FX Daily Planet: Sydney/Asia Open

FX Daily Planet: Sydney/Asia Open

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View for the day

Resignation by Prime Minister Gordon Brown confirmed the end to Labour party rule and speculation is now focused on the prospect of Con-Dem collation as David Cameron pledged to form a coalition government. This news helped GBP to rise against the majors today, currently up 0.6% against the USD in afternoon trading. Although it is hard to imagine there being much common ground within a Con-Dem coalition, especially when it comes to spelling out the fiscal plan, anything that brings an end to days of uncertainty is likely to be a near term positive for GBP. Elsewhere in markets, the euphoria that followed the weekend’s announcements has faded rapidly as risk assets come under remain under pressure following a tumultuous overnight session. Equities, after an initial rise into positive territory early in New York trading, have slumped once again and most major indices are trading down about 0.2%. There have been no significant developments regarding the sovereign debt crisis during the session and markets continue to scrutinise the details of the funding framework. The 10yr bond yield spread between Southern Med countries and Germany has narrowed further although not at the pace seen Monday. Given the frantic nature of trading at the start of the week, the session’s price action may represent investors desire to take stock of recent events which suggests a period of range trading in the sessions ahead.

Data releases have been thin on the ground during the session with only the NFIB small business optimism survey, which came in slightly better than forecast at 90.6, and the wholesale inventories report, which showed inventories increasing 0.4%m/m. Earlier, swedish inflation data was on the softer side of expectations, supporting our economists’ view that the Riksbank can afford to stay on the sidelines a little longer than the market currently anticipates. In light of this release, SEK remains today’s weakest currency, down about 1% against the USD. In the UK, industrial production was significantly stronger than expected. The focus is likely to remain on the UK with the employment data coming out tomorrow, as well as on the Euro zone as we receive GDP and IP there tomorrow.

Overnight news

GBP: Gordon Brown resigned as Britain’s Prime Minister and David Cameron took over as Britain’s Prime Minister.

USD: Mar wholesale inventories increased 0.4%m/m (Cons: 0.5)

SEK: April Inflation is weaker than expected, unchanged on the month both for headline and CPIF.

GBP: Industrial production is much stronger than expected, rising 2% m/m.

Today’s watchlist (all times BST; +9hrs for Sydney, +8hrs for Tokyo, -5hrs for New York)

KRW: BoK rate announcement for May (Cons: 2.00, JPM: 2.00)

AUD: Housing finance (%m/m, sa) for March (JPM: -3.5, Cons: -3.0) @ 02:30

JPY: Leading index prelim (CI) for March (JPM: 101.6) @ 06:00; Coincident index prelim. (CI) for March 101.6

EUR: Germany GDP flash (%q/q, sa) for 1Q10 (Cons: 1.2) @ 07:00; IP (%m/m, sa) for March (Cons: 1.2) @ 10:00; GDP flash (%q/q, sa) for 1Q10 (Cons: 0.1)

CHF: Producer and import prices (%m/m, sa) for April @ 08:15

GBP: Unemployment rate (%, sa) for April (Cons: 4.8) @ 09:30; Claimant count (000’s, ch, m/m, sa) for April (JPM: -25, Cons: -20) @ 09:30; Average earnings (3M, %oya, sa) for March (JPM: 1.9, Cons: 2.2); BoE releases Quarterly Inflation report @ 10:30

Overnight price action

FX: SEK and EUR are under pressure while GBP and JPY gain.

FX vol: Front-end volatility bounces as risk FX comes under renewed pressure.

Commodities: Oil falls 1% and gold is up nearly 3%.

Bonds: US yields are down 2bp across the curve.

Equities: US equities are lower by 0.3%

Technical View for the day

A mixed day for the USD as this week’s recovery continues to develop. While this week’s action suggests an improved backdrop for risk particularly given the push above the key 1150/1160 resistance zone for the S&P, confirmation is still lacking as the short term price action maintains a two-sided bias. Still, we do see some compelling developments that suggest continued high beta outperformance. In that regard, yesterday’s highlight was the strength in CAD following the break below the key 1.02 support area. Again, this is where prices broke out last week and while the near term setup can allow for some pause, the downside risks appear to be back on track. Note that we have entered a new short EUR/CAD position as yesterday’s impulsive breakdown suggests a closer test of the 2001/2000 lows near 1.26/1.25. In line with the CAD outperformance, note that AUD/CAD has finally broken the key December-April range lows, while CAD/NOK has broken through the medium term range highs near 5.99. Moreover, this week’s reversal in EUR/AUD and EUR/NZD seems consistent with the high beta outperformance view with additional downside and breaks of the May lows expected.

The action in EUR/USD remains poor as the pullback from this week’s high stays heavy particularly following the failure below the important 1.3115/55 resistance zone. In turn, while the setup suggests some more stability, the overall bearish risks remain intact. Note that last week’s .9135 breakdown area for AUD/USD remain the key focus and will continue to define whether prices can see another run at the medium term range highs.

While USD/JPY has pushed through last week's breakdown zone near 93.00/25 which includes the violated March trendline, sustained follow-through has been lacking. Still, we continue to see risk for additional upside. The key levels for cross JPY are holding including last week’s breakdown levels. As such, a break above the 85.00/30 zone for AUD/JPY and the 92.00 area for CAD/JPY are necessary to reassert the upside bias.

ENDS

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