Dollar Surges on Debt Deflation Risks

* The dollar surged against its counterparts on Tuesday as debt deflation risks increased. The US dollar index traded at the highest level in a year as demand for dollar liquidity rose. Investors worried about a possible contagion from the Greek debt crisis and slowing Chinese economic growth. The S&P 500 plunged 28.66 to 1,173.60. US interest rates dropped and commodity prices fell. The yen, while little changed against the dollar, gained versus other key currencies as investors exited carry trades. The euro fell as interest rates in Greece and other peripheral countries surged after Germany’s ruling coalition stepped up calls for allowing the “orderly” default of euro-region member states burdened with high debt. Sterling fell ahead of the UK election, pressured by the weaker-than-expected UK consumer credit and mortgage lending. The Canadian dollar fell while risk aversion rose.
* The AUD/USD fell after the Reserve Bank of Australia signaled today’s interest-rate increase, the sixth in seven meetings, may be the last for some time. The RBA boosted the overnight cash rate target to 4.50% from 4.25% and said borrowing costs are now around “average,” signaling it may slow the pace of rate rises. The decline in the HSBC/Markit China manufacturing PMI to a 6-month low also represents a risk to the Australian economic expansion as China is the biggest buyer of Australian commodities. After breaking its short-term uptrend, the AUD/USD will likely test the 0.90-area support. If this is broken, the pair will drop significantly.

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Financial and Economic News and Comments

US & Canada

* US pending home sales grew a more-than-estimated 5.3% m/m in March, the third gain in four months, after an upwardly revised 8.3% m/m increase in February, with the NAR US pending home sales index, a leading indicator for the housing sector, rising to 102.9 from February’s upwardly revised 97.7, according to a report from the National Association of Realtors. The gain partly reflected buying ahead of the expiration of the home buyer tax credit. March pending home sales rose 21.1% y/y, following an upwardly revised 17.4% y/y February advance.

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* US factory orders rose a more-than-expected 1.3% m/m to $391.5 billion in March, a seventh straight monthly rise and the 11th gain in 12 months, after an upwardly revised 1.3% m/m increase in February, figures from the Commerce Department showed. Excluding transportation, factory orders grew 3.1% m/m to $350.9 billion, the largest rise since August 2005, following February’s upwardly revised 1.5% m/m advance. Factory orders rose 15.5% y/y in March; ex-transportation orders rose 11.3% y/y.

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Europe

* Eurozone producer prices grew a slightly less-than-expected 0.6% m/m in March, a sixth consecutive month-on-month gain, after a 0.1% m/m increase in February, according to PPI data from Eurostat. March PPI rose as forecast 0.9% y/y, the first year-on-year rise since December 2008, following a revised 0.4% y/y February decline.

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* Germany’s retail sales, adjusted for calendar and seasonal variations, fell a more-than-expected 2.4% m/m in March, the second fall in three months, after an upwardly revised 1.1% m/m February increase (vs. previously reported -0.4% m/m), according to data from the Federal Statistical Office. March retail sales grew 2.7% y/y, the first year-on-year gain in 11 months, following a revised 0.4% y/y February decline.

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* The number of loan approvals for UK house purchase increased to 48,901 in March, the first advance in four months, from a downwardly revised 46,882 in February, according to figures from the Bank of England. Net lending secured on dwellings increased £0.3 billion ($0.46 billion), the least since July 2009, following February’s upwardly revised £1.8 billion rise. Consumer credit was up £0.3 billion in March, below an upwardly revised £0.6 billion increase in February. The March figures were lower than anticipated.
* The UK manufacturing PMI increased to a higher-than-expected 58.0 in April from an upwardly revised 57.3 in March, indicating UK manufacturing expanded for a seventh straight month to the highest level since September 1994, according to PMI data from Markit Economics and the Chartered Institute of Purchasing and Supply. Manufacturing employment grew at 3-year high and new exports growth reached a series record.

Asia-Pacific

* The HSBC/Markit China manufacturing PMI declined to 55.4 in April from 57.0 in March, today’s report by HSBC Holdings Plc and Markit Economics showed, suggesting China’s manufacturing expanded at the slowest pace in six months. Meanwhile, the Chinese government manufacturing PMI increased to 55.7 in April from 55.1 the prior month, PMI data released on May 1 by the Federation of Logistics and Purchasing showed, indicating China’s manufacturing grew for a 14th straight month at a slightly faster pace. Different methodologies of seasonal adjustment may be an explanation for the conflicting results.

Source: Hans Nilsson

04.05.2010