Dollar and Yen Surge on Extremely Volatile Trading

* The dollar and yen surged on Thursday while stocks, interest rates and commodities plunged on concern European leaders are not effectively solving the region’s debt crisis. The European Central Bank maintained its key interest rate at 1.00%, as expected. ECB President Jean-Claude Trichet said the ECB Governing Council did not discuss buying government debt today, adding that Spain and Portugal do not face the same challenges as Greece. We believe the Federal Reserve needs to meet growing dollar demand as the higher dollar overvalues dollar-denominated assets and pushes prices lower. The S&P 500 fell 37.75 to 1,128.15, recovering from a much sharper sell-off blamed on erroneous sell order. Technically, even if that is true, the stock market is likely to test today’s low again before moving higher. The euro plunged for a fourth straight day. Greece’s parliament approved austerity measures demanded by the EMU and IMF as a condition of a ?110 billion bailout. The USD/JPY dropped from 94 to 88 before recovering; this may have caused the huge intraday decline in the stock market, as investors exited carry trades. Sterling broke its 1.50 support ahead of UK election results. The latest UK election polls indicated a victory for the Conservative Party, but the Tories may be unable to win an absolute majority in parliament. The Australian and Canadian dollars plunged as risk appetite and growth outlook plummeted.
* The dollar index rose strongly for a fourth consecutive day. After breaking its steep uptrend, the index has risen 13 out of the last 16 trading days on increasing sovereign default risk. Up about 14% since its December low, the index is currently at its highest level in a year and will likely test the 85-area resistance. If this is broken, the index will likely rise to the upper trading band in the trading channel.

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Financial and Economic News and Comments

US & Canada

* US nonfarm productivity increased at a 3.6% q/q annualized rate in Q1 2010, higher than expected but the slowest pace in a year, after rising at a downwardly revised 6.3% q/q annualized pace in Q4 2009, according to preliminary Q1 data from the Labor Department. Q1 nonfarm productivity rose 6.3% y/y, the largest year-on-year gain since 1962. Real compensation per hour in the nonfarm sector increased at a 0.4% q/q annualized rate in Q1 but declined 0.1% y/y. Unit labor costs fell more than expected at a 1.6% q/q annualized rate in Q1 after falling at a revised 5.6% q/q annualized pace in Q4. Q1 unit labor costs decreased 3.7% y/y.
* US initial jobless claims in the week ending May 1 fell 7,000 to as forecast 444,000, a third consecutive fall and the lowest level in a month, from the previous week’s upwardly revised 451,000. The 4-week moving average declined 4,750 to 458,500. Continuing claims in the week ending April 24 dropped 59,000 to 4,594,000 from the preceding week’s upwardly revised 4,653,000. The 4-week moving average of those continuing claims increased 8,000 to 4,649,000. The insured unemployment rate for the week ending April 24 was unchanged at 3.6%.

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* Canadian seasonally adjusted building permits rose a more-than-anticipated 12.2% m/m to C$6.33 billion ($6.05 billion) in March, the first gain in five months and the highest since September 2008, after a revised 0.7% m/m decline in February, data from Statistics Canada showed, led by increases in multi-family and industrial building permits. March building permits jumped 38.9% y/y, a sixth straight year-on-year gain.

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* Canada’s Ivey PMI rose for a fourth consecutive month to a higher-than-expected 58.7 in April from 57.8 in March, indicating purchases in Canada’s public and private sectors were higher than the prior month, according to data from the Richard Ivey School of Business and the Purchasing Management Association of Canada. The employment index advanced to 54.0 from 51.6, showing April employment was higher than the previous month and above the 50 level for the second time since September 2009.

Europe

* Germany’s seasonally adjusted manufacturing orders increased a more-than-expected 5.0% m/m in March, the second gain in three months, after no change in February, according to data from the Federal Ministry of Economics and Technology. March manufacturing orders rose 26.1 y/y nsa, a fifth consecutive year-on-year gain, following a 24.5% y/y February advance.
* The CIPS/Markit UK services PMI unexpectedly declined to 55.3 in April from 56.5 in March, indicating the UK service sector expanded for a 12th straight month but at a slower pace, according to data from the Chartered Institute of Purchasing and Supply and Markit Economics. Service-sector employment climbed for a second consecutive month and at the fastest pace for over two years, while price pressures rose to the highest since September 2008.
* Switzerland’s consumer prices were up a marginally higher-than-expected 0.9% m/m in April, a third consecutive month-on-month advance, after a 0.1% m/m increase in March, according to CPI data from the Swiss Federal Statistical Office. The consumer-price inflation rate was unchanged at 1.4% y/y.

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Asia-Pacific

* Australia’s trade deficit widened to A$2.082 billion ($1.858 billion) in March, swelling for a third consecutive month, from a revised A$1.701 billion shortfall in February, figures from the Australian Bureau of Statistics (ABS) showed, in line with our forecast. Imports, rising faster than exports, advanced 3.0% m/m to A$22.524 billion in March. Exports increased 2.0% m/m to A$20.441 billion.
* Australian retail sales grew a less-than-expected 0.3% m/m to A$19.92 billion ($17.78 billion) in March, the second gain in three months, after a revised 1.2% m/m decline in February, according to a separate report released by the ABS. March retail sales rose 2.9% y/y nsa, following a 3.4% y/y February advance. Retail sales, adjusted to remove inflation, were up 0.1% q/q in Q1 2010 after a downwardly revised 1.0% q/q increase in Q4 2009.

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Source: Hans Nilsson

06.05.2010