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Risk FX Recovers Recovers But Remains Capped

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Top Stories

  • Portugal negotiates deal with EU
  • UK Construction PMI weaker and lending slows
  • Nikkie up 1.57% Europe off 0.5%
  • Oil sliding to $110/bbl
  • Gold at $1537/oz.

Overnight Eco

  • AUD HIA New Home Sales m/m 4.3% vs. 0.6%
  • AUD AIG Services Index 51.5 vs. 46.5
  • NZD Visitor Arrivals m/m -7.1% vs. -4.9%
  • NZD Building Consents m/m 2.2% vs. 9.8%
  • EUR Final Services PMI 56.7 vs. 56.9
  • EUR Retail Sales m/m -1.0% vs. -0.2%
  • GBP Nationwide HPI m/m -0.2% vs. 0.3%
  • GBP Construction PMI 53.3 vs. 55.6
  • GBP Net Lending to Individuals m/m 0.5B vs.1.7B
  • GBP Prelim Mortgage Approvals 48K vs. 44K

Event Risk on Tap

  • USD Challenger Job Cuts y/y
  • USD ADP Non-Farm Employment Change expected at 202K
  • USD ISM Non-Manufacturing PMI expected at 58.4
  • USD Crude Oil Inventories

Price Action

  • USD/JPY trades either side of 81.00
  • AUD/USD slips to 1.0800 but rebounds in EU risk flows
  • GBP/USD hammered further to 1.6465 as lending declines
  • EUR/USD Portugal deal helps to lift off 1.48 but 1.4900 still caps

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Risk FX recovered some of its Asia session losses, boosted by the announcement that Portugal agreed to a bailout deal with EU. However, lackluster economic data in Europe and UK capped the upside for most of morning European trade with EUR/USD unable to take out the 1.4900 figure while Aussie remained below 1.0900.

Portugal and EU agreed on the terms for a bailout deal worth about 78 billion euros which included about 12 billion euros for recapitalization of the country's banks. The terms of the deal were considerably better than Portugal's initial request. Under the conditions of the package Portugal will have to reduce its budget deficit to 5.9% of GDP this year 4.5% in 2012 and 3% by 2013. Originally, the EU had asked for more draconian cuts seeking to reduce the deficit by 3% in 2012.

The news helped to lift investors spirits and the pair managed to recover all the way to 1.4870 on the relief that Portugal will now be able to service a bond repayment of 4.2 Billion euros due in June. However, the rally in the EUR/USD was capped by weaker than expected final PMI Services data which printed at 56.7 versus 56.9 initially reported. The EU final services sector readings declined from their flash estimates suggesting that economic activity slowed as April progressed, most likely weighed down by higher energy prices and exchange rate appreciation.

EZ Retail Sales were also markedly weaker coming in at -1.0% versus -0.2% eyed as consumers retrenched in the wake of higher gasoline costs. This was the sharpest decline in consumer demand in more than 10 months and the fourth monthly contraction out of the past five. The news suggests that despite strong EZ growth on the production side, consumption remains anemic at best and as such may cause ECB policymakers to delay any further tightening for the near term. While ECB authorities have always insisted that price stability was their primary policy objective, the latest data from the region clearly shows a weakening of consumer demand and may cause them to pause for the time being especially in light of the rising euro.

In UK the eco news continued to be dour with PMI Construction data printing at 53.3 versus 55.6 eyed and lending slowing to 0.5 Billion pounds versus 1.7 Billion forecast. Unless the UK PMI Services report due tomorrow, surprises to the upside the economic data from UK will offer no reason to expect any tightening action from BOE in the foreseeable future. Cable therefore is likely to remain under pressure and could slide towards 1.6400 figure as the day progresses if risk aversion flows increase.

In North America the focus will be on the ADP report due at 12:15 GMT and the ISM Non-Manufacturing report due at 14:00 GMT. Market consensus calls for ADP to print at around 200K while the ISM number is expected to rise to 57.9 from 57.3 the period prior. The key however, will be the employment subcomponent of the ISM report which typically provides the best guide to the NFP data due this Friday. If the news surprises to the upside it may provide a small lift to the greenback against the yen which has been testing the 81.00 support level all night long.

FX Upcoming

Currency GMT EST Release Expected Prior
USD 11:30 7:30 Challenger Job Cuts y/y -38.6%
USD 12:15 8:15 ADP Non-Farm Employment Change 202K 201K
USD 14:00 10:00 ISM Non-Manufacturing PMI 58.4 57.3
USD 14:30 10:30 Crude Oil Inventories 6.2M

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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