Euro Touches 1-Year Low on Spain’s Downgrade

* The dollar traded mixed on Wednesday. Standard & Poor’s downgraded Spain’s credit rating to AA from AA+. The Federal Open Market Committee reiterated its intention to keep interest rates “exceptionally low” for an “extended period” and saw positive signs in the labor market. The S&P 500 index was up 7.65 to 1,191.36, between the important 1180-area support and 1220-area resistance. The yen reversed yesterday’s gain. Sterling fell for a second day after former Bank of England policy maker Timothy Besley stated that the UK economy remained in a “fragile state” and inflation is likely to stay under control. The Australian and Canadian dollars rose as equity and commodity prices recovered. The aussie was also supported by stronger-than-expected Australian consumer-price inflation.
* The EUR/USD touched the lowest level in one year following Spain’s credit-rating downgrade and speculation Greece may need more aid than estimated. However, the pair reversed losses after German Chancellor Angela Merkel, who expressed frustration with Greece’s commitment to an austerity program, pledged to step up efforts to overcome the Greek fiscal crisis. European Central Bank President Jean-Claude Trichet stressed that the eurozone stability is “impacted” by the delays in delivering the Greek aid, “underscoring the need for action.” Despite its late recovery today, the EUR/USD will likely fall further. Strong support is in the 1.29-1.30 area and resistance in the 1.33 area.

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Financial and Economic News and Comments

US & Canada

* The MBA US market composite index, a measure of mortgage loan application volume, declined 2.9% in the week ending April 23 after a 13.6% rise a week earlier, the Mortgage Bankers Association reported. The refinance index fell 8.8%, but the purchase index rose 7.4% to the highest level since October 2009.
* The Federal Open Market Committee maintained the fed funds target rate at a range of 0 to 0.25%, as forecast, expecting that “economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” The Fed seems upbeat on the overall US economy and labor market, asserting that “information received since the Federal Open Market Committee met in March suggests that economic activity has continued to strengthen and that the labor market is beginning to improve.” Kansas City Fed President Thomas Hoenig dissented for a third consecutive meeting. He stressed “that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to a build-up of future imbalances and increase risks to longer run macroeconomic and financial stability, while limiting the Committee’s flexibility to begin raising rates modestly.”

Europe

* Germany’s consumer prices slipped 0.1% m/m in April, the first month-on-month decline in three months, after a 0.5% m/m increase in March, preliminary April CPI data from the Federal Statistical Office showed. The consumer-price inflation rate decelerated to 0.9% y/y from March’s 1.1% y/y. The harmonised index of consumer prices (HICP), calculated for European purposes, declined 0.1% m/m in April after a 0.6% m/m advance in March. The HICP rate slowed to 1.0% y/y from March’s 1.2% y/y.

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Asia-Pacific

* Japan’s retail sales unexpectedly rose a seasonally adjusted 0.8% m/m in March, a third consecutive month-on-month rise, after a 0.9% m/m advance in February, according to data from the Ministry of Economy, Trade and Industry. Retail sales grew a more-than-expected 4.7% y/y, a third straight year-on-year gain and the largest since 1997, following February’s 4.2% y/y rise. Sales at large-scale retail stores fell as forecast 5.0% y/y in March, a 24th straight year-on-year slide, after a 4.0% y/y decline in February.

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* Australia’s consumer prices rose a slightly more-than-expected 0.9% q/q in Q1 2010, a fifth consecutive quarterly rise, after a 0.5% q/q increase in Q4 2009, CPI data from the Australian Bureau of Statistics showed. The consumer-price inflation rate accelerated to 2.9% y/y in Q1, the highest since Q4 2008, from 2.1% y/y in Q4, increasing speculation the Reserve Bank of Australia will keep raising its key interest rate.

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* The Reserve Bank of New Zealand maintained the official cash rate at 2.50%, as forecast. RBNZ Governor Alan Bollard said New Zealand’s economy is “recovering broadly as expected and growth is predicted to pick up further through 2010,” reiterating that the central bank expects to “begin removing policy stimulus over the coming months, provided the economy continues to evolve as projected.” His statement read: “The increased wedge between the OCR and lending rates, as well as a steeply positive-sloped interest rate curve, is expected to make OCR increases more effective than in the past. Accordingly, these factors should reduce the extent to which the OCR will need to be increased relative to previous cycles.”

Source: Hans Nilsson

28.04.2010