Greenback Falls as Risk Measures Decline

* The dollar fell on Tuesday on improving risk sentiment. The greenback’s safe-haven demand declined as three major US banks sought to return government TARP funds as the banking sectors improved. The LIBOR interbank borrowing rate fell to a record low. The optimism was limited as US April housing starts fell to a record low led by the volatile multi-family sector. The silver lining is that new production will not add to high inventories of unsold houses. US stocks traded little changed as the VIX index dropped below 30 for the first time since the Lehman Brothers debacle. The S&P 500 index fell 1.58 points to 908.13. The yen declined ahead of Japan’s Q1 GDP release, which Japanese Finance Minister Yasano said would be weak. Sterling rose to a 5-month high on speculation the worst of the UK recession is over. UK inflation fell to the lowest level since January 2008. The Canadian dollar advanced as crude oil rose. The Australian dollar also advanced on the higher commodity prices and Reserve Bank of Australia Governor Glenn Stevens’ expectation for a global recovery in the late 2009.

* The EUR/USD rose as the ZEW German investor sentiment index rose to the highest level in 3 years. The pair successfully tested the support from the 200-day moving average in the 1.34 area yesterday. There is resistance in the 1.37 area. If this resistance is broken, the EUR/USD may rally to 1.40.

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Financial and Economic News and Comments

US & Canada

* US housing starts unexpectedly fell 12.8% in April to a record-low 458,000 annual rate, after an 8.5% fall to upwardly revised 525,000 in March, data from the Commerce Department showed. Housing starts dropped 54.2% y/y. The fall in April housing starts was due multiple-family starts, which dropped 46.1% and were volatile from month to month. Single-family starts increased 2.8% in April, having not had a down month since January. Housing starts declined in the Northeast, Midwest, and South, but increased in the West. Meanwhile, building permits unexpectedly declined 3.3% in April to a record-low 494,000 annual rate, led by a decline in multiple-family units, after a 7.1% fall to downwardly revised 511,000 in March. Single-family permits rose 3.6%.

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Europe

* Eurozone investor confidence improved for a seventh straight month in May, with the ZEW eurozone economic expectations index increasing more than anticipated to 28.5 from April’s 11.8, according to data from the ZEW Center for European Economic Research. The current economic situation index was down to -93.2 from April’s -93.0.

* Eurozone construction output in March decreased a seasonally adjusted 1.0% m/m after February’s upwardly revised 0.6% m/m decline, Eurostat reported. March construction output fell 8.7% y/y.

* Germany’s investor confidence climbed for a seventh consecutive month to a 3-year high in May, with the ZEW German economic expectations index rising more than expected to 31.1 from April’s 13.0, ZEW data showed. The current economic situation index declined to -92.8 from April’s -91.6.

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* The UK consumer-price inflation rate decelerated more than expected in April to 2.3% y/y, a 15-month low, from 2.9% y/y in March, according to CPI data from the Office for National Statistics. The core CPI slowed to 1.5% y/y, following March’s 1.7% y/y. The retail price index fell 1.2% y/y in April, the most since records started in 1948, after a 0.4% y/y decline.

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Asia-Pacific

* Australia’s economy is likely to “record better outcomes than most other advanced economies in 2009 and 2010, reflecting the healthy state of the domestic banking system and effectiveness of the macroeconomic policy stimulus to date,” according to minutes of the May 5 Reserve Bank of Australia meeting released in Sydney today. RBA Governor Glenn Stevens said the economy is in a good position to benefit from a global recovery later this year. Australia is “well placed to take part in a renewed international expansion,” Stevens said, adding that “most observers think that the early part of any new global expansion will be characterized by pretty slow growth.” Treasury Secretary Ken Henry said “the early signs are positive” that the government’s spending is aiding the economy, asserting that “consumer confidence has held up better than many other countries.”

* Japan’s industrial production increased 1.6% m/m but declined 34.2% y/y in March, according to final March data released by the Ministry of Economy, Trade and Industry. The index for capacity utilization was revised upward to a 0.8% m/m increase to stand at 61.0 in March, from a preliminary -11.9% m/m decrease.

FX Strategy Update

EUR/USD USD/JPY GBP/USD USD/CHF USD/CAD AUD/USD EUR/JPY
Primary Trend Neutral Neutral Negative Neutral Neutral Neutral Neutral
Secondary Trend Positive Positive Neutral Neutral Negative Positive Positive
Outlook Positive Negative Positive Negative Negative Positive Positive
Action Buy None Buy None None Buy None
Current 1.3626 95.97 1.5474 1.1096 1.1556 0.7739 130.75
Start Position 1.3149 N/A 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 1.3335 N/A 1.4935 N/A N/A 0.7150 N/A
Support 1.3400 94.50 1.5000 1.1000 1.1500 0.7300 128.00
1.3000 91.50 1.4500 1.0700 1.1300 0.7000 125.00
Resistance 1.3700 99.00 1.5600 1.1300 1.2000 0.7750 136.00
1.3900 101.00 1.5800 1.1500 1.2200 0.7900 139.00

Source: Hans Nilsson

19.05.2009