The optimism surrounding �green shoots� has taken a back seat to concerns over the financial sector. Yesterday Fed’s Kohn warned that while there were signs of a recovery in the US, house prices remaining weak and a restructuring of the US car industry would add to problems in the economy. In Australia, the RBA today released the minutes to the April Board Meeting, when the bank delivered a 25bp rate cut taking the cash rate to 3.00%. The Bank of Canada will deliver its rate announcement today and markets are expecting policy makers to hold at .50% and limited comments on QE to emerge.
[B]News and Events:
[/B]
The optimism surrounding �green shoots� has taken a back seat to concerns over the financial sector. However, the equity markets have reversed early losses and US stock futures are pointing to a higher open. Commodities are following what seems to be a rapid reversal of negative sentiment with gold and crude currently trading higher. The USD and JPY, both primary recipients of the risk aversion trades, are now coming under significant selling pressure. The EURUSD rallied off the 1.2900 level and is currently trading at 1.2957, while the AUD is making daily highs against the USD after yesterday�s weakness. Overall we do not see the recent rash of risky asset selling to be the reversal of the last month�s trend, but just a much needed short term correction (in light volume). Despite the signs that global growth stabilization are spreading (although Market News reported that the IMF will downgrade global growth significantly from its forecast presented at last month’s G20), and corporate earnings printing higher then expectations, the concerns over US �stress tests� has sparked this most recent bout of risk-reduction. US banks’ have been trying to convince investors of their liquidity positions but ongoing worries over solvency are hurting the sector and confidence. Sentiment was also hurt after a major Bank of America reported strong profits but warned of worsening conditions in the near future and the need to increase provisions for credit losses. In addition, rumors that the treasury and regulators are arguing about how to actually release the results scheduled for May 4th give the impression that there are some dark spots. US officials are well aware of the systemic risk should even a few of the banks fail to pass, especially since the methodology of the stress test have not been fully disclosed to the markets satisfaction. Yesterday, Fed’s Kohn warned that while there were signs of a recovery in the US, house prices remained weak and a restructuring of the US car industry would add to problems in the economy. In Australia, the RBA today released the minutes to the April Board Meeting, when the bank delivered a 25bp rate cut taking the cash rate to 3.00%. Although the minutes highlight a Board being divided over whether to cut rates by 50bp or hold, which likely resulted in the 25bp compromise, the tone of the minutes now leads us to believe the RBA will be on hold in the coming months. Despite downgrades in the economy Australia still is fairing better than developed markets peers and should keep the AUD supportive. The Bank of Canada will deliver its rate announcement today and markets are expecting policy makers to hold at 0.50% and limited comments on QE to emerge. As pressure to exploit the unconventional options increase, we expect to see the CAD come under selling pressure.
[B]
Today’s Key Issues (time in GMT):[/B]
07:30 SEK Riksbank interest rate announcement, % Apr hold at 3.50%
08:30 GBP CPI, % m/m (y/y) Mar 0.2 (2.9) exp, 0.9 (3.2) prior
08:30 GBP Core CPI, % m/m (y/y) Mar (1.5 y/y) exp, 0.7 (1.6) prior
08:30 GBP RPI, % m/m (y/y) Mar -0.2 (-0.6) exp, 0.6 (0.0) prior
08:45 GBP BoE executive director of markets Paul Fisher attends Treasury select committee hearing
09:00 EUR ZEW economic expectations index Apr 1.0 exp, -3.5 prior
09:30 GBP BoE MPC member Andrew Sentence speaks at the Agricultural Engineers Association
13:00 CAD BoC interest rate announcement, % hold at .50%
17:30 EUR ECB Vice-President Papademos presents the Annual Report 2008 to the European Parliament’s Committee on Economic and Monetary Affairs
[B]The Risk Today: [/B]
[B]EurUsd:[/B] Firm floor comes in at 1.2900 as a crucial level we tested several times yesterday and this morning. Furthermore the upper extremity for the current range stands at 1.2954. General trend continues to be bearish as the dollar gains on a return to risk aversion ahead of the results of the stress tests due on May the 4th. A break out of the range would set sights on 1.2986 then 1.3016 � however tentative moves higher (extending the range) have failed to hit crucial levels. However, the resumption of the general trend on March 19th has led to a 5 wave formation which (in Elliot wave�s theory) would see a 3 wave A-B-C reversal; this dynamic is not to be discounted. This said a bias for a strong greenback and break below 1.2900 would allow for 1.2834 then 1.2732 with a long term view for 1.2517 levels.
[B]GbpUsd:[/B] Bleak CPI numbers are expected out of the UK today, however how much of that is already priced in to the recent 1.5067 � 1.4480 decline that started on the 15th of April? Yesterday brought on a steep decline as risk sensitive currencies moved substantially, Cable hitting all our stops and extending as low as 1.4469. Current 1.4582 � 1.4469 range sees a break for 1.4616 (50% retracement from 1.4763) as Sterling finds a bottom. On the downside a resumption of Sterling biased weakness would retest current support and extend to 1.4353.
[B]UsdJpy:[/B] Calls for a change in risk derived Yen dynamics prove somewhat premature as pair continues to weaken in the light of uncertainty returning to the markets. Predicted low at 98.14 materialized at 97.66. Continued risk aversion as earnings season moves on would focus 97.07 then 95.96 as support levels. This said, we maintain a light bullish bias in the long-term with initial resistance at 98.45 which would then allow for 99.75 then 100.74.
[B]UsdChf:[/B] We flirted with the 23.60% retracement at 1.1678 on the 1.1465 � 1.1744 move and are set to do it again. We see the pair trade sideways as we await further data and developments on the risk front. A return to risk appetite would see the pair trade lower towards 1.1647 and 1.1465 for a longer term view. On the upside (and as risk aversion continues) our initial target stands at 1.1744 then 1.1784.
[B]Resistance and Support:
[/B]
By[B] Peter Rosenstreich [/B]- ACM Advanced Currency Markets, Geneva, Switzerland