Sterling Deepens Gloom, Yen Gains on Risk Appetite

The US trade deficit fell to $58.21 billion in March from $62.3 billion, overshooting expectations of $61.3 billion. US exports fell 1.7% after rising 1.8%, while imports tumbled 2.8% after rising 2.6%. The decline in imports was mainly owing to a temporary retreat in energy products. While much ink had been spilled over the benefits of a weak dollar on international trade, there was no relief on overall exports. In fact, as long as a falling dollar is accompanied by surging oil, the net effect is negative via rising oil imports.

Dollar struggles anew as commodities soar across the board, from oil, to gold and rice. Oil surges to $125.90 per barrel, gold hits a 1-1/2 week high of $890 per ounce and rice surges for a third consecutive day as the world's largest rice importers Nigeria and the Philippines upped their shipments following supply disruptions in the aftermath of the cyclone in Myanmar. But it is also case of reduced risk appetite with the high yielding GBP and NZD tumbling across the board, especially against the yen following yesterday's bigger than expected loss from AIG and the uninterrupted escalation in oil.

Sterling En-Route in Taking "Worst" Title from USD

In late 2007 we predicted the British pound to be the US dollar of 2008 and so far it has not disappointed. The currency is down 4.7% from its $2.04 high of March 14, and is the worst performer amid G10 currencies. Today, GBPUSD has lost a full cent to hit a fresh 2 ½ month low at $1.9469, two days after shedding 2.5 cents in one session. Yesterday's decision by the Bank of England to hold rates unchanged at 5.00% was as expected as it signaled further rate cuts for the rest of the year. The UK's high interest rates of 5.0% render the GBP vulnerable to more significant interest rate erosion than EUR, USD or JPY, hence the extended sell-off. We retain our month-end forecast of $1.9450, followed by $1.90 for Q3. The smaller than expected US trade deficit should also help drag GBP towards $1.9450 and onto $1.9380.

Loonie Gets Jobs Relief

The much anticipated Canadian jobs report showed employment rising by a net 19.2K in April following a 14.6K increase in March, beating expectations of a 10K increase. The unemployment rate rose to 6.1% from 6.0%. The report managed to boost the CAD but further volatility is anticipated for the day due as expectations of further BoC rate cuts still remain. The loonie was being sold off across the board during the Asian and European session despite oil prices soaring to a new record high of $125.80 per barrel. The jobs data provided CAD with temporary relief against the struggling GBP and CAD but USDCAD and EURCAD remain volatile. We expect surging oil and today's jobs report to favor CAD versus GBP and NZD but maintain USDCAD capped at 1.0120. We expect losses to revisit 1.0060, followed by 1.0030.

Yen Soars on Rising Fear

Yen flexes its muscles after marked reduction in risk appetite following the AIG earnings. Out expectation for a rise in the VIX after the rare 4-day string of uninterrupted declines also helps us anticipate fresh declines in US equities. Although our 103 yen month end target has already been breached, we continue to stick by it. In the shorter term, we expect the pair to test 102.50. Key support stands at the 50-day MA of 102. Upside stands at 103.30.

Euro Rises Past $1.54 But Gains Seen Limited

Rising oil and continued hawkishness from ECB's Trichet reinvigorated the euro to broaden its rebound, especially against the USD. Yesterday's cover story in the Financial Times about a joint preference by the US and Europe to stem dollar weakness is no more than an extension of last month's G7 statement about currencies and must not be taken as a change of policy. Whether the story was a PR coup by the US and Europe to pick the timing of the publication of the story in order to extend the dollar's gains, market participants are well aware that the only meaningful change in possible for currency markets is a change in central bank policy instead of the rhetorical tack of Finance Ministers. As long as the ECB maintains its relentless hawkishness against rising inflation and the Federal Reserve is forced to leave the door open for further rate cuts, the dollar's medium term weakness is likely to remain.

Surging oil prices and mixed US data will continue to slow pace of the euro's recent decline. Support is seen cropping up to $1.5420, backed by $1.5360. Upside remains capped at $1.5480, with subsequent resistance being downgraded to 1.5520 from 1.5550.

Revisiting Thursday's FX charts strategies pointed to further declines in GBPUSD, NZDJPY and a rise in the VIX index which is bearish for equities. The first two are well in our projected direction, with NZDJPY tumbling from 80.35 to 78.55, breaching below the 79.20 support. Cable tumbled from $1.9562 to $1.9469, nearing our expected target of $1.9450. Our anticipation of further pullback in equities with a rise in the VIX has yet to play out. We expect yesterday's bigger than expected loss from AIG and the uninterrupted escalation in oil will give traders little reason to hold on to gains before the weekend.

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Ashraf Laidi
CMC Markets Plc
http://www.cmcmarkets.com/usfx

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