Daily Forex Analysis by Finexo.com 29/04/2010

Past Events:

• EUR German Prelim CPI m/m out at out at -0.1% versus expected 0.1%, prior 0.5%
• USD Cure Oil Inventories 1.9M, versus expected 0.9M, prior 1.9M
• USD Federal Funds Rate out at <0.25%, versus expected <0.25%, prior <0.25%
• GBP Nationwide HPI m/m out at 0.1%, versus expected 0.4%, prior 1.0% (revised up)
• AUD CB Leading Index m/m out at -0.3%, versus -0.2%
• NZD Official Cash Rate out at 2.50%, versus expected 0.25%, prior 0.25%
• NZD Trade balance out at 567M, versus expected 375M, prior 335M (revised up)

Upcoming Events:

• EUR German Unemployment Change (0855GMT)
• EUR M3 Money Supply y/y (0900GMT)
• EUR ECB President Trichet Speaks (1230GMT)
• USD Unemployment Claims (1330GMT)
• CAD BOC Gov Carney Speaks (1530GMT)

Market Commentary:

The Euro hit a new 12 month intraday low yesterday after Standard & Poor’s downgraded its debt rating on Spain, compounding sovereign debt fears just as a resolution to Greece’s aid package seemed imminent.

The Euro traded at as low as $1.51240 as concern that Europe’s deficit crisis may widen damped the appeal of assets in the 16-nation region. A cut to Spain’s credit rating yesterday, coming after downgrades this week to Portugal and Greece exasperated fears that the Euro Zones debt crisis is spreading. Standard & Poor’s cut Spain’s credit rating to AA from AA+ and said the outlook on the country’s debt is negative. This move comes just two days after the rating agency sliced Greece’s borrowings to junk and reduced Portugal’s to the third-lowest investment grade. The extra yield investors demand to hold Spain’s 10-year debt rather than German equivalents widened to 112.5 basis points this week, the most in more than a year.

Europe’s single currency fell for the third time in four days against the greenback after the IMF said in its Regional Economic Outlook report that the “main risk scenario” from Greece’s debt crisis is “one of worsening global risk aversion, should the jitters spill over to some of the larger European economies.” Moreover, as concerns about a domino effect spread officials said a joint IMF EU rescue package could now total up to €120billion ($150 billion) over three years – nearly three times the amount recently pledged – as the IMF urged reluctant German lawmakers to move quickly in approving support for immediate financial aid.

Investors are abandoning the euro at a rate not seen since the collapse of Lehman Brothers Holdings Inc. as Europe’s worsening fiscal crisis threatens to splinter the 16-nation currency union. After reaching a new 12-month low against the USD, the Euro managed to recover slightly in the North American trading session to close at $1.52003, down 0.29% from its opening price.

This morning, Germany will release its latest figures for the unemployment change. A significant drop in the number of unemployed people was reported last month – 31,000. Economists are optimistic this time, and predict another drop of 11,000. A better than expected number could provide some stabilizing relief for the falling Euro.

Britain’s currency, also affected as by news of the Spanish downgrade, tumbled to a low of $1.51240 yesterday. The GBP/USD recovered slightly to close at $1.52443, down 0.29% from its opening price. This morning, a report by the Nationwide Building Society showed that housing prices in U.K rose by 1.0% in April from March. According to Nationwide data, this marks the second consecutive monthly rise of 1.0% rise, leaves house prices up by 10.5% on an annual basis.

In the United States, the Federal Reserve said yesterday that the U.S economy continues to strengthen, but that the “slack” left over from the recession was still so large that it expected interest rates to stay near zero for an “extended period”.

The labor market is beginning to improve,” the Federal Open Market Committee said in a statement yesterday in Washington, after last month saying it was “stabilizing.” Officials also said growth in household spending has “picked up recently.” Federal Reserve Chairman Ben S. Bernanke is contending with an unemployment rate that has been stuck at 9.7% for three straight months even as payrolls started to grow. Fed officials repeated that inflation is likely to be “subdued” and that consumer spending is held back by tight credit and weak income growth.

The Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners, was at 82.254 from 82.381 yesterday, when it rose to 82.714, the strongest since May 2009. The Dollar Index neared an 11-month high before a U.S. Labor Department report today (1330GMT) that economists said will show initial jobless applications dropped by 11,000 to 442,000.

Yesterday, the USD/CAD sunk as low as 1.00725 as investors sought the refuge in currencies of nations with relatively strong balance sheets. The Canadian dollar strengthened for the first time in three days against its American counterpart, to close at C$1.01033, appreciating a total of 0.54% against the USD. The Loonie added to its gains after the Fed restated its intention to keep the benchmark U.S. interest rate near zero for an “extended period.” Analysts expect that the BOC will raise interest rates in Canada as early as June 1st. Later today, the BOC governor Mark Carney will speak before parliament, in his second of two speeches this week. Carney is expected to give an overview of the economic situation as well provide hints about the pending rate decision.

New Zealand’s central bank kept its benchmark interest rate unchanged at a record low amid “elevated” risks to the global economy and indicated borrowing costs may not need to be increased as much as in previous cycles. “The New Zealand economy is recovering broadly as expected,” Reserve Bank Governor Alan Bollard said in a statement in Wellington yesterday, after maintaining the official cash rate at 2.5%. The governor went on to say that “At the same time, risks to the global outlook remain elevated.”

Bollard has held borrowing costs steady at 2.5% since April 2009 in order to help push the economy out of its worst recession in over 30 years. The New Zealand fell to $0.7170, from around $0.7200 late in New York, moving away from three-month highs of $0.7257 hit last week. It had rallied on speculation that the Reserve Bank of New Zealand (RBNZ) would prepare the ground for rate hikes as early as June. The Kiwi closed at $0.71788, up 0.80% from its opening price.

On the other hand, the Australian dollar held gains at around $0.9240, having jumped over 1% in the previous session, on speculation the Reserve Bank of Australia (RBA) will raise interest rates at its May policy meeting next week. The AUD/USD, which closed yesterday’s trading session at 0.92432, has reached a high of 0.92549 in early this morning.

Written by Finexo.com