May 2009

US Dollar Plummets as US Assets Lose ‘Safe Haven’ Luster, Japanese Yen Mixed Ahead of BOJ Announcement

- Euro, British Pound Rally Continues Despite UK Outlook Downgrade by S&P
- Canadian Dollar Could Break Recent Highs vs. US Dollar on Canadian Retail Sales Report

US Dollar Plummets as US Assets Lose “Safe Haven” Luster, Japanese Yen Mixed Ahead of BOJ Announcement
The combination of the plunge in the US dollar and Treasuries, vast drops in FX carry trades, the equity markets, and oil, along with a jump in the CBOE’s VIX volatility index tells us one thing: the greenback and US assets in general may be losing their luster as “safe haven” assets. Following S&P’s downgrade of the UK’s economic outlook from “stable” to “negative” due to “deteriorating public finances,” there has been increased discussion of the same thing happening to the US as national debt levels soar in light of the government’s efforts to bail out Main Street and Wall Street. However, the Japanese yen did, to a certain degree, maintain its link with risk trends.

Meanwhile, the release of the US Labor Department’s jobless claims report reflects very little change in the employment outlook, as initial claims fell by 12,000 during the week ending May 16 to 631,000 while continuing claims jumped by 75,000 during the week ending May 16 to another record high of 6,662,000. Indeed, these moves suggest that while the pace of job losses, as reflected by non-farm payrolls (NFPs, will slow further, the unemployment rate is likely to continue climbing higher. This was something projected by the Federal Reserve during their April policy meeting, as the FOMC meeting minutes showed that the range of forecasts shifted from 8.0 percent – 9.2 percent up to 9.1 percent – 10 percent.

In more positive news, the Conference Board’s leading economic index jumped 1.0 percent in April, the first increase since June 2008 and the biggest increase since November 2005. The improvement was led by components such as average workweek, jobless claims, consumer goods orders, stock prices, interest rate spread, and consumer expectations. Also, the Philadelphia Fed’s manufacturing activity index rose to -22.6 in May from -24.4, signaling a slower contraction.

Looking ahead to Friday, there will be very little in the way of US event risk ahead of Monday’s US Memorial Day holiday and market closure. That said, RSI on the daily charts of the DXY index has fallen into oversold territory, and when this happened in December 2008 and March 2009, we subsequently saw price bounce higher. As a result, there is potential for the greenback to stage a recovery versus the majors in the near-term, though it could ultimately be short-lived. For the Japanese yen, traders will see the release of the Bank of Japan’s rate decision, and they are widely anticipated to stay neutral at 0.10 percent. The thing to watch will be the BOJ’s economic outlook, as indications that the recession is nearing an end could offer a boost to FX carry trades overnight.

Euro, British Pound Rally Continues Despite UK Outlook Downgrade by S&P
The British pound fell sharply this morning versus most of the majors, pushed GBP/USD down roughly 250 points toward 1.5550 and EUR/GBP up over 150 points toward 0.8850 on news that S&P lowered its outlook on UK debt to “negative” from “stable,” but ultimately affirmed their long-term credit rating at AAA. Negative news for the currency also came from the UK’s Office for National Statistics, which said that business investment contracted for the third straight quarter in Q1 at a rate of -5.5 percent, marking the steepest drop since Q1 2004 when investment plunged 21.38 percent. A breakdown of the report shows that manufacturers and non-manufacturers alike cut back on their investments, though construction firm reductions were less than in recent quarters at -9.0 percent. Ultimately, a lack of investment indicates a lack of confidence in future demand and the potential for further job cuts down the line. Positive news came in the way of a 0.9 percent rise in UK retail sales for the month of April, the second straight increase.

By the time the US trading session got going, though, a steady and steep plunge in the US dollar across the majors propelled both GBP/USD and EUR/USD above Wednesday’s highs while EUR/GBP eased back down toward 0.8750. Now, daily charts of GBP/USD show that RSI is in overbought territory while EUR/USD is nearing that point, suggesting we could see reversals in the near-term, though another spike higher may not be out of the question.

Looking ahead to Friday, UK GDP for Q1 is projected to go unrevised at a nearly 30-year low of -1.9 percent, while the annualized rate should hold at a 28-year low of -4.1 percent. If these figures are downgraded in any way, the British pound’s rally could easily be cut short, while readings in line with forecasts should have too much of an impact on price action. According to the Bank of England’s median growth projections published in the latest Quarterly Inflation Report, GDP may be posted at -4.72 percent in Q2, -4.54 percent in Q3, and -3.20 percent in Q4. These forecasts are based on interest rates staying on 0.50 percent and a continuation of the BOE’s 125 billion pound quantitative easing (QE) program, but if the growth outlook starts to deteriorate further, there’s no stopping the BOE from considering expanding their QE program further.

Canadian Dollar Could Break Recent Highs vs. US Dollar on Canadian Retail Sales Report
USD/CAD continued its consolidation above 1.1350 on Thursday, and on Friday morning the release of Canadian retail sales could offer a boost to the Loonie as spending is anticipated to have risen for the third straight month in March at a rate of 0.5 percent. Indeed, Canadian data has generally been better-than-expected latest, as the Canadian economy surprisingly added on employees during April and Ivey PMI rose above 50 – signaling an expansion in business activity – for the first time since October 2008. If the indicator rises in line with or more than expectations, the Canadian dollar could rally, but if retail sales actually fall, the currency could tumble.

**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

ECONOMIC DATA

SUPPORT AND RESISTANCE LEVELS

Written by: Terri Belkas, Currency Strategist for DailyFX.com
E-mail: tbelkas@dailyfx.com

Crude Declines On Dissapointing Employment Data, Safe-Havens Continue Gains

Commodities – Energy

Crude Declines As Employment Data Dissapoints

Crude Oil (WTI) $61.150 -$0.890 -1.43%
Crude prices declined today as jobless claims showed worse than expected losses, dragging down sentiment. Global equities exhibited weakness as well following a number of news releases of debt downgrades. The support that a recovery would bring to crude prices may have begun to ease off as a result but prices may not show sharp weakness quite yet. The announcement of possible UK debt downgrades has led some to worry that the US may too be at similar risk. Given the size of the federal budget deficit, the possibility of a debt downgrade can be real. Consequently, this may lead to dollar weakness. Since crude is a dollar-denominated asset, greenback weakness would push up its price in order to make up for the weaker buying power of the dollar. That factor could counteract downward pressure on prices from weak crude demand and large stockpiles. Nevertheless, most of the extended price gains that crude enjoyed in past weeks were supported by optimism. As optimism fades, prices will still likely continue a pullback for the short-term.

Commodities – Metals

Safe-havens Continue Gains As Dollar Declines

Gold $954.900 +$17.500 +1.87%
Gold prices continued to gain as markets took in prospects of government debt downgrades. Gold is accordingly in position to gain from two main interconnected factors. On the one hand, if the perceived risk increases for US debt downgrades, the US dollar will show weakness. Given its competing status as a safe-haven vehicle, greenback weakness could trigger outflows from the currency to gold, raising prices. On the other hand, once a recovery will begin to take hold, gold will also benefit from dormant inflationary risks. This risk remains very high due to the amount of capital that has been injected into the economy. Gold will likely gain further for the short-term.

Silver $15.5450 +$0.2650 +1.86%
Silver prices showed similar gains as gold today. Even though silver is perceived as somewhat of a safe-haven, it may not move in lock-step with gold. While it too would benefit from uncertainty within the market, industrial demand for the metal could decline if the economy turns sour again, offsetting some gains. On the other hand, if the econonomy show signs of recovery and inflationary risks pump up safe-havens metals, silver has the potential to gain at a faster pace than gold.

-Written by Stefan Tifigiu, CFDTrading Research
Please send any comments about this report to Stifigiu@fxcm.com

European Equities Plummet As Ratings Downgrades Weaken Sentiment

Europe Session Key Developments

• S&P Announces Possibility Of UK Debt Downgrade, Offsets Minorly Positive Releases
  
• US Recovery, A Major Component To A Recovery In Europe Seems Unlikely
  
• Tenuous Optimism Likely To Falter In Coming Sessions
  

European stocks gave in to sharp weakness today despite some favorable releases as prospects were released of downgrades for UK government debt. Some Optimism was built as Manufacturing and Services Production reports, though still contracting, showed a slowdown in the rate of contraction for the zone. British Retail Sales also showed better than expected results. Optimism however was derailed as Standard & Poor’s made an announcement of a one in three chance of UK debt downgrade. The move may be necessary as the amount of outstanding debt reaches near 100% of GDP, substantially raising the risk of default. Some worry that the US, one of Europe’s largest trading partners, may also face similar downgrades. Deficit spending in the US has too ballooned in combating the economic crisis. Expectations were revised in commentary from the Federal Reserve in which deeper weakness was to be seen, raising the fear of this possibility. In this regard, a recovery in Europe may partly depend on a recovery in the US.  These announcements underscore the shaky state of the global economy and strongly contest the notion that the European economy has bottomed. Lamentably, much of European equity rallies have largely been driven by this tenuous optimism. Sentiment that flared up on slight signs of stabilization pushed up equities too fast and too quickly. True, slightly better than expected data and a lower Libor are positive signs, but they are not concrete enough to peg a bottom. Now that some negative news is returning attention to the extremely weakened state of the global economy, the euphoria that has boosted rallies may begin to wear off. If that happens European markets will exhibit sharp weakness in the near to medium term.

FTSE 100            4345.47       -122.94       -2.75%
Basic Materials, Telecoms, and Financials all declined -5.29%, 4.27%, and 4.06% respectively. Weakness in Basic Materials was led by BHP Billington which declined 6.3% after reports that its chairman Dan Argus expects a “protracted and complex” decline to follow. Rio Tinto also declined 7.23% after news that Chinalco may accept a lower stake in deal than previously discussed. Vodafone declined 4.29% after Nomura lowered the company to “reduce” from “buy”

CAC40                3217.41           -85.96          -2.60%
Basic Materials showed a sharp decline of 6.14%, followed by the technology and industrial sectors which declined 4.10% and 3.46% respectively. Air Liquide SA declined 3.74%, Cad Gemini also declined 3.42% after it announced a 3million share sale for its employee program. Saint Gobain also showed a decline of 5.13%.

DAX                    4900.67          -138.27        -2.74%
German Index weakness was led by the Industrials, Financials, and Basic Materials sectors which declined 3.71, 3.24, and 3.01% respectively. Siemens-AG RG declined 4.35% despite favorable news in winning power transmission bid in China. Thyssenkrupp AG also declined 4.16% after downgrades from Fitch.

IBEX35            9225.30            -164.10        -1.75%
Weakness was primarily in the Basic Materials, Consumer Services, and Financials sectors. Arcelor Mittal let weakness in basic materials as it declined 7.57%. Financials were weakened by Banco Bilboa and Banco Santander which declined 3.22%, and 2.7% respectively as both banks undergo downgrades and lower price estimates from Moody’s and S&P’s ratings agencies.

S&P/MIB         19883.00         -642.00     -3.13%
The Italian Index showed the most weakness of all the Indexes with weakness primarily in the Technology sector declining 6.72%. The Telecoms and Financials sectors also declined 4.17% and 3.68% respectively. Unicredit SPA declined 4.85% followed debt downgrades. Telecom Italia declined 4.07% as it weighs seperation from Telefonica unit. STMMicro Electronica also declined 6.53% amid the weakness in the markets.

-Written by Stefan Tifigiu, CFDTrading Research
Please send any comments about this report to Stifigiu@fxcm.com

Major Indexes Becoming Range Bound As Resistance Levels Hold

To review: “The decline from the October 2007 high is in 5 waves, therefore a multi-month countertrend 3 wave advance is underway. Fibonacci resistance does not begin until 8736. Wave B within an A-B-C corrective advance from 6470 is complete at 7792. The Dow should rocket higher in wave C in the next few weeks.” 9088 is the former 4th wave extreme and an objective. Near term, there is the potential for a drop below 8230 in order to complete an expanded flat.

The Dow briefly broke above resistance at 8,522 the 61.8% Fibo extension of the 9,795-6,470 decline but failed to hold those gains. A clean break above there would leave 9,000 as the next barrier. However, if resistance holds we could see a retrace back to 8,120/30 which served as support in October and December of 2008.

The S&P count is the same as the Dow count. A B wave is complete at 827. A target is 1086 (100% extension) and the index should remain above 827.

The S&P 500 ended yesterday lower after a strong start which is bringing into doubt another test of the January 6^th high of 943 in the near-term. A test of support at 880 is a possibility and a break below there leaves the April 21^st low of 826 as the next challenge.

The Nasdaq is in the same position as the other US indexes although the short term pattern is not clear. A deeper corrective rally is likely; perhaps to the 50% at 1902 or the 61.8% at 2094.

The Nasdaq continues to be held in check by resistance at 1,785 and has fallen back to the 38.2% Fibo level of 2,474-1,262. The tech laden index appears vulnerable to a retrace with possible support at 1,660; a hold there could lead to range bound price action.

Asian Stock Markets Falter as Fed Sees Deepening Downturn, Lowers Growth Forecasts

Asia Session Key Developments

· FOMC lowers growth forecasts, may expand asset purchase program

· Demands for Japanese services fall the most since April 1997

The Asian stock markets tipped lower following the dismal outlook held by the U.S. Federal Reserve, and as the central bank lowers their growth forecast for the world’s largest economy, fears of a deepening downturn in global trade could weigh on the export-driven economies going forward. At the same time, a report by the Trade Ministry showed demands for services marked its biggest decline in March since April 1997, while the appreciation in the Japanese yen during the overnight session weighed on the outlook for future earnings.

NKY 225 9264.15

Japanese stocks slipped lower on Thursday following the rise in the Yen, with the Nikkei losing 80.49 points (0.86%) to end the trading session at 9,264.15 in Tokyo. A breakdown of the index showed all 10 of the components slipped lower, with consumer services and telecommunications leading the decline. At the same time, shares of Nippon Koei Co surged 9.9% after the company stated that it expects net income to increase to JPY 1.4B from 300M this year, while Nissin Foods Holdings Co jumped 6.6% to mark the biggest advance since October 29 after the firm bought back 3.68% of its shares outstanding.

HSI 17199.49

The equities market in Hong Kong fell for a second day this week, with the Hang Seng falling 276.35 points (1.58%) to end at 17,199.49 as investors weighed the outlook for future growth. Industrials and consumers goods led the decline as the components slipped nearly 2.5%, and was followed by 1.86% drop in financials, while utilities gained 0.07%. Foxconn International Holdings Ltd, the world’s largest contract maker of mobile phones, led the markets lower as its shares plunged 5.1%, while Melco International Development Co slide 9.2% after the firm announced a loss in the first quarter. Meanwhile, utilities climb higher today as the sector gained 0.07%,

ASX 200 3813.90

Stocks in Australia slipped lower, led by a drop in utilities and consumer services, with the ASX shedding 10.70 points (0.28%) to close at 3,813.90 in Sydney. Nevertheless, shares of AWB Ltd surged 14.29% after Citigroup raised the firms rating to ‘hold’ from ‘sell,’ while Rio Tinto, the world’s third-largest mining company, increased nearly 3% as Chinalco agreed to take a 15% stake in the firm.

US Dollar Plummets as FOMC Meeting Minutes Show Potential for Expanded QE, Downgraded Growth Forecasts

- Japanese Yen Gains as 15.2% Contraction in Q1 GDP Proves To Be Better Than Expected
- Euro, British Pound Rocket Through Key Resistance Levels, BOE Minutes Reveal Few Surprises
- Canadian Dollar Breaks to 7-Month Highs vs. the US Dollar Despite Drop in Canadian CPI to 14-Year Low

US Dollar Plummets as FOMC Meeting Minutes Show Potential for Expanded QE, Downgraded Growth Forecasts
The US dollar took a heavy hit on Wednesday, falling close to 2 percent against the British pound and tumbling over 1 percent versus the Canadian dollar, Japanese yen, and euro, suggesting that the currency has lost its link with risk trends. Indeed, US equities spent part of the day in positive territory but the S&P 500 subsequently ended the NY trading session down 0.5 percent.

Looking to the big US event risk for the day, the release of the minutes from the Federal Open Market Committee’s (FOMC) April meeting shed a bit more light on their policy bias. After the Federal Reserve’s last meeting, the markets saw no surprises as they left the fed funds target range at 0.0 percent – 0.25 percent and said that “conditions are likely to warrant exceptionally low levels…for an extended period.” Furthermore, the FOMC reiterated measures first announced in March, when they said they would still purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year, as well as $300 billion of Treasury securities by autumn.

However, according to the minutes, some members noted that a further increase in the total amount of asset purchases may be needed later on in order “to spur a more rapid pace of recovery,” though all members wanted to wait and see how economic and financial market conditions progress. Meanwhile, the FOMC’s quarterly economic forecasts were revised, as the Committee now expects that a deeper recession in 2009, a slower rebound in 2010, a greater rise in unemployment, and a slight increase in prices.

Japanese Yen Gains as 15.2% Contraction in Q1 GDP Proves To Be Better Than Expected
An interesting thing happened in the FX markets on Tuesday night: the Japanese yen gained following better-than-expected Japanese economic data. Though Japan’s economy shrank by a record 15.2 percent in Q1 from a year earlier, the decline was not as severe as projected since Bloomberg News was calling for a 16.1 percent contraction. The drop was led by falling private demand, as consumption declined further and businesses cut back on investment. Furthermore, exports plunged by a record as the Japanese yen held strong and the economies of Japan’s biggest trade partners slowed or fell deeper into recession. All told, there’s little in the way of positive news reflected in this report, but in the FX markets, everything is relative. The bigger factor here was that the Japanese yen didn’t necessarily respond to risk trends, and as a result, leaves Japanese fundamental reports as a key thing to watch going forward.

Euro, British Pound Rocket Through Key Resistance Levels, BOE Minutes Reveal Few Surprises
The euro and British pound rocketed higher on Wednesday, as EUR/USD broke above the March and May highs of 1.3723/40 while GBP/USD pushed above a rising channel formation that had contained price since April to six-month highs near 1.5800. Meanwhile, EUR/GBP fell below its short-lived range of 0.8800-0.9025, though the next levels of support loom close by at 0.8726 (the 2/24 low) and 0.8662 (the 200 SMA). Looking at event risk from the Euro-zone and UK, it was clear that none of them had much of an impact on the FX markets. German producer prices plunged 1.4 percent in April, pushing the annual rate down to -2.7 percent, suggesting that if there are any inflation risks for the Euro-zone, they are more heavily weighted to the downside.

From the UK, the minutes from the Bank of England’s May 7 meeting weren’t as market-moving as they’ve been in the past, as there has already been significant detail revealed about the mindset of the Monetary Policy Committee (MPC).  We already knew that the BOE decided to expand their quantitative easing (QE) program by 50 billion pounds to 125 billion pounds (which happened to be by a unanimous vote), that the drop in Q1 GDP of -1.9 percent was worse than expected, and that CPI will likely will be below the BOE’s 2 percent inflation target in the medium term. While the minutes did reveal that some members thought that “a case could be made for a larger stimulus,” the high uncertainty of QE led them to believe that there was “no pressing need for the larger extension” at that point.

Canadian Dollar Breaks to 7-Month Highs vs. the US Dollar Despite Drop in Canadian CPI to 14-Year Low
The Canadian dollar surged against the greenback, pushing USD/CAD below key support at 1.1500, despite the fact that headline Canadian inflation fell to a more than 14-year low. On a monthly basis, CPI surprisingly fell 0.1 percent in April while the annual rate dropped to 0.4 percent, the lowest since December 1994. However, the decline was due primarily to weaker energy prices as core CPI – which excludes volatile items – rose 0.1 percent, leaving the annual rate at 1.8 percent, down from 2.0 percent.

According to the Bank of Canada’s last Monetary Policy Report in April, the Bank is open to quantitative easing (QE) and credit easing if nominal interest rates start to fall below zero. The Bank stated that while they could cut rates to zero in theory, it would ultimately “eliminate the incentive for lenders and borrowers to transact in markets, especially in the repo market.” As a result, inflation reports will be key to gauging whether the Bank of Canada will go the route of QE in the future, but with core levels of inflation holding at fairly robust levels, the risks remain pretty low.

**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

ECONOMIC DATA

SUPPORT AND RESISTANCE LEVELS

Written by: Terri Belkas, Currency Strategist for DailyFX.com
E-mail: tbelkas@dailyfx.com

Crude Oil Breaks Key Resistance Marker

Long-term Technical Forecast for Crude Oil

Recent commentary has been that “a possible wave count is an expanded flat, which would require a push above 59.66.”  The wave count described is no longer possible but probable as crude is about to exceed 59.66.  Although the minimum for wave C is just above 59.66, crude could soar as high as 71.33, which is the 161.8% extension of wave i of C.

Short-term Technical Forecast for Crude Oil

Long-term Technical Forecast for Gold

Gold is oscillating between the 55 and 200 SMAs.  Structure since the top at 1034 is a mess, which means that an expanded flat is probably underway.  Under this count, Gold would make an unorthodox top above 1034 in wave B of the flat prior to crashing (below) 681 in wave C.

Short-term Technical Forecast for Gold

Long-term Technical Forecast for Silver

Silver’s waves are quite clear.  The drop from the March 2008 high to the October 2008 low was in 5 waves, indicating that any subsequent rally should prove corrective.  The rally from 8.65 was corrective but the decline from 14.63 was also corrective.  As such, it is likely that a complex correction is underway towards an extension at either 16.08 or as high as 19.5.

Short-term Technical Forecast for Silver

Crude Gains On DoE Supply Report, Gold/Silver In Position To Gain

Commodities – Energy

Crude Prices Continue To Climb As DoE Shows Supply Declines

Crude Oil (WTI)   $61.780                             +$1.680                         +2.80%
Crude prices continued to rise today after a Department of Energy report showed greater than expected declines in stockpiles. While more than expected the declines still peg current supplies at very high levels. Movements in the US dollar will also have some impact on pricing of crude as the commodity is priced in the greenback. A long term effect that may begin to affect pricing is the inverse value relationship to the US dollar. If the economy begins to show signs of recovering, investors who hold positions in the US dollar as a safe-haven may begin to pull out, driving down the value of the currency. As a result, dollar-denominated assets such as crude oil will rise in price to accommodate for the lower buying power. For the moment, prices will likely begin to move toward the downside. If equity markets continue to pull back as some in the US did today, support for crude that positive sentiment had provided for the past month will begin to let off. Without that support, crude markets will move to establish prices more in tune with weak demand and large supplies. If however more positive news is released and rallies continue, crude prices could test beyond current levels.

Commodities – Metals

Safe-havens Continue to Show Strength

Gold                   $939.000                           +$12.300                             +1.33%
Gold prices continued to gain modestly as markets showed uncertainty over the prospects of an economic turnaround. While some signs of stabilization had prompted markets to rally in past sessions, the lack of any hard data to support that notion has led markets to stall. Gold is in a position where it may either continue to benefit from weakness in the economy as a safe-haven. On the other side of the spectrum, it may benefit handsomely from inflationary risks once the economy picks up. With information that the US Federal Reserve may have continued liquidity boosting in markets, this risk shows even further potential. In the meantime, gold will likely show modest gains until more concrete evidence of a turnaround emerges.

Silver                 $14.2950                          +$0.1700                             +1.20%
Silver prices showed similar gains as gold today. As we stated before, due to silver’s many industrial uses, a decline in the economy could mute price gains somewhat. Even though safe-haven metals are benefitting from uncertainty, silver prices are likely held down by weaker industrial demand. When a recovery begins to take shape, safe-haven metals could benefit handsomely from inflationary risks. When that happens, due to silver’s historically lagging prices, it could very well outperform price gains from gold. In the meantime, look for modest price gains for the near-term.

European Equities Hang On To Optimism

Europe Session Key Developments

• Investors Still Fishing For Signs Of A Bottom
• Some Data Continues To Point To Weakness
• Libor Remains Stable But Will Current Optimism Last?

European equities showed strength in early trading before cooling down to only modest gains for the session. The move comes as investors search for the possibility that an economic recovery has begun to form. Most equity strength lies in these positive expectations as today’s releases actually showed even more weakness. As we noted, market rallies of the past month are in danger of retracement. Strength in past sessions came on optimism that a turnaround might have begun. Unfortunately, rallies were pushed by optimistic momentum caused by slightly better than expected data. Strength in equities ultimately ignores a number of impediments that stand in the way of a brisk recovery. As such even with a recovery, the European economy will remain weak for most of the year­­­­­­­­­­­­­­­–that is, if a recovery has begun at all. This notion itself remains questionable given that several indicators continue to point to the downside. Unemployment continues to rise, Spanish GDP today showed a sharper decline than anticipated, and loan exposures  remain ominously in European bank holdings. About the only tangible evidence of a possible stabilization comes from the steady reduction in the 3-month Libor. The decline may signal stronger bank confidence and may result into more liquid credit markets, a key ingredient to getting the economy back to health again. Even so, it is still too early to call a bottom with certainty. In the absence of any more solid data, the largely unfounded optimism of the prior month may dissipate. If that happens, this will give way for equities to pare back gains.

FTSE 100                               4468.41                                -13.84                    -0.31 %
The index was the only to decline in European markets as Financials and Telecoms sectors reversed yesterday’s strength, declining over 2.05% and 2.55% respectively. Major movers were Vodafone, which declined 2.86% as it announced that Profit halved due to a write-off in its Spanish operations. Lloyd’s Banking showed a 7.95% decline as it announced that it may still face a damaging ruling from the European Union due to the UK’s banking bailout.

CAC 40                                   3303.37                                +28.41                  +0.87%
The French index showed strength in all sectors except financials, which declined 1.26%. the basic materials and utilities sectors led strength with gains of 5.31% and 2.38% respectively. Alcatel-Lucent gained another 2.89% for the day as it announced that it would help introduce the Blackberry Bold into Vietnam markets. Arcelor Mittal gained 5.64% after news crossed the wires that Coal of Africa Ltd. May receive a takeover offer from the company. Air-France showed an impressive 11.44% gain after announcing a trans-Atlantic global joint venture with Delta Airlines.

DAX                                        5038.94                 +79.32                 +1.60%
The German Index showed the second most strength for the day, led by the Basic Materials and Utilities sectors, gaining 5.66% and 2.29% respectively. Bayer AG gained 6.37% after receiving approval from Japanese authorities to sell Nexavar, a liver cancer treatment medicine. BAS gained 5.49% as it announced it had a good chance of topping 2009 adjusted earnings before interest and taxes. ThyssenKrupp AG also gained 3.09% despite a downgrade by Fitch to BBB- and a change of outlook to ‘negative’.

IBEX 35                                  9389.40                                +47.80                  +0.51%
The Basic Materials and technology sectors gained 3.87% and 3.0% respectively. Iberia gained 5.73% after Goldman Sachs added it to conviction buy list. Iberdrola SA gained 3.36% despite announcing that it would delay opening of Almaraz 2 Nuclear power plant.

S&P/MIB                               20525.00             +353.00              +1.75%
The Italian index showed the most strength of all European markets today as strength was seen in all sectors except for Consumer Services. The Oil&Gas and Industrial sectors showed the most strength, gaining 2.63% and 2.35% respectively. Pirelli & Co. gained 3.57% after its price estimate was raised by Goldman Sachs. Fiat gained 1.79% despite news that German officials preferred the Magna International Co.’s bid for GM’s Opel brand rather than Fiat.

-Written by Stefan Tifigiu, CFDTrading Research
Please send any comments about this report to Stifigiu@fxcm.com

US Dollar Down as US Housing Starts, Building Permits Plunge to Record Lows

- Japanese Yen Down as FX Carry Trades Gain – Watch for Japanese GDP Overnight
- Euro, British Pound Pause Below Key Resistance – GBP/USD Faces BOE Meeting Minutes on Wednesday
- Canadian Dollar Gains Ahead of Upcoming Canadian CPI Report

US Dollar Down as US Housing Starts, Building Permits Plunge to Record Lows
The US dollar was the biggest loser on Tuesday as US housing data proved to be very disappointing. The Commerce Department reported that housing starts plunged by 12.8 percent during the month of April, and a whopping 54.2 percent from a year earlier, to a record low annual pace of 458,000. Likewise, new building permits slumped 3.3 percent in April, and 50.2 percent from a year earlier, to 494,000.

The main event risk for the US dollar on Wednesday will be the release of the minutes from the Federal Reserve’s last meeting on April 29. Following that meeting, the markets saw no surprises from the Federal Open Market Committee (FOMC), as they left the fed funds target range at 0.0 percent – 0.25 percent and said that “conditions are likely to warrant exceptionally low levels…for an extended period.” Furthermore, the FOMC reiterated measures first announced in March, when they said they would still purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year, as well as $300 billion of Treasury securities by autumn. However, there were tinges of optimism within the policy statement as the FOMC qualified their initial, repeated remark that data indicates that the economic contraction has continued by adding that “the pace of contraction appears to be somewhat slower.”

Since this information has already been revealed, the release of the minutes may not be very market-moving. The one thing that may capture the market’s attention, though, is the FOMC’s long-run projections for growth, unemployment, and inflation as revisions that indicate that the outlook appears to be even worse than previously anticipated could hurt risk appetite throughout the financial markets, and thus lift safe-haven currencies like the US dollar. However, if the revisions improve, FX carry trades could surge and punish the greenback.

Japanese Yen Down as FX Carry Trades Gain – Watch for Japanese GDP Overnight
The Japanese yen fell against most of the majors on a day that FX carry trades continued to make headway. The status of the correlation between the JPY crosses and equities could be tested tonight, though, when Japan’s Cabinet Office will release preliminary growth readings. After three consecutive quarters of contraction, the outlook doesn’t look good. There are signs that businesses are suffering considerably at the hands of waning domestic and foreign demand. Consumers have very little to work with these days, as the jobless rate has slowly climbed to a nearly five-year high, and perhaps even worse, cash earnings growth contracted by 3.7 percent in March from a year earlier, the sharpest drop since 2002. Meanwhile, Japanese exporters have had to grapple with not only slowing global growth, but also the appreciation of the Japanese yen, all of which has led foreign-bound shipments to tumble a whopping 46.5 percent in March from a year ago, according to figures published by the Ministry of Finance. As a result, a Bloomberg News poll of economists shows expectations for GDP to fall 4.3 percent in Q1, with the annualized rate forecasted to plummet by a record 16.1 percent.

Euro, British Pound Pause Below Key Resistance – GBP/USD Faces BOE Meeting Minutes on Wednesday
The euro and British pound both gained against the US dollar, but EUR/USD was ultimately unable to break above the May 14 high of 1.3667 and GBP/USD backed down from the upper end of a channel formation at 1.5525 that has contained price since late April. There were a variety of reports from both the Euro-zone and the UK, though none proved to be highly market-moving. German investor sentiment continued to reflect divergent views on current conditions and the economic outlook in May. Indeed, the ZEW survey on investor confidence in the current situation slipped to -91.3, the lowest since July 2003, from -91.6 while the expectations component surged to a nearly 3-year high of 31.1 from 13.0.

UK inflation data was all-around weaker than anticipated, as the headline consumer price index (CPI) rose 0.2 percent during the month of April (0.4 percent expected) while the annualized rate of growth slowed to a 15-month low of 2.3 percent (2.4 percent expected) from 2.9 percent. Meanwhile, the retail price index (RPI), rose a slight 0.1 percent (0.2 percent expected), allowing the annualized rate to plunge to a record low of -1.2 percent (-1.1 percent) from -0.4 percent. In the end, the decline in headline rates of inflation leaves CPI closer to the Bank of England’s 2 percent target, but with RPI falling rapidly, the central bank may become increasingly concerned about deflation risks and thus, there is potential that they will consider expanding their quantitative easing program.

Looking ahead to Wednesday, the minutes from the Bank of England’s May 7 meeting may not be as market-moving as they’ve been in the past, as there has already been significant detail revealed about the mindset of the Monetary Policy Committee (MPC). Indeed, we already know that the BOE has decided to expand their quantitative easing program by 50 billion pounds to 125 billion pounds, that the drop in Q1 GDP of -1.9 percent was worse than expected, and that CPI will likely will be below the BOE’s 2 percent inflation target in the medium term. However, the growth and inflation outlook published in the BOE’s Quarterly Inflation Report suggests that the central bank may be open to expanding their quantitative easing program later on. If the minutes from the BOE’s most recent meeting reiterate this, the British pound could pull back very sharply.

Canadian Dollar Gains Ahead of Upcoming Canadian CPI Report
USD/CAD fell further on Tuesday thanks to broad US dollar declines, leaving the pair within a range of 1.1500 – 1.1800. FXCM SSI, a contrarian indicator, shows that traders remain net long the pair by 1.87:1, suggesting we could see additional declines in the near term. However, USD/CAD faces high event risk on Wednesday. According to the Bank of Canada’s last Monetary Policy Report in April, the Bank is open to quantitative easing (QE) and credit easing if nominal interest rates start to fall below zero. Indeed, the Bank stated that while they could cut rates to zero in theory, it would ultimately “eliminate the incentive for lenders and borrowers to transact in markets, especially in the repo market.” As a result, inflation reports will be key to gauging whether the Bank of Canada will go the route of QE, but looking ahead to upcoming reports, this shouldn’t be the case and thus, the news shouldn’t be too market-moving. Headline CPI is projected to have risen 0.2 percent in April, leading the annual rate to slump to 0.6 percent, the lowest since November 2001. Meanwhile, core CPI is forecasted to have risen 0.1 percent during the month, leaving the annual rate down at 1.8 percent from 2.0 percent. All told, the Canadian dollar may only respond if CPI rises more than expected (CAD bullish), or if CPI contracts on a monthly bases and drags the annual rates of price growth much low (CAD bearish).

**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

ECONOMIC DATA

SUPPORT AND RESISTANCE LEVELS

Written by: Terri Belkas, Currency Strategist for DailyFX.com
E-mail: tbelkas@dailyfx.com

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