Foreign Exchange

Sterling started the morning on a great footing- hitting a new 6 month high against the dollar to 1.5816 and hitting a 3 month high against the euro to 1.1460.

Sterling was bullish hitting a high of 81.2 last seen in December 2008. In addition the UK economy received praise from the IMF on their aggressive action in tackling the recession thus far. However the IMF also warned that the government needed to adopt more plans to reduce the huge scale of government borrowing.

Today this facet was drilled home as the S & P downgraded the UK outlook from stable to negative. Immediately on this news sterling was dramatically sold- losing 2% on the USD and 1.5% against the euro in the space of 10 minutes!

Going forward I feel the amount public debt will increasingly become a focus for global economies…once recovery is apparent economies will have to face up to the reality of the massive borrowing that was required to get the economy moving.

A similar pattern can be seen in the US. Last night the Fed commented in their minutes that they are looking to expand their asset-purchasing programme. Against the back drop of recent improved sentiment the Fed minutes downgraded the growth expectations for the US economy- officials saw the economy contracting between 1.3% and 2% this year against forecasts of 0.5% to 1.3% in Jan. In addition unemployment is expected to rise significantly higher than forecasts raised in January.

Concerns are growing on the long term health of the US economy- more weak indicators and indications of more borrowing will cause a shift out of the dollar as it will lose its favour as a safe haven currency. The USD has lost ground across the markets- hitting a 5 month index related low- EUR/USD hit 1.3838 and USD/YEN 94.27.

Data already released from the UK showed that retail sales came in better than expected at 0.9% month on month for April. However this will be overshadowed by the downgrade from S & P.

Asian markets advance on a firm pace on Friday following yesterday’s advance on Wall Street, and renovated hopes of economic recovery. Euro and Pound trade slightly higher from yesterday’s lows.

Tokyo Nikkei 225 Index rises 1.66%, while South Korean Kospi Index trades 1.16% higher. Markets in Australia, New Zealand and Hong Kong are all going through gains ranging from 1% to 2.15%.

Japanese Machinery orders fell 22% year on year in March, but the decline was lower than expected, furthermore, Sony’s bright outlook for financial year has lifted investors sentiment and returned hopes of economical improvement to stock markets.

Euro and Pound rise from Thursday’s lows

EUR/USD has bounced up after hitting intra-week low at 1.3525 yesterday to reach 1.3665 session high on early Asian trade. At the moment, the Euro trades around 1.3625.

GBP/USD bounced yesterday at intra-week low at 1.5055 and has risen during U.S. And Asian session to take back some of the ground lost yesterday, reaching a session high at 1.5245.

USD/JPY has bounced at support level at 95.10 to break above resistance level at 95.75, reaching a session high at 96.20, to set back afterwards to levels around 95.90.Friday in Asia, the New Zealand dollar tumbled to its lowest level in almost 8-days against the Aussie after a report showed that New Zealand’s retail sales fell for the sixth consecutive quarter in the first three months of 2009 as consumers restrained spending, leaving the door open for more rate cuts to help the recession-hit economy. The kiwi also edged down against the currencies of U.S., Europe and Japan.

Aussie News

Statistics NZ reported today that when adjusted for inflation, retail sales volume for the first quarter declined 2.9 percent from the preceding quarter. The drop was more than double the previous record decline of 1.4 percent registered in June 2008 and March 1997.

The agency said the long term trend in total retail sales volumes has been declining since June 2007, having fallen a cumulative 6.7 percent since then, marking the longest and fastest period of decline since record keeping began in September 1995.

In terms of value, total retail sales for the quarter were down a seasonally adjusted 1.5 percent, the fourth straight quarterly fall and the largest in 12 years. The biggest declines were seen in motor vehicle sales, which were down 9.2 percent. Auto fuel retailing dropped 6.6 percent.

Since retail sales account for close to eight per cent of New Zealand’s gross domestic product, today’s report pointed to another sharp contraction in the first quarter, and more easing by the central bank.
New Zealand’s economy has been in recession since the start of last year as the global financial crisis exacerbated the effects of a rapidly cooling housing market, bringing about job cuts and stagnating incomes.

The Reserve Bank of New Zealand responded by cutting the key rate by a total of 575 basis points since last July to a record low 2.5 per cent. It has said last month it would keep the interest rate steady or lower until the latter part of 2010.

The New Zealand dollar slipped to 1.2853 against the Aussie during Asian deals on Friday. This set the lowest point for the kiwi since April 07. On the downside, 1.295 is seen as the next likely target for the NZ dollar. The aussie-kiwi pair was worth 1.2755 at Thursday’s close.

The kiwi tumbled to near a 2-month low of 1.2950 against the aussie on April 30. Although the kiwi gained 3% thereafter, it weakened again after hitting a 13-day high of 1.2569 on May 11. Thus far, the kiwi has declined 2% against the aussie.

In Asian trading on Friday, the New Zealand dollar dropped against the U.S. currency. At about 10:10 pm ET, the kiwi-greenback pair touched 0.5908, down from yesterday’s close of 0.5968. If the pair weakens further, it may likely target the 0.5865 level.

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Sterling

The Pound has lost strength after having hit a fresh 4-month high at 1.5305 and has dropped to levels right above yesterday’s high at 1.5260, a support level which is being tested at the moment.

According to the Swiss e Trade Strategy Team, the pound is about to give away recent gaiins dropping to 1.5150: “In a bold move, cable is trying to break a long-term resistance zone in early European hours, currently trading at 1.5270, near the day’s high. We expect the upmove to lose momentum around the 1.5300 mark, turning into a down movement towards the 1.5150 level.”

Euro

The Euro has won around 75 pips against the Dollar last hour, rising from 1.3620 to reach a new 7-week high at 1.3695 and test the 1.3700 level. Currently the pair is trading around 1.3680/90, 0.70% above today’s opening price.

According to Peter Rosentreich, analyst at ACM - Advanced Currency Markets, Bernanke and Trichet comments are helping risk appetite: “The EUR continues to be helped by recent risk-appetite, supported by equity market rallies and declining VIX and growing credibility to the ‘green shoots’ theory. In addition, as the market discounts the probability of a “black swan” event in the financial sector, the flight to safety trades becomes less relevant. With focus being put back on the Fed’s massively bloated balance sheet, timing of recovery and clean break of 200d ma, we expect traders are looking to build long position in the EUR. Comments by Bernanke and Trichet have added to the growing optimism surrounding the global recovery. Bernanke attempted to talk up the USD yesterday, stating that “the USD will be strong because the US economy is strong”. On the comment both EUR and GBP sold off dropping to intra-day lows but then quickly recovering, as trader focused/ believing the “US economy is strong portion” of more than the rational of a strong USD.”

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Foreign Exchange

The Pound rallied to the strongest level against the Dollar in four months yesterday, rising to a high of $1.5160 in London.

GBP/USD closed higher on Tuesday and above the 20-day moving average crossing confirming that a short-term high has been posted. The high-range close sets the stage for a steady to higher opening on Wednesday. Stochastics and the RSI are bullish signalling that sideways to higher prices are possible near-term. If it extends last week’s rally, the reaction high crossing is the next upside target. Closes below the 10-day moving average crossing would confirm that a short-term bottom has been posted.

EUR/USD closed lower due to profit taking on Tuesday as it consolidated some of Monday’s rally. The low-range close sets the stage for a steady to lower opening on Wednesday. Stochastics and the RSI remain bullish signalling that sideways to higher prices are possible near-term. If it extends this week’s rally, the reaction high crossing is the next upside target. Closes below the 20-day moving average crossing would temper the near-term friendly outlook in the market.

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