or reduce losses if risk appetite returns.

* The GBP/USD rose modestly for a sixth day ahead of the Bank of England’s rate decision. UK consumer confidence rose by the most in almost two years and the services sector contracted less than forecast indicating the BOE’s easy monetary policy is starting to have intended effect and making it less likely for further easing. The GBP/USD is building a bottom. The pair has broken the 1.50 handle, which is now acting as support. Absence of negative surprises in the US bank stress report may also help sterling as the UK is dependent of global banking.

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Financial and Economic News and Comments

US & Canada

* US private-sector payrolls declined a less-than-expected 491,000 in April, the fewest since October, data from ADP Employer Services showed. March data was revised to show a decline of 708,000, down from a previous estimate of 742,000. Friday’s official employment report by the Labor Department may show overall job losses approximately 610,000 with the unemployment rate rising to a 25-year high of 8.9%.

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* Canada’s building permits jumped a much more-than-expected 23.5% m/m in March to C$4.5 billion ($3.8 billion), the first gain in six months and the largest since March 2007, following February’s upwardly revised 15.8% m/m drop, according to data from Statistics Canada.

* Canada’s Ivey PMI unexpectedly rose to 53.7 in April from 43.2 in March, indicating purchases were higher, according to the Richard Ivey School of Business and the Purchasing Management Association of Canada.

Europe

* Eurozone retail sales unexpectedly fell 0.6% m/m in March after an upwardly revised 0.3% m/m decline in February, Eurostat reported. Retail sale dropped a more-than-estimated 4.2% y/y, the largest decline since records began in 1996, deepening February’s 4.0% y/y decrease.

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* The eurozone services PMI for April was revised higher to 43.8 from a preliminary 43.1, final April eurozone PMI data by Markit Economics showed, up from 40.9 in March, indicating the eurozone service industry contracted at a slower rate in April. The composite eurozone PMI was upwardly revised to 41.1 from a preliminary 40.5.

* The German services PMI for April was revised higher to 43.8 from a preliminary 43.5, according to final April German PMI data by Markit Economics, up from 42.3 in March, indicating Germany’s services sector shrank at a slower rate in April.

* The UK services PMI rose more than expected in April to 48.7, the fifth consecutive increase and the highest reading since August, from 45.5 in March, indicating the UK’s services sector contracted at a slower pace and signaling the UK recession is easing, according to data from the Chartered Institute of Purchasing and Supply and Markit Economics.

* UK house prices fell for a third consecutive month in April, falling 1.7% m/m to an average of £154,716 ($233,000), after a 1.9% m/m decrease in March, Halifax reported. April house prices dropped 17.7% y/y.

* UK consumer confidence improved in April, with the UK consumer confidence index rising more than expected to 50 from March’s upwardly revised 42, data by Nationwide Building Society showed.

Asia-Pacific

* Australia’s retail sales gained a much more-than-anticipated 2.2% m/m in March after declining 2.0% m/m in February, according to data from the Australian Bureau of Statistics. The March trade surplus expanded to A$2.5 billion ($1.8 billion) from February’s downwardly revised A$1.75 billion, a separate ABS report showed. The figures add to signs of an Australian economic recovery.

* The People’s Bank of China said in its quarterly monetary-policy report that the Chinese economy performed “better than expected” in Q1 2009, pledging an “ample” supply of money to spur an economic recovery. “A policy mistake made by some major central bank may bring inflation risks to the whole world,” the PBC said.

FX Strategy Update

EUR/USD USD/JPY GBP/USD USD/CHF USD/CAD AUD/USD EUR/JPY
Primary Trend Negative Negative Negative Positive Positive Negative Negative
Secondary Trend Positive Neutral Neutral Neutral Negative Positive Positive
Outlook Positive Negative Positive Neutral Negative Positive Positive
Action Buy Buy Buy None None Buy None
Current 1.3318 98.40 1.5119 1.1326 1.1663 0.7474 131.00
Start Position 1.3149 96.42 1.4845 N/A N/A 0.6601 N/A
Objective N/A N/A N/A N/A N/A N/A N/A
Stop 1.2940 94.80 1.4650 N/A N/A 0.7150 N/A
Support 1.3000 97.00 1.4950 1.1100 1.1500 0.7200 128.00
1.2500 95.00 1.4500 1.0700 1.1300 0.7000 125.00
Resistance 1.3500 99.50 1.5200 1.1700 1.2000 0.7500 134.00
1.3700 101.00 1.5500 1.2000 1.2200 0.7900 136.00

Source: Hans Nilsson

06.05.2009