Weekly Review and Outlook

Yen Surges Broadly as Risk Aversion Fights Back

Risk aversion was the main driving force towards the end of last week as markets witnessed a turn in the global equity markets as well as sharp rebound in the Japanese yen. While bad corporate results and the concern of continuation of the credit market crisis were still the factors affecting investors sentiments, there were growing concern that persistently high inflation, fueled of sharp rise in energy and food prices, are going to hurt the economy eventual. Oil prices surged to another record high above $126 a barrel is seen as the major factor that triggered the turn in investor's risk appetite. Yen crosses were sharply lower last week on carry trade unwinding. Greenback also reversed earlier gains and weakened in general. Sterling also dived again, pressured by risk aversion as well as a string poor economic data even though BoE was on hold. Euro, on the other hand, was mixed after ECB kept rate unchanged as widely expected.

The coming week will feature a number of important economic data from around the world. But the focus would likely be more on inflation data from US, UK & Eurozone and it will be interested to see how markets will react to the data given the current sentiments.

Currency Heat Map Weekly View

Economic calendar in the US was rather light last week. Though, one of the most important events was the news that mortgage lender Fannie Mae, reported a larger- than-expected $2.19 billion loss. The news revived concern that the worst of subprime problem triggered financial markets crisis may not be over yet. The ISM non-manufacturing index surprised the markets by climbing from 49.6 to 52.0 in Apr, back in the expansion region have three months of contractionary readings. Price paid component surged further to 72.1. Employment component improved remarkably from 46.9 to 50.9. However, the business activity component, though staying above 50, showed some weakness by falling from 52.2. to 50.9. US Nonfarm business productivity growth was surprisingly strong in Q1, coming in at 2.2%, up from 0.9% in the Q4, was well above the consensus. Unit labor costs rose an annualized 2.2%, slightly below the consensus. Trade deficit in US unexpected shrank back to below -60b at -58.2b. Jobless claims dropped back from 383k to 365k. Pending home sales dropped from 83.8 to 83 in Mar. Whole sale inventories dropped -0.1% in Mar comparing to expectation of 0.5%.

ECB left rates unchanged at 4.00% as widely expected. Trichet maintains his usual hawkish tone in the following press conference by emphasizing that the central bank's monetary policy was designed to deliver medium-term price stability and added that inflation will stay high "for a rather protracted period." While Trichet acknowledged the downside risks to growth, he still maintained an upbeat tone of the economy and describe it as having " sound fundamentals and does not suffer from major imbalances."

On the data front, Eurozone PPI climbed more than expected from 5.3% yoy to 5.7% yoy. Services PMI rose more than expected from 51.6 to 52.0 in Apr. March retail sales saw surprised -0.4% mom contraction, bringing yoy rate down to 1.6%. Germany factory orders were also weak, falling -0.6% mom, -5.0% yoy. Germany trade surplus that was steady at 16.7b. Industrial production slowed more than expected to 4.7% yoy in March.

BoE left rates unchanged at 5.00%, which was as expected by markets before the weak economic data released last week. No statement was released and markets will look into the minutes to be released on May 21 for details including vote split. Nationwide consumer confidence fell to 70, the lowest reading on record. Industrial production and manufacturing production were both much weaker than expected. IP contracted -0.5% mom in Mar, dragging yoy rate down from 1.2% to 0.8%. MP also contracted 0-0.5%, dragging yoy rate down from 1.9% to 0.6%. UK Services PMI also deteriorated more than expected from 52.1 to 50.4.

Swiss CPI moderated from 2.6% yoy to 2.3% yoy in Apr. Unemployment rate is unchanged at 2.6%.

The Canadian economy added 19.2k jobs in Apr, much higher than consensus of 12.5k. Unemployment rate was up from 6.0% to 6.1% but that was mainly due to large in labor force. Canadian trade surplus came in wider than expected at 5.5b. Building permits dropped -4.5% in March. Housing starts dropped more than expected to 213.9k in Apr. Ivey PMI beat expectation by dropping from 59 to 57.6, above consensus of 54.5.

RBA left interest rates unchanged at 7.25% as widely expected. The accompanying statement suggested that even though headline inflation rose to a seven year high in Q1, RBA is satisfied that "evidence is accumulating" that "growth in aggregate demand" will be "significantly slower" in 08 and will "reduce inflation over time". This was taken as an indication that RBA will be on hold for the time being. Trade deficit narrowed more than expected to -2.7b in Mar with exports climbing 4.4% mom, imports rising 1.0% mom. House price inflation climbed 3.1% qoq, 13.8% yoy, up from prior 3.2% qoq, 12.3% yoy. Unemployment rate climbed from 4.1% to 4.2% in Apr even though job gains beat expectation by growing 25.4k.

New Zealand Q1 employment dropped sharply by -1.3% qoq with unemployment rate edged higher to 3.6%.

Suggested readings:

• This Week's Market Outlook
• The Weekly Bottom Line
• FX Briefing: Signs of Weakness in the Eurozone
• Weekly Focus: Headwinds Keep Building

ECB & BOE

• Euroland: ECB Keeps Neutral Stance
• Economists Note Subtleties in Trichet's Remarks Following ECB Rate Decision
• ECB, Uncomfortable, but Unmoved
• Trichet Holds His Hawkish Tone Despite Ongoing Financial Turmoil
• (ECB) Press Conference Introductory Statement 8 May 2008

BoE

• BOE Will Maintain Gradual Easing of UK Interest Rates, Economists Say

RBA

• (RBA) Statement on Monetary Policy May 2008
• RBA Says Australian Inflation Pressures to Persist Until 2010
• Economists Expect RBA Tightening Following Hawkish Monetary Policy Statement
• (RBA) Monetary Policy Statement by Glenn Stevens, Governor - 6 May 2008
• Australian Interest Rates Stay at 7.25% on Inflation Fears

The Week Ahead

The economic calendar this week is jam packed with important data from around the world. However, the most important driving force will likely be the yen and risk aversion. Technically speaking, EUR/JPY has led the way by breaking near term trend line support for some time. GBP/JPY and AUD/JPY then followed showing that the crosses has likely topped in near term. The completion of corrective rebound pattern is most apparent in NZD/JPY. Meanwhile, USD/JPY is also pressing near term channel support too. More broad based yen strengths could be seen.

In the US, intial focus is on Tue's retail sales which is expected to be flat in Apr, with ex auto sales growing 0.2%. CPI will then take center stage and is expected to be unchanged at 4.0% yoy , with core CPI unchanged at 2.4% yoy in Apr. Housing data will then be watched with NAHB housing market index and new residential construction featured. Empire state index and Philly Fed survey, industrial production, Import & export prices, business inventories, TIC capital flow, U of MIchigan consumer sentiment will be rleased.

From Eurozone, Q1 GDP growth is expected to slow from 2.2% yoy to 1.9% yoy. HICP is expected to be finalized as down from 3.6% yoy to 3.3% in Apr. Trade balance will be releasde too.

Inflation data from UK will also be closely watched. In particular, CPI is expected to climb from 2.5% yoy to 2.6% while core CPI is also expected to rise from 1.2% to 1.3% yoy. PPI, employment report , various house price indices will also be featured.

Japanese Q1 GDP is expected to slow from 3.5% annauzlied to 2.5%. Domiestic CGPI, trade balance, machine orders, industrial production and consumer confidence wil be released.

Suggested Readings:

• Economic Calendar Summary 5/11 - 5/16
• Economic Outlook: Will the Tax Cuts Have any Effect?
• US Economic Indicators Preview
• EMU Economic Indicators Preview
• US Dollar: US Retail Sales Could Get A Surprise Boost on Tuesday - Why?
• Canadian Dollar Will Fall Across the Board
• Long Term View of the EURUSD
• The Week Ahead Canada & U.S.: U.S. Advance Retail Sales, CPI and Housing Starts
• The Week Ahead Europe & UK: UK and European Inflation Reports
• The Week Ahead Japan & Australia: Japanese GDP, Australian Commonwealth Budget

EUR/JPY Weekly Outlook

After initial recovery to 163.09, EUR/JPY's fall from 164.97 resumed and dived further to as low as 158.60, touching 100% projection of 164.97 to 160.58 from 163.09 at 158.70. Initial bias remains on the downside this week as long as 160.42 minor resistance holds. As discussed before, break of 158.24 support (50% retracement of 151.71 to 164.97 at 158.34) will confirm that rally from 151.71 has completed bring deeper decline towards the lower end of the medium term range near to 151.71. On the upside, above 160.42 minor resistance will turn intraday outlook neutral first.

In the bigger picture, EUR/JPY turned into sideway consolidation after medium term up trend was limited at 168.93. It's unclear whether such consolidation has completed at 151.71 already. Though, below 158.24 support will argues that such consolidation is still in progress with at least another fall to the lower end of the medium term range before completion. However, strong rebound form 158.24, followed by break of 163.09 resistance, will leave the fall from 164.97 in corrective nature. Hence in such case, it will argue that rise from 151.1 is going to extend further to retest 168.93 high. And firm break of which will confirm the medium term up trend has resumed.

In the longer term picture, EUR/JPY is still staying inside long term rising channel (support at 156.45). The long term up trend from 88.97 (00 low) is probably still in force. Nevertheless, more choppy trading could be seen with EUR/JPY still staying inside range of 149.27 and 168.93 before firm break above this 168.93 high. Though, on resumption, the long term up trend is expected to target next important cluster resistance at 188.22 (50% retracement of 285.56 (79 high) to 88.97 (00 low) at 187.26). Meanwhile, decisive break of 149.27 low will argue that the whole up trend form 88.97 (00 low) has completed. In such case, much deeper medium term decline would be seen to support zone of 124.15 and 140.92 first.

Subscribe to our daily and mid-day newsletter to get this report delivered to your mail box