FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
Risk appetite rose steadily for most of the Asia trading session, but took a turn for the worse as the start of the European session drew near. USDJPY made some upward progress after the FOMC minutes helped keep US yields supported. EURUSD traded 1.4212-1.4306, USDJPY 81.38-81.81. The minutes themselves were not hugely surprising as Fed Chairman Bernanke had already laid out a less dovish stance at his first press conference. Officials remained cautious on growth, though they did note the recovery would “strengthen over time.” But market participants may have been surprised at the extent to which exit strategies were discussed, as officials laid down several guiding principles for policy normalization, even though the minutes gave no indication that any decisions were imminent. Nevertheless, the dollar received a modest boost from the minutes and the S&P 500 closed up +0.88%. St Louis Fed president Bullard said the Fed is likely to stay on hold until at least late 2011. We now await comments from the more dovish members of the committee, regional Fed presidents Dudley and Evans. Upcoming data releases include jobless claims, existing home sales, leading indicators and the Philadelphia Fed manufacturing index.
EUR
ECB Governing Council member Constancio said a Greek debt restructuring is the last resort, which suggests he would not rule it out completely. Meanwhile, ECB Executive Board member Stark said it is an illusion to think Greek debt restructuring would help solve the problems the country faces. Rather, he said it would reduce Greek bank liquidity and wipe out bank capital. Greek Finance Minister Papaconstantinou does not see any magic restructuring scenarios that would take Greece out of a crisis situation but said that Greece will continue with its fiscal austerity plans.
ECB Executive Board member Bini Smaghi said that Greece faces a choice between tough consolidation measures and disaster like Argentine-style default. He added that a soft-restructuring concept is unclear, and that nobody knows what it means exactly. He also said the Fed and the BoE, unlike the ECB, are financing state deficits, which is postponing consolidation in the US and the UK.
JPY
Japan’s Q1 GDP was much weaker than expected, falling -0.9% q/q (cons. -0.5%) and -3.7% y/y (cons. -1.9%). The tragic disaster on March 11 clearly played a role, although there is other underlying economic weakness too given this is the second successive quarterly contraction.
GBP
The minutes from the May 5 BoE policy meeting were more dovish than expected. There was no change in the vote split, which remained at 6-3 in favour of no hike. MPC member Sentance voted for a 50bp hike, and Weale and Dale for a 25bp hike. However, the minutes revealed that “Two of these members [Dale and Weale] regarded the matter as finely balanced and favoured only a small tightening in policy, given the weakness of the real economy and the uncertainty facing the outlook”. So it is clear that even the hawks are turning more cautious. With rate expectations pushed back we remain cautious on sterling, although a rate hike in August remains the base case of our analysts.
UK April jobless claims increased by +12.4k, well ahead of expectations for no change. UK March ILO unemployment rate came in at 7.7%, just lower than expectations for 7.8%..
NZD
Consumer confidence for May fell -1.3%, and wages in Q1 grew by a slower pace than expected, rising only +0.8% q/q (cons. +1.1%). Our Australian economics team notes that today’s data reduces the pressure for a near-term rate hike, but they stick to their view that the RBA will likely next hike in August.
TECHNICAL OUTLOOK
USDJPY targets 81.85.
EURUSD BEARISH As long as resistance at 1.4389 holds, focus is on the downside with initial support at 1.4121 ahead of 1.4048/21 support area.
USDJPY NEUTRAL Recovery targets 81.85; a break here would trigger a positive tone. Support lies at 80.94.
GBPUSD BEARISH Momentum is negative with focus on 1.6091; break though the level would expose 1.6046 and 1.6000. Initial resistance is at 1.6288.
USDCHF NEUTRAL Near-term resistance is at 0.8951, while break of 0.8784 has exposed 0.8708.
AUDUSD BEARISH While resistance at 1.0717 holds, expect losses towards 1.0506 ahead of 1.0443.
USDCAD BULLISH Pullback through 0.9684 has exposed 0.9600. Initial resistance is at 0.9759 ahead of 0.9794.
EURCHF BEARISH Pressure builds on 1.2485/33 support zone. Near-term resistance lies at 1.2614.
EURGBP NEUTRAL Violation of 0.8858 would favour upside, while a pullback through 0.8757 would open 0.8674.
EURJPY BEARISH Recovery holds below 116.90, which keeps our focus on the downside. Initial support is at 115.23 ahead of 114.29.
SCHEDULE
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