Greenback Hit by Reserve Status Speculation

* The dollar continued its decline on Tuesday with risk appetite and global growth prospects rising and investors moving funds from “safe” dollar short-term papers into risky assets. US economic releases today indicated the two worst sectors showed signs of bottoming; US pending home sales rose the most since 2001 and US auto sales climbed more than expected. Investors are also worried about the greenback’s reserve currency status as Russia is floating ideas about a new reserve currency basket. This is unlikely to happen soon, but combined with the extreme increase in dollar liquidity and US funding needs, it got attention from investors and foreign reserve allocators. The S&P 500 increased a modest 1.87 points to 944.74, staying above the 200-day moving average for a second day. The yen rose as Japan’s Finance Minister Kaoru Yosano said the Japanese economy has stabilized and will likely recover in spring 2010. We buy the USD/JPY with stop at 92.70. Sterling rose to a 7-month high after penetrating the 1.65 resistance, despite Middle Eastern investors selling a £4 billion stake in Barclays. The Australian dollar advanced to the highest level since September after the Reserve Bank of Australia held its key interest rate at 3.00% and Australia’s current-account deficit narrowed more than expected. The Canadian dollar rose as crude oil traded over $69/barrel.

* The EUR/USD gained for a fourth day despite today’s euro-area data showing the eurozone unemployment rate climbed to the highest level since September 1999. The pair hit a new 2009 high on improved risk appetite and reduced demand for the USD as a safe haven. Having been trading in a rising channel since April, the EUR/USD is currently overbought and at resistance at the upper trading band. As a momentum is strong, we may have to wait further for a consolidation. We moved up the stops on the EUR/USD and other pairs.

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Financial and Economic News and Comments

US & Canada

* US pending home sales rose for a third consecutive month in April, with the NAR US pending home sales index rising a much more-than-expected 6.7% m/m to 90.3, the largest gain since 2001, after a 3.2% m/m increase in March, data from the National Association of Realtors showed. April pending home sales increased 3.2% y/y. The affordability index was at 174.8 in April, the second-highest level, after reaching a record-high 176.9 in January.

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Europe

* The eurozone unemployment rate rose more than expected in April to 9.2%, the highest since September 1999, from 8.9% in March, according to data released by Eurostat. The number of people unemployed rose by 396,000 in April.

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* The CIPS/Markit UK construction PMI climbed more than expected to a 13-month-high 45.9 in May from 38.1 in April, indicating UK construction-sector activity contracted at the slowest pace since April 2008, according to data from Markit Economics and the Chartered Institute of Purchasing and Supply.

* UK mortgage approvals rose more than estimated to 43,201 in April, the highest level in a year, compared with March’s upwardly revised 40,038, figures from the Bank of England showed. April’s £1.0 billion increase in net lending secured on dwellings was higher than March’s downwardly revised £0.6 billion increase but below the previous 6-month average. Net consumer credit rose more than expected by £0.3 billion in April, also below the previous 6-month average.

* Switzerland’s GDP fell 0.8% q/q in Q1 2009, the deepest contraction since Q2 1994, after a downwardly revised 0.6% q/q decline in Q4 2008, the State Secretariat for Economic Affairs said. Exports fell 5.4% q/q and gross fixed capital spending declined 0.4% q/q. Q1 GDP contracted a more-than-expected 2.4% y/y.

* The SVME Swiss PMI increased more than expected to 39.8 in May from 34.7 in April, the largest index-point gain since September 2005; however, the PMI remained below the 50-point mark, indicating manufacturing contraction in Switzerland for nine consecutive months, according to data from the Swiss Association of Purchasing and Materials Management.

Asia-Pacific

* Japan’s monetary base rose for a ninth consecutive month in May, rising 7.9% y/y, after an 8.2% y/y advance in April, the Bank of Japan reported.

* Australian building approvals climbed for a third straight month in April, rising a much more-than-anticipated 5.1% m/m to 11,402, after March’s upwardly revised 6.3% m/m rise, according to data from the Australian Bureau of Statistics (ABS). April building approvals fell a less-than-estimated 16.1% y/y, following March’s upwardly revised 15.2% y/y drop.

* Australia’s current-account deficit narrowed more than expected in Q1 2009 to A$4.61 billion ($3.7 billion) from a revised A$6.36 billion in Q4 2008, data from the ABS showed.

* The Reserve Bank of Australia kept the cash rate target unchanged at a 49-year-low 3.00% for a second month, as forecast, saying there is scope for monetary policy easing. “The prospect of inflation declining over the medium term suggests that scope remains for some further easing of monetary policy, if needed,” RBA Governor Glenn Stevens said.

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 Positive Neutral Negative Positive Positive
Outlook Positive Neutral Positive Negative Negative Positive Positive
Action Buy None Buy None None Buy None
Current 1.4307 95.69 1.6580 1.0614 1.0810 0.8208 136.91
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 1.3770 N/A 1.5390 N/A N/A 0.7670 N/A
Support 1.4000 94.00 1.6000 1.0500 1.0700 0.7800 128.00
1.3600 91.50 1.5500 1.0300 1.0500 0.7500 125.00
Resistance 1.4320 97.50 1.6700 1.1000 1.1300 0.8220 139.00
1.4550 99.50 1.7000 1.1300 1.1500 0.8500 142.00

Source: Hans Nilsson

02.06.2009