Daily Forex Fundamentals - May 12, 2011

 
articles by babypips.com

What's on the Economic Horizon today...
U.S. Retail Sales and PPI to Show Downside Surprise?
U.K. Manufacturing Production Rebound in Sight
Euro Zone Industrial Production Report Due

U.S. Dollar (USD)

The Greenback was off to a rocky start but was able to get its act together later on as risk aversion popped its head back in the markets. It ended the day higher against all its major counterparts after USDX landed above the 75.50 mark. Continue reading to find out whether risk aversion could linger and keep the Greenback afloat today.

Mixed results of the Chinese reports released yesterday and the weak U.S. trade balance seemed to dampen traders' risk appetite. Not even the pound, which got a strong boost from the upbeat BOE inflation report, was able to close higher than the safe-haven Greenback at the end of the day.

Traders flocked back to the lower-yielding U.S. dollar when the U.S. trade balance printed a 48.2 billion USD deficit, wider than the projected 46.8 billion USD shortfall. Components of the report revealed that higher oil prices pumped up imports by 4.9%, outpacing the 4.6% rise in exports.

Today the U.S. is set to release another set of top-tier reports namely their PPI and retail sales figures. Producer prices are projected to have risen by 0.6% in April, following the 0.7% uptick seen last March. Core PPI is expected to post a mere 0.2% increase because this figure doesn't include the impact of food and energy prices. Meanwhile, the headline retail sales figure could print a 0.5% increase while the core version could show a 0.7% rise in consumer spending.

Euro (EUR)

WHERE IS THE LOVE? The euro found itself singin' to the Black Eyed Peas' hit single as it took a nasty nosedive yesterday. Strikes in Greece and Portuguese bank problems had traders hatin’ on the shared currency, forcing EUR/USD to plunge by 197 pips and EUR/JPY to fall by 131 pips.

Don’t tell me you didn’t see this one coming! With the way the euro zone’s debt problems have been coming to light again, it was only a matter of time before we saw further losses from the euro.

In Greece, large strikes were held in protest against the government’s austerity plans. Things even turned violent, with protesters throwing rocks and the police whippin’ out tear gas! Of course, having your people violently oppose austerity measures isn’t a good sign for a country that is in dire need of cost-cutting, which is why many believe there’s a big chance Greece may have to restructure its debts or risk defaulting on them.

But Greece isn’t the only one to blame for yesterday’s sharp selloff; Portugal had a hand in it, too! According to S&P, the Portuguese banking system may need more support from the government, putting its credit rating on the line. Ouch! Way to deal a blow to investor confidence, eh?

With such a dark cloud hanging over its head, it’s hard to see the euro posting gains this week. But maybe today’s industrial production report can provide at least a little relief from the bearishness when it comes out at 9:00 am GMT. Forecasts have the report printing a 0.4% growth in output, slightly lower than the 0.5% we say in February. If March can somehow outperform February, it may be enough to trigger a mini euro rally.

British Pound (GBP)

As my momma always said, things can always change on a dime… and that’s exactly what happened on Cable yesterday! After zooming higher following the inflation reports, GBP/USD found tough resistance at the 1.6500 before nose diving all the way back down. By the end of the day, the pair closed at 1.6348, 10 pips below its closing price and 170 pips off its highs of the day.

The Bank of England came out more bullish than expected, as they rose their inflation forecasts and hinted that it may just raise rates later this year. According to their estimates, inflation will most likely hit 5% later this year and stay well above their 2% target in 2012.

While the BOE did acknowledge downside risks to the recovery, that’s not what traders were focused on. It’s all about interest rates baby! Just take a look at the euro zone – despite all those sovereign debt concerns, the euro rose earlier this year on rate hike speculation. With the BOE most likely raising rates later this year, it’s no surprise that pound bulls’ hearts jumped up like a teenager girl’s at a Justin Beiber concert.

What was surprising however, was how quickly the pound gave back all its gains. Thanks to mixed Chinese data and disappointing U.S. trade balance figures, we saw a broad risk sell-off take place during the U.S. session. Safe havens like the yen and dollar benefitted, and we saw GBP/USD fall right back to its opening price! Boohoo Mr. Cable!

Looking at today’s economic calendar, we’ve got another set of top tier data coming out.

At 8:30 am GMT, manufacturing production figures are set to be released. Word on the forex grapevine is that production grew by 0.3% in March, after we saw flat growth in February. Take note that the past few months, forecasts have been way off target. If you’re the type who likes playing news events, this may be right up your alley!

Later on, NIESR will be releasing its GDP estimates. Has the U.K economy improved upon the 0.7% month-on-month growth from March? Find out later at 2:00 pm GMT!

Japanese Yen (JPY)

That's three out of four for the Japanese yen! Thanks to the return of risk aversion yesterday, the yen was able to end higher against the euro, pound, and Aussie. Its only loss was against the Greenback, as USD/JPY opened at 80.83 and closed 3 pips above the 81.00 handle. Can JPY score four out of four today or will it erase its recent wins?

Even though Japan didn't release any top-tier reports yesterday, the Japanese yen was able to flex its muscles against most of its major counterparts. Mixed results of the Chinese data and the not-so-good outcome of the U.S. trade balance were the most likely culprits for the drop in risk-taking. Because of that, most traders started unwinding their riskier positions to the benefit of the Japanese yen.

Japan's economic schedule is empty again for today but that doesn't mean the yen's movement will be just as quiet. Bear in mind that the U.S. schedule is filled with red flags today!

Canadian Dollar (CAD)

KAPOW! And just like that, Loonie bears are back in the game! The Loonie erased much of its gains from earlier this week despite posting growth in exports and imports. Without support from oil, USD/CAD lifted off, rising from its intraday low of .9514 to end the day 34 pips higher at .9611.

For a moment, Loonie bulls were at the top of the pip-world, but it didn’t take long for them to come crashing back down! News of Canada’s trade surplus expanding from 400 million CAD to 600 million CAD (versus forecasts for 500 million CAD) in March took the bulls to nirvana, but oil prices had other plans for the Loonie.

After oil prices came crashing down (a 4% plunge!), bears took complete control over the Loonie. Of course, this is due to the direct relationship the Loonie has with oil prices.

Anyway, today, we only have NHPI data on tap, and it's slated to show a 0.3% rise following the previous month’s 0.4% uptick. This report probably won’t do much to shake up USD/CAD, but it’s still worth catching at 12:30 pm GMT since it could move the markets if it prints waaaay off forecast!

Australian Dollar (AUD)

Can you guess what song was on loop in the Aussie's playlist? I'm willing to bet it's Adele's "Rolling in the Deep" because that's exactly how the Aussie moved yesterday! AUD/USD fell short of the 1.0900 handle then tumbled by more than 200 pips to a low of 1.0664 while AUD/JPY found resistance at 88.00 and closed at 86.38. Find out what caused the Aussie's sharp drop.

The Aussie seemed to have it all at first when it edged higher despite the mixed Chinese economic data, but it played to the beat of risk aversion after the U.S. released a weak trade balance. Perhaps traders had a tough time interpreting the results of the Chinese spending and inflation reports which printed an annualized 17.1% rise and a 5.3% increase respectively. We never know what the PBoC will be up to this time!

Today Australia is set to release its jobs reports, which could show a 17,600 increase in hiring for April. This would be much less than the 37,800 employment change figure posted last March, which implies that the Australian jobs market is seeing a bit of a slowdown. But hey, an increase in employment is still an increase in employment! This could keep the jobless rate steady at 4.9% for the month, but if the actual figure falls short of expectations, the Aussie could keep rolling in the deep! Keep an eye out for that report due 12:30 am GMT.

If you're trading AUD/USD, make sure you also stay tuned for the release of the U.S. consumer spending and inflation reports later on. I'm sure y'all saw how the weak U.S. trade balance damaged risk appetite yesterday and we might just see the same scenario today. Stay on your toes, everyone!