NEWS / Foreign Exchange

Special times in the financial markets

It??™s special times in the financial markets. The yield of the 10-year Notes vaulted above the 5 percent threshold and hopes that the Fed will cut rates this year are gone. The US equity markets have pulled back significantly and this time we can??™t blame the emerging Shanghai market. But the M&A are going through a historical flurry of activity as the appetite for risk remains high. On this milieu the dollar made a difficult upmove versus the majors, but plunged further against the commodity currencies. Focus on cross trading while the carry trades remain in good shape.

Past Week's Data and Events

United States

The dollar managed to reverse losses it made early last week to a spectacular rally versus the European currencies and by a lesser degree against the yen. Its strength came from the rising interest rates in the US, where the yield of the 10-year Notes climb above 5 percent for the first time in nearly 11 months.  That means the Fed is caught between a rock and a hard place, unable to cut rates to stimulate the weakening economy but possibly forced to hike rates to stave off inflation, and this would weaken the economy even further.

The commodity currencies are doing very well, unlike the majors, and this discrepancy should persist, albeit in a choppy manner, this week as well. Trading the crosses is the way to do it at this time.

The US data was all over the place and this lack of clarity reflects the reality our there.

Factory goods orders rose a smaller-than-expected 0.3 percent in April, but the March orders were revised upward to a 4.1 percent gain from the previously reported 3.1 percent. Ex-transportation, the orders expanded 0.7 percent after a 2.4 percent increase in March.

The dollar rallied briefly on news that the Institute for Supply Management's services index rose to 59.7 in May from 56.0 in April.  That was the strongest level since April 2006.

Productivity for the first quarter was revised down to an annual rate of 1 percent from the 1.7 percent pace reported last month.

On an irrelevant note, the trade deficit narrowed by a more than forecast 6.2 percent of $58.5 billion in April from a revised $62.4 billion in March.  Exports rose 0.2 percent and imports fell 1.9 percent. More importantly, the trade gap with China widened to $19.4 billion, the highest since January, from $17.2 billion in March. The deficit so far this year is up 19 percent from 2006. 

Initial jobless claims fell by 1,000 to 309,000 in the week ended June 2.

The White House Council of Economic Advisers, Treasury Department and Office of Management and Budget revised down a forecast for 2007 growth in gross domestic product to 2.3 percent this year from 2.9 percent.

The Eurozone

The euro/dollarsank further last week.

There was no reaction to news that the European Central Bank matched the market expectations and raised interest rates by a quarter-point to a six-year high of 4 percent in order to leash in inflation.

Germany manufacturing orders fell 1.2 percent in April and the March report was revised sharply downward to 1.1 percent from 2.4 percent.

German industrial production contracted 2.3 percent in April, the most in seven years, from March, when it expanded only 0.2 percent.  The slowdown in construction was responsible for the weak report.

The German trade surplus was 15.8 billion euros in April.

France's trade deficit almost doubled in April to 2.83 billion euros from 1.47 billion euros a month earlier. Exports were little changed at 33.34 billion euros, but imports expanded to 36.2 billion euros from 34.8 billion.

Italian gross domestic product rose expanded a more than expected 0.3 percent in the first quarter from the fourth quarter, when it unexpectedly grew 1.1 percent, the quickest rate since 1999.

The Eurozone service sector PMI rose to 57.3 in May from 57.0 in April.

The Eurozone retail sales rose only 0.2 percent April and the March report was revised downward to 0.4 percent from 0.5 percent.

Japan

Dollar/yen recouped losses last week to close little changed.

Japan's diffusion index of leading economic indicators fell to a preliminary 20.0 in April from a revised 33.3 in March. The lagging index fell to 50.0 in April from a revised 66.7 in March. But the coincident index rose to 66.7 in April from a revised 9.1 in March.

The pair rallied on Friday on news that Japan's machinery orders rebounded only 2.2 percent in April after falling 4.5 percent in March.

The UK

Sterling/dollar sank further last week.

UK service sector PMI was unchanged at 57.2 in May.

Meanwhile, the BRC sales expanded only 1.8 percent on a yearly basis.

The Bank of England held its official interest rate steady at 5.5 percent on Thursday, after lifting rates last month to leash in strong inflation trends.

UK industrial production rose 0.3 percent in April.

Canada

Dollar/Canada made a weak recovery last week and should attempt the same this week.

Canada's unemployment rate remained at a 33-year low of 6.1 percent for a fourth month in May, but 9,300 new jobs were created.

The trade surplus widened to C$5.8 billion in April from C$5.1 billion in March.

New-home starts rose to 229,700 units on an annual basis in May from 211,900 in April.

Purchasing activity in the Canadian economy rose to 62.7 in May from 60.9 in April, according to the Ivey Purchasing Managers Index. The employment index rose to 61.7 in May from 61.2 in April, while the prices index rose to 68.8 percent from 64.5 in April.

Canadian building permits fell by a more-than-expected 8.4 percent in April after the huge 26.5 percent gains in March. Housing permits fell by a tamer 1.4 percent.

Switzerland

Dollar/Swiss manage to reverse sharp losses last week and should attempt to pad its gains this week.

Australia

The Aussie/dollar rallied aggressively for the second week as strong data strengthened the case for a rate hike.

Australia's current account gap narrowed to A$15.38 billion in the first quarter from a revised A$15.5 billion in the fourth quarter. This owed to rising exports.

Employment rose 39,400 in May after gaining 34,900 in April and this helped the jobless rate to drop to 4.2 percent, the lowest in nearly 33 years.

Gross domestic product rose 1.6 percent in the first  quarter and 3.8 percent in from a year earlier.

Reserve Bank of Australia left the overnight cash rate target at 6.25 percent for a sixth meeting. 

This Week's Data and Events

United States

The US economic calendar will start on Wednesday with the release of the Retail sales report for May and of the Business inventories report for April.

The Beige Book report for June 27-28 FOMC meeting is due on Wednesday as well.

Thursday will see the release of the PPI report for May.

On Friday be on the lookout for the release of the CPI report for May, Industrial production and Capacity utilization report for May, the preliminary University of Michigan sentiment report for June, and of the New York Fed index report for June.

The TIC international portfolio balance report for April is due on Friday as well.

The Eurozone

The Eurozone economic calendar will open on Monday with the release of the French and Italian Industrial production reports for April.

The Eurozone Industrial production report for April is due on Tuesday.

The Eurozone Trade balance report for April is due on Friday.

Japan

Japan??™s economic calendar will start on Monday with the release of the second estimate of the first quarter GDP.

Tuesday will see the release of the Consumer confidence report for May.

The final report of the Industrial production for April is due on Wednesday.

The Tertiary index for April is due on Thursday.

The Bank of Japan will leave rates unchanged on Friday.

The UK

The UK economic agenda will begin on Monday with the release of the PPI input and output reports for May and of the DCLG house prices report for April.

The RPI report for May and the trade balance report for April are due on Tuesday.

Wednesday will see the release of the French preliminary CPI report for May.

Also on Wednesday, be on the lookout for a strong Claimant count report for May and for the RICS house price balance report for May. 

The Retail sales report for May is due on Thursday.

Canada

The Canadian economic calendar will start on Monday with the release of the New house prices report for April and of the Capacity utilization report for the first quarter.

Wednesday will see the release of the Manufacturing shipments report for April.

Overview

Euro/dollar
Last week's range: 1.3322 ??“ 1.3553 (Down)
Previous range: 1.3390 ??“ 1.3535 (Mixed)

The euro/dollar fell from a three-week high to a two-month low last week. The medium term outlook is slightly negative.

Initial support is at 1.3322.  Below this the pivot level there is support at 1.3275.  Distant support is at 1.3125.

Initial resistance is seen at 1.3450. A close above 1.3553 would signal another attack on the upside to 1.3610. If 1.3679 gives way, then look for a test of the distant resistance at 1.3805.

NEAR-TERM:Mixed with bearish bias
MEDIUM-TERM:Bearish
LONG-TERM: Bullish

Dollar/yen

Last week's range: 120.79 ??“ 122.11 (Down)
Previous range: 121.19 ??“ 122.14 (Up)

Dollar/yen trimmed losses from a two-week low of 120.79 to the tune of 78.6%. Sideways to higher trading is likely this week.

Above 122.18 the next resistance remains at 122.50 from another 50-point pivot, which targets 122.00 and 123.00. Distant resistance is at 124.00.

Initial support is 121.55. Key support level remains at 121.05 from a 50-point pivot, which targets 120.55 and 121.55. Below 120.00, strong support comes at 119.65 from another 50-point pivot that targets 119.15 and 120.15. Next level is 118.85. Distant support remains at 118.25 from a 50-point pivot that targets 117.75 and 118.75. 

NEAR-TERM: Mixed to slightly bullish 
MEDIUM-TERM: Bullish
LONG-TERM: Bullish

Sterling/dollar

Last week's range: 1.9623 ??“ 1.9968 (Down)
Previous range: 1.9734 ??“ 1.9900 (Mixed)

Sterling/dollar fell to a two-month low following intense sales on Thursday and Friday. The medium term outlook is slightly bearish, but only a close below 1.9650 would confirm this view.

If this level gives way on a closing basis, look for further support at 1.9623. A close below this level would signal a further slide to 1.9545. Distant support follows at 1.9420. 

Immediate resistance is at 1.9770. If it breaks, then look for a further rebound to 1.9870. Next level is 1.9925. Above 2.0000, resistance remains between 2.0131 and 2.0151, but this is very unlikely. 

NEAR-TERM: Mixed with bearish bias
MEDIUM-TERM:Bearish
LONG-TERM:Bullish

Dollar/Swiss franc

Last week's range: 1.2149 ??“ 1.2367 (Up)
Previous range: 1.2200 ??“ 1.2329 (Mixed)

Dollar/Swiss rallied franc from a three-week low to a near four-month high. The medium term outlook is slightly bullish.

Above the resistance at 1.2367 there is good resistance is at 1.2425.  Distant resistance looms at 1.2572.

Immediate support is at 1.2255. Strong support follows at 1.2210. Below 1.2170, the next levels are 1.2095 and 1.2065. Next levels are 1.1996 and 1.1945.Dollar/Swiss franc then has strong support at 1.1885.

NEAR-TERM: Mixed with upside risk
MEDIUM-TERM:Slightly bullish
LONG-TERM: Bearish

Dollar/Canada

Last week's range: 1.0550 ??“ 1.0713 (Mixed)
Previous range: 1.0600 ??“ 1.0837 (Down)

Dollar/Canada recovered from a new 30-year low, but didn??™t fly anywhere fast. More sideways to higher trading is likely.

Immediate resistance is at 1.0713.  The pair then retains resistance at 1.0755. Next level is pegged at 1.0905.  Distant resistance is now seen at 1.1065.  

Initial support is at 1.0585.  Below 1.0550 there is support at 1.0483 from a Gann extension level. Strong support follows at 1.0430 from a long-term Gann retracement and at 1.0415 from a channel line.  Distant support looms at 1.0245 from a Fibonacci extension level.

NEAR-TERM: Mixed
MEDIUM-TERM: Bearish
LONG-TERM: Bearish 

Euro/yen

Last week's range: 161.78 ??“ 164.59 (Down)
Previous range: 162.96 ??“ 164.29 (Up)

The euro/yen fell to a one-month low from an all-time high. It looks like a bearish reversal, but there hasn??™t been any confirmation yet. Choppy trading is favored.

Immediate support is now seen at 161.78. Only a close below the pivotal level at 161.10 would signal a significant decline. The next level would become 159.95.

Initial resistance is now seen at 163.20. The next level is 163.90. Above 164.80, there is resistance at 165.35. Distant resistance still looms at 166.95.

NEAR-TERM: Mixed 
MEDIUM-TERM: Bullish
LONG-TERM: Bullish

Euro/sterling

Last week's range: 0.6768 ??“ 0.6808 (Up)
Previous range: 0.6768 ??“ 0.6811 (Mixed)

Euro/sterling traded another week within an inside range. Thus, the outlook remains mixed.

Initial support is still seen at 0.6756.  This is followed by a Fibonacci retracement level at 0.6740. Further support remains at 0.6725.  Strong support follows at 0.6690 and 0.6660.

Immediate support comes at 0.6810. Strong resistance follows at 0.6858 from a Fibonacci retracement level.  A pivot high still lies at 0.6867. Distant resistance is at 0.6960. 

NEAR-TERM: Mixed 
MEDIUM-TERM: Mixed
LONG-TERM: Bearish