USD Finds Support as Risky Assets Consolidate Gains

* The dollar gained against its rivals on Wednesday following a less-than-expected improvement in US economic data. The ISM US non-manufacturing index rose less than expected and factory orders increased less than anticipated, while ADP saw US job losses of over half a million in May; thus, reducing market optimism of a US economic recovery. Federal Reserve Chairman Ben S. Bernanke warned large US budget deficits threaten financial stability and the government can’t continue indefinitely to borrow at the current rate. Investors sold risky assets. The S&P 500 fell 12.98 points to 931.76. The yen declined modestly versus the dollar but gained against most other key currencies. The euro and sterling dropped as risk aversion increased and investors took profits. The Australian and Canadian dollars fell as commodity prices consolidated recent gains.

* The dollar index rose for the first day in five. The index has fallen dramatically after breaking the long-term uptrend about a month ago. The dollar is oversold and may rise for a while, but the trend is clearly down. There are support in the 78 area and resistance in the 80 area.

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Financial and Economic News and Comments

US & Canada

* The ISM US non-manufacturing index increased to a less-than-expected 44.0 in May from 43.7 in April, indicating contraction in the US services sector for an eighth straight month, but at a slower pace, according to data from the Institute for Supply Management. Major index components were mixed in May. The employment index increased to 39.0 from 37.0 and the supplier deliveries index expanded to 50.0 from 45.5, while the business activity index decreased to 42.4 from 45.2 and the new orders index declined to 44.4 from 47.0. The prices paid index rose to 46.9 in May from 40.0 in April. In essence, given recent data on rebounding home sales and auto sales, the ISM non-manufacturing index will possibly expand beyond 50 within the next few months.

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* US private-sector payrolls fell 532,000 in May, according to estimates by ADP Employer Services. While this is still a substantial loss, it is the smallest in six months. April data was revised to show a decline of 545,000, up from a previous estimate of 491,000. Friday’s official employment report by the Labor Department may show overall job losses approximately 530,000 with the unemployment rate rising to a 25-year high of 9.2%.

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* US factory orders gained for the second time in three months, increasing a less-than-expected 0.7% m/m to $344.4 billion in April, after a downwardly revised 1.9% m/m decline in March, figures from the Commerce Department showed. Excluding transportation, factory orders increased 0.1% m/m, following March’s 0.9% m/m decline. April factory orders fell 24.3% y/y.

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Europe

* Eurozone GDP contracted 2.5% q/q in Q1 2009, matching a flash estimate and the deepest since records began in 1995, preliminary estimates released by Eurostat showed, following Q4’s 1.8% q/q decline. Household consumption was down 0.5% q/q while exports fell 8.1% q/q and imports declined 7.2% q/q, all the sharpest since records started in 1995. Investment declined 4.2% q/q after Q4’s downwardly revised 4.3% q/q decrease, the deepest since 1995. Government expenditure was unchanged q/q. The eurozone economy shrank 4.8% y/y in Q1, deeper than an initially estimated 4.6% y/y contraction, following Q4’s 1.7% y/y decline.

* The Markit econozone composite PMI increased more than expected to 44.0 in May from 41.1 in April, final May PMI data by Markit Economics showed, indicating euro-area manufacturing and service industries contracted at a slower pace. The services PMI improved to 44.8 in May from 43.8 in April, while the manufacturing PMI increased to 40.7 from 36.8.

* Eurozone producer prices fell a more-than-expected 1.0% m/m in April after a 0.7% m/m decline in March, according to PPI data from Eurostat. April PPI fell a slightly more-than-estimated 4.6% y/y, the largest drop since records began in January 1981, following March’s upwardly revised 2.9% y/y decline.

* The Markit German PMI was revised to 45.2 for May, down from a previously reported 46.0 but up from April’s 43.8, indicating Germany’s services sector contracted at the slowest rate in 3 months, according to final May PMI figures by Markit Economics.

* The CIPS/Markit services PMI rose more than anticipated to 51.7 in May from 48.7 in April, according data from the Chartered Institute of Purchasing and Supply and Markit Economics. Above the 50-point mark, the May PMI indicates the UK services sector expanded for the first time in a year, adding to signs of a UK economic recovery.

* The Nationwide UK sentiment index increased more than expected to 53 in May, indicating UK consumer confidence rose to the highest level in six months, following April’s upwardly revised 51, data from Nationwide Building Society showed.

Asia-Pacific

* Australia’s GDP unexpectedly rose 0.4% q/q in Q1 2009 after a downwardly revised 0.6% q/q contraction in Q4 2008, not slipping into a recession according to technical definitions of two consecutive quarters of declining GDP, according to figures from the Australian Bureau of Statistics. The Q1 GDP unexpectedly grew 0.4% y/y, following Q4’s upwardly revised 0.8% y/y rise.

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* The AiG/Commonwealth Bank performance of services index improved for a third consecutive month in May, increasing to 39.9, from 39.8 in April; still, remaining below the 50-point mark indicating contraction in Australia’s services sector for a fourteenth straight month, the Australian Industry Group and Commonwealth Bank reported.

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 Buy Buy None None Buy None
Current 1.4157 95.95 1.6306 1.0707 1.1117 0.8003 135.80
Start Position 1.3149 95.69 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 1.6500 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

03.06.2009