Forex Market Update: NZD And AUD Looking Vulnerable On Data As The Week Gets Under Way. UK Inflation, Trade Data On Tap Today

Lowest housing turnover in 16 years in New Zealand. Australia Home Loans data suggest rapidly slowing housing market.

MAJOR HEADLINES - PREVIOUS SESSION

Overnight developments:

• Australia Mar. Home Loans fell -6.1% vs. -0.8% expected and -6.8% in Feb.
• Australia Mar. Investment Lending fell -7.2% vs. -10.1% in Feb.
• Australia Apr. NAB Business Confidence out at -8 vs. -4 in Mar.
• New Zealand Apr. QV house Prices rose 4.9% YoY vs. 6.5% in Mar.
• New Zealand Apr. REINZ House Sales out at -45.5% vs. -53.3% in Mar.
• China Apr. CPI out at 8.5% YoY vs. 8.2% expected
• China Apr. Trade Balance out at $16.6B vs. $15.5B expected and $13.4B in Mar.
• Japan Apr. Machine Tool Orders out at 0.3% YoY vs. 3.3% in Mar.

THEMES TO WATCH - UPCOMING SESSION

Key event risks today (all times GMT):

• Today is a Holiday for much of mainland Europe, though some exchanges are open
• UK Apr. PPI Input/Output (0830)
• UK Mar. Visible Trade Balance (0830)
• EuroZone ECB's Gonzalez-Paramo to speak (1045)
• Canada Mar. New Housing Price Index (1230)
• US Fed's Evans to speak about economic outlook (1315)
• EuroZone ECB's Trichet to speak (1500)
• US Apr. Monthly Budget Statement (1900)
• UK Apr. Retail Sales Monitor (2301)
• UK Apr. RICS House Price Balance (2301)

Market Comments

A renewed focus on the credit crunch fallout late last week as AiG announced unsettling writedowns that suggest the fallout from the credit crunch will continue to roll for some time. HSBC was also out with writedown announcements. In related news, Citigroup announced over the weekend that it would sell about $400B of its assets (most of the ones that got it into trouble in the first place) and one article pointed out that this kind of announcement should be very bullish for treasuries, which in turn could help the relative prospects of the JPY if global treasury yields fall. On Friday, risk aversion trades generally performed well, with the JPY sharply stronger across the board, and the increasingly vulnerable NZD finally going into a nosedive. But the action didn't carry through with much momentum in Monday's Asian session as the USD found stronger footing again and Asian equities generally performed well. The USDJPY sell-off was turned back just above the 55-day moving average, which comes in around 102.40 now (see more in the chart below).

New Zealand continues to look vulnerable and would look in even worse shape if food prices were to correct lower. The turnover in the housing market has been falling at faster than a -20% YoY clip since mid last year. Sellers are slow to move their prices lower as YoY price comparisons are still marginally positive, though they have been falling rapidly and will easily enter negative territory in the coming months. With most of New Zealand debt in foreign hands due to their very large current account deficit, NZD will be very vulnerable to any further moves in risk aversion.

On the AUD front, the housing market activity data in particular has turned strongly south and a number of other figures have disappointed of late, so we wonder how long the AUD can remain at these still fairly elevated levels. The rising trendline from January this year in AUDUSD is fast approaching - keep an eye on that one.

GBP may be the mover today with inflation data and trade balance data out shortly - but also keep an eye on the RICS House Price balance number tonight. This is the best housing survey number for the UK as it tends to lead the other surveys and registered a record low the last time around as the UK housing market seems to be gaining negative momentum. In GBPUSD, we're approaching some 14-month lows around 1.9335, a break of which could open up for 1.9000. The BoE is behind the curve on its interest rate cuts.

Charts: USDJPY

USDJPY tested interesting support levels late last week before rallying to begin this week. The recent trendline break looked important, but the pair hasn't managed to close convincingly below the 102.80/90 support area, and the 55-day moving average (red line) also offers support, so a follow up move lower is needed for any confirmation that we are in anything worse than a ranging market for the moment.

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