NEWS / Foreign Exchange

A data swirl

Contents

• The week ahead - A data swirl
• Market movment matrix
• Informa global markets calendar for the week ahead

The week ahead

A data swirl

The broad Dollar index recovery has started to stall out ahead of the 82.50 level as short covering pauses. However, the Loonie has outperformed as markets take on board the implications of the recent strong run of data for next week??™s BoC policy meeting (Tuesday). The tone of the last policy announcement was slightly more hawkish and the Loonie has moved to factor in a potential turnaround in central bank policy even as soon as next week. Unchanged rates could lead to a kneejerk correction, although the data stream during the week should continue to leave a broad underlying tone to the Canadian unit.

The latter includes March employment and earnings data Tuesday, April industrial and raw material prices with the March/Q1 GDP starring on Thursday. Strong March economic data indicate a good-sized gain in monthly GDP report. Thursday, although Q1 got off to a slow start, it has picked up steam and this is seen propelling Q1 GDP into the 3.5%-4.0% range. If this proves to be the case, it could be disturbing for the BoC against the background of the recent Monetary Policy

Report expected only 2.5% Q1 GDP growth and an the economy already at capacity. The price/earnings data has also been robust with earnings outpacing CPI. At the same time, the Q1 Current account outturn (Wednesday) will underline the strong external foundations for the Loonie.

Staying with the most recent outperforming currencies, the Nokkie slots in just behind the Cad over the past week as the Norges Bank meeting looms Wednesday. This should satisfy market expectations of a 25 bp hike to 4.25% after last month??™s pause, and maintain a hawkish bias. Local data (April retail sales Thursday and May unemployment Friday) are likely to support the bias with another increase on the cards. The Norges bank predicts benchmark policy rates in the 4%-5% range by the time of the next inflation report (27 June). This suggests that the May and June policy meetings (the latter at same time as the next Inflation Report) should see the tightening bias resume. To this extent, the Norges Bank will be opening up clear blue water between it and the more cautious ECB. Staying in Scandinavia Sweden sees a slate of May business confidence (Monday), April retail sales (Tuesday) and May ISM (Friday). With Q1 GDP Thursday, all this should highlight the underlying strength of the Swedish economy and could help the catch up plays against the Nokkie.

The heavy US slate contains non-farm payrolls Friday While the headline is only expected to tick up slightly from the prior print, the April report hardly qualified as good news with the broad trend consistent with a slower trend in hirings. This is likely to continue through Q2. In addition, there are press reports that the BLS data is overstating the jobs picture. Other components also look to be becoming more downbeat. In addition, the April report contained the first downward revision since May 2006. Ahead of this come the usual precursors with ADP employment change Wednesday.

The NFP comes alongside the usual rash of data that includes the Chicago and national ISMs (Thursday/Friday), the US April PCE combo Friday, alongside pending April home sales. Unlike pending home sales, the national ISM showed a bounce in April, although the recent erratic behaviour of the Chicago ISM suggests that the series may have encountered some data problems - the April read fell back more into line with softer other regional surveys. The PCE data has been above trend and looks unsustainable, so some adjustment may occur. But the focus will also be on the Fed??™s favoured PCE measure of core inflation. May consumer confidence Tuesday is followed by the second take at Q1 GDP Thursday with speculation that the paltry initial outturn could be revised down further. Into all this is thrown the minutes of the May FOMC, although given the statement no surprises are expected.

In a holiday shortened week (UK, US and some other European countries are off Monday) there is a wide spread of releases. Friday see the spate of EMU wide May manufacturing PMIs. While the April numbers stalled, the manufacturing sector remains well in the expansion zone and this is unlikely to change. Ahead of this (Thursday) are the broad May EMU sentiment indicators. All up, April was a bit of mixed bag, although the headline is sitting just off 7-year highs. The fundamental backdrop remains supportive into May.

For the ECB, April M3 Wednesday and May flash CPI Thursday will be noted ahead of the following week??™s policy meeting. Headline CPI has been contained below the 2.0% ceiling largely on base effects for the eighth successive month, and this should continue in May. Some lead on this may come from the German preliminary CPI Tuesday which is expected to remain flat in y/y terms. EMU M3 is likely to remain in double figures after hitting a record 10.9% last month and while some corrective forces may come into play after the run of ECB tightening, it is unlikely to be enough to change ECB rhetoric. Note also the French April unemployment rate Tuesday and the May read from Germany Thursday. Both should underline the robust employment dynamics

In contrast to EMU, the UK PMI Friday could continue to ease back on fears of even higher interest rates. The output component shot up massively in April, but the jobs component is only a whisker away from the 50 "boom/bust" level. Meanwhile, house price releases during the week are likely to register notable monthly rises, and Gfk consumer confidence (Thursday) stabilise after April??™s uptick. Likewise for Friday??™s CBI distributive trades report. Elsewhere, the Swiss SVME PMI could edge up from already robust levels. But Q1 GDP (Thursday) should moderate in line with leading indicators, and May CPI less punchy, leaving SNB expectations intact.

Japanese markets are heavily laden with the usual deluge of month end data. Anecdotal indicators suggest the BoJ's CSPI will remain impressively firm as service prices likely increase when companies revise their fees in April. On Tuesday unemployment is set to remain at an 8 year low, but household spending growth could remain weak on the back of disappointingly sluggish wage growth. April retail sales are set to remain well in the red, contrasting with April preliminary industrial output should post stronger results after activity unexpectedly fell in March. METI recently revised down but still kept to its forecasts that production was on "a moderately rising trend". On Thursday a further insight into the manufacturing sector outlook should emerge through the May PMI. April??™s wage report will be the real key after earnings remained sluggish. Housing starts is otherwise set to remain firm.

Australia dominates the Antipodeans with April retail sales, building approvals private sector credit and trade data all due; as well as Q1 CAPEX in the lead up to Q1s key GDP release and RBA Board the following week. April retail sales (Wednesday) are expected to remain healthy; whilst credit growth on Thursday is set to have remained brisk with housing credit is showing renewed strength. However, Thursday??™s April trade balance could provide a reality check for the Dollar by being well in the red as exports continue to be affected by cyclones and imports continue their uptrend on the back of firm domestic demand. Favourable business conditions are likely to see CAPEX rising solidly.

In New Zealand; eyes will be on whether higher mortgage rates have started to cool the heady April credit growth (Monday). The NBNZ business survey on Thursday will also be of keen interest as it is predominantly the first real indicator that covers the April rate hike.