Forex Market Update: All Eyes On FOMC Rate Decision And Policy Statement. USD Will React To Guidance From The Fed And Rash Of Other Data Today

GBP falls on weak Retail data and doom and gloom from BOE's Blanchflower. CAD oddly resilient despite oil sell-off.

MAJOR HEADLINES - PREVIOUS SESSION

Overnight developments:

• US Feb. S&P/CaseShiller Home Price Index fell -12.7% vs. -12.0% expected and vs. -10.7% in Jan.
• US Apr. Consumer Confidence fell to 62.3 vs. 61.0 expected and 65.9 in Mar.
• US ABC Weekly Consumer Confidence fell to -41 from -40 the previous week
• New Zealand Mar. Building Permits fell -9.1% MoM
• UK Apr. GfK Consumer Confidence out at -24 vs. -20 expected and -19 in Mar.
• Japan Apr. Manufacturing PMI out at 48.6 vs. 49.5 expected
• Japan Mar. Jobless Rate out at 3.8% vs. 3.9% expected and 3.9% in Feb.
• Japan Mar. Household Spending out at -1.6% YoY vs. 0.5% expected and 0.0% in Feb.
• Japan Mar. Industrial Production out at -3.1% MoM vs. -0.8% expected
• Australia Mar. HIA New Home Sales fell -6.0% MoM
• New Zealand Apr. Business Confidence out at -54.8 vs. -57.9 in Mar.
• Japan BoJ left rates unchanged at 0.50% as expected
• Japan Mar. Housing Starts out at -15.6% YoY vs. -6.7% expected
• Japan Apr. Small Business Confidence out at 43.1 vs. 46.6 expected

THEMES TO WATCH - UPCOMING SESSION

Key event risks today (all times GMT):

• Germany Apr. Unemployment Rate and Unemployment Change (0755)
• Norway Mar. Retail Sales (0800)
• EuroZone ECB's Constancio to Speak (0900)
• EuroZone Apr. CPI Estimate (0900)
• EuroZone Apr. Confidence Indicators (0900)
• Switzerland Apr. KOF Swiss Leading Indicator (0930)
• EuroZone ECB's Trichet to Speak (1155)
• US Apr. ADP Employment Change (1215)
• Canada Mar. Industrial Product Price (1230)
• US Q1 GDP and breakdowns - first estimate (1230)
• Canada Feb. GDP (1230)
• US Apr. Chicago PMI (1345)
• US Weekly Crude Oil and Product Inventories (1430)
• EuroZone ECB's Garganas to Speak (1530)
• US FOMC Rate Announcement (1815)
• Australia Apr. AiG Performance of Manufacturing Index (2330)
• Australia Mar. Building Approvals (0130)

Market Comments

A mother load of data is on its way today from the US. First up we get the ADP employment change data. The market may want to react to this number, but we prefer to ignore it due to its spotty record of predicting the non-farm payrolls number, which itself seems to have worn down its ability to cause significant market reactions. It is interesting to note that the expectations are extremely negative for this number at -60k according to Bloomberg and compare this with the slowing of weekly jobless claims in Apr. compared to March. Then later we get the first pass at the US growth estimate - which if inflation was honestly calculated should be well into negative territory. But since it isn't, it's expected at a paltry 0.5% vs. 0.6% in Q4. Later we get the Chicago PMI - another precursor to tomorrow's ISM Manufacturing, and the weekly US crude oil inventories ahead of the main event: the FOMC rate announcement.

Again, guidance from the Fed will be critical this evening in addition to the expected (but not 100% priced in) 25 bps cut. Do we get a statement signaling that the Fed believes in the V-shaped recovery theory with minor notes of caution or do we get a more dovish statement that says it will take some time before the all clear can be given and further action may be necessary. We need to remember that, despite the enormously fast recovery of risk appetite, it was only 6 weeks ago that the Fed chopped a whopping 75 bps off the rate, so we suspect that the guidance could be on the slightly dovish side of expectations/market positioning. That means there is a risk of some USD weakness as an immediate reaction and would provide a key test for how much the USD sentiment is shifting. Still, the USD could yet strengthen in coming sessions even on slightly dovish guidance if the expectations of relative slowing elsewhere become the focus (we've already noted the relative disappointment of European data lately compared to US data.)

The risk appetite pairs like EURCHF and the JPY crosses dipped precipitously yesterday on signs of weakness in equities and a rallying fixed income market, but recovered a decent chunk of lost ground into the US close, as the market may be unwilling to commit directionally before the big FOMC event this evening. Again, we favor a fresh round of risk aversion, so let's see if tonight's announcement, or its wake in the coming sessions proves a pivot point for these trades.

GBP weakened yesterday on weakish mortgage data, a catastrophic CBI Retail Sales report and a hefty dose of doom and gloom from the BOE's Blanchflower, the BOE's dove extraordinaire. Consider statements like 'We face a real risk that the UK may fall into recession and aggressive action is required to prevent this from occurring.' and 'Monetary policy, in my view, still remains restrictive currently, and we need to take action to loosen policy sooner rather than later.' Give that man a medal! His comments are spot on. These events served to at least temporarily cut the relationship between a stronger USD and stronger GBP. It looks like GBPUSD may finally be headed for a range breakout to the downside, though there's still a lot of wood to chop down to 1.9350 before we can call this a renewal of the downtrend.

CAD has been relatively strong of late, which made some sense as long as oil prices were eking out new gains on supply disruption hysterics. Another factor contributing to the CAD strength in non-USD crosses is the linking the market has made with the USD and CAD due to their similar rate trajectories and heavy short CAD positions likely accumulated in crosses like AUDCAD, EURCAD, etc... With these positions now having seen a decent correction, eventually the focus could return to the USDCAD cross, which looks vastly underpriced in the big picture considering the long term recoupling theme for the two economies. Will today's Canadian GDP and US crude inventory data finally see the pair breaking out of the range, or are we still stuck in the mud there?

Charts: AUDUSD and EURUSD

AUDUSD: A key chart point has developed in AUDUSD around the 0.9300 area, which serves as a flatline support level and a head and shoulders neckline also in the same area (this formation is more visible on a 4-hourly chart). A break and hold below here could set up confirmation that the recent false break above 0.9500 may be the top for the cycle.

EURUSD: some key supports coming in here ahead of the FOMC meeting. The setup suggests that EURUSD must find support relatively soon or risk a test much lower toward 1.5000. First, we have the key 55-day moving average (red line) coming in around 1.5475 and then the 0.382 Fibo for the move from 1.4438 to 1.6018 coming in at 1.5415. Below there, not much until the old 1.5000 resistance zone.

Analysis Disclosure & Disclaimer

SaxBank A/S shall not be responsible for any loss arising from any investment based on any recommendation, forecast or other information herein contained. The contents of this publication should not be construed as an express or implied promise, guarantee or implication by SaxBank that clients will profit from the strategies herein or that losses in connection therewith can or will be limited. Trades in accordance with the recommendations in an analysis, especially leveraged investments such as foreign exchange trading and investment in derivatives, can be very speculative and may result in losses as well as profits, in particular if the conditions mentioned in the analysis dnot occur as anticipated.

SaxBank utilizes financial information providers and information from such providers may form the basis for an analysis. SaxBank accepts nresponsibility for the accuracy or completeness of any information herein contained.

Any recommendations and other comments in SaxBanks analysis derive from objective fundamental macreconomical and company specific calculations, statistical and technical analysis, and subjective general market assessment.

If an analysis contains recommendations tbuy or sell a specific financial instrument, such recommendation should be seen as SaxBanks opinion that the specific instrument will respectively outperform the relevant market or underperform compared tthe market. SaxBanks recommendations should statistically correspond tan even distribution between buy and sell recommendations.

The recommendations may expire promptly due tmarket volatility and in general, SaxBank does not anticipate its recommendations tbe valid more than one month. An analysis will be updated if and only if a market development or other issues relevant tthe analysis render a new analysis on the same topic relevant. SaxBanks analysis does not cover any specific financial product over time but only products which SaxBanks strategy team finds it important tcover at any given point in time.

In order tprevent conflicts of interest, SaxBank has established appropriate business procedures, incl. procedures applicable tresearch and analysis tensure objective research reports. SaxBanks research reports have not been discussed with the parties, e.g. issuers of securities, mentioned in the analysis.

SaxBank is under supervision by the Danish Financial Supervisory Authority. SaxBank does not engage in corporate finance activities and accordingly, SaxBanks employees, incl. the persons responsible for an analysis, dnot receive remuneration associated with investment banking transactions.