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Mid-Day Report: CAD Tumbles on CPI and Retail Sales, Euro Lower on Bundesbank Report

Canadian dollar is sharply lower in early US session after data showed tamer than expected inflation. Headline CPI rose 0.3% mom 3.3% yoy in April, below expectation of 0.5% mom, 3.3% yoy. BoC CPI core moderated from 1.7% yoy to 1.6% yoy. Also, retail sales were disappointing with headline sales flat in March while ex-auto sales dropped 0-0.1% mom. Markets expected 0.9% mom rise and 0.7% mom rise respectively. BoC Governor Carney has made it clear that any further rate hike would be "carefully considered" and today's data supports BoC to be on hold for a while.
Euro weakens broadly today after Germany's Bundesbank said that the country's economy will lose momentum ahead and "growth is likely to ease somewhat in the foreseeable future." The bank noted that the strong reading of 1.5% qoq in Q1 GDP growth "considerably overstates the underlying economic momentum". Meanwhile, the bank also warned that softening fiscal reform measures in Greece would hamper the country's ability to shoulder its heavy load of debts and discredit future European agreements on member states' fiscal prudence.
BoJ left rates unchanged at between 0% and 0.1% on unanimous vote today. The bank noted in the statement that the economy is facing "strong downward pressure, mainly on the production side, due to the effects of the earthquake disaster." However, the banks still expect the economy to "return to a moderate recovery path from the second half of fiscal 2011 as supply-side constraints ease and production regains traction." Hence, the bank decided to refrain from adding additional stimulus. The JPY 30T credit program and the JPY 10T asset purchase program was maintained unchanged. Note that Deputy Governor Nishimura dropped the call for expand the asset purchases too.
Dollar index's rebound from 72.70 is still in favor to continue with 74.80 minor support intact. Nevertheless, we're expecting strong resistance from medium term falling trend line (now at 76.81) to limit upside and bring down trend resumption. Hence, focus will be on reversal signal as the index breaks 76 resistance. On the downside, below 74.80 will flip bias back to the downside for a new low below 72.70.

USD/CAD Mid-Day Outlook

Daily Pivots: (S1) 0.9648; (P) 0.9681; (R1) 0.9707; More.
USD/CAD's strong rebound in early US session suggests that pull back from 0.9792 might have finished at 0.9640 already. Intraday bias is cautiously on the upside. Break will confirm that whole rise from 0.9444 has resumed. Note that a head and shoulder bottom bottom pattern should be formed (ls: 0.9525, h: 0.9444, rs: 0.9512) and 0.9444 might be a medium term bottom. Above 0.9792 will target key resistance at 0.9972. On the downside, though, below 0.9603 minor support will dampen the bullish case and turn focus back to 0.9444 support instead.
In the bigger picture, at this point, there is no indicate that medium term down trend from 2009 high of 1.3063 has completed yet. Outlook will remain bearish as long as 0.9972 resistance holds and further fall could be seen towards 0.9056 key support (2007 low). Though, we'd again start to look for reversal signal as USD/CAD approaches this key support level. Meanwhile, sustained break of 0.9972 will suggest that USD/CAD has indeed bottomed out already and should bring stronger rally towards 55 weeks EMA (now at 1.0063) first.
USD/CAD 4 Hours Chart
USD/CAD Daily Chart

BOJ drops proposal for further easing

On Friday morning, BoJ meeting concluded with a surprise move, after Deputy Governor Kiyohiko Nishimura dropped his vote to loosen policy further by raising stimulus by Y5tln. The proposed expansion of the central bank's asset-buying scheme was turned down by an 8-1 margin.

The BOJ had already eased policy right after the devastating earthquake from March by injecting up tp 10 trillion yen ($122.5 billion) through the purchase of financial assets including government bonds and corporate debt. The BOJ also maintained its economic assessment, saying the economy is facing strong downward pressure.

The statement highlighted the downward pressure on the production side due do supply-side constraints caused by the devastation, resulting in weaker exports and domestic demand. What´s more, inflation as recorded by the CPI remains around 0% with the rate decline continuing to slow.

The bank puts forth a baseline scenario of a modest recovery in the 2nd half of 2011 as supply-side constraints ease and production picks up, with expectations for the economy returning to a normal sustainable growth path with price stability in the longer-run.

In an effort to aid the economy regaining traction, the BoJ insisted on continuing to make contributions through a “comprehensive monetary easing, ensuring financial market stability, and providing support to strengthen the foundations for economic growth.”

USD/JPY rises as the Yen wakens

USD/JPY rebound from 80.95 low on Wednesday was capped on Thursday's US session at 82.25, and the pair retreated below 82.00 to consolidate between 8.40 and 81.80 during Asian session.

According to Karen Jones, technical analyst at Commerzbank, the USD/JPYmight open a consolidation phase, ahead of another bull run towards the 200-day MA at 82.77.Above 82.77, the pair would target hey resistance at 84.49, 4-year downtrend: "We would allow for some consolidation prior to tackling the 200 day ma at 82.77.

Above 82.77 should be enough to retarget the more important 4 year downtrend at 84.49," she added.Japan back into recession

Japan back into recession

Japan’s economy results were worse than estimated in Q1 after the March 11 earthquake and tsunami, sending the nation to its third recession in a decade. Japan's gross domestic product contraction was larger than expected, beating expert forecasts of -0.5%. "That is of course negative for the Yen but also negative for risk-on trades; therefore net effect of zero" observes Sean Lee at Forexlive.

“The result translated into an annualized contraction of 3.7 percent, much worse than the median economist forecast of a 2.0 percent contraction and compared with annualized growth of 1.8 percent in the United States in the same quarter,” reports Tetsushi Kajimoto and Rie Ishiguro at ThompsonReuters.

Analysts interviewed by think that although there's not a single definition for recession, it's commonly accepted that a recession is "two consecutive down quarters of GDP" as economic statistician Julius Shiskin suggested in a New York Times article in 1975; other economists prefer a definition of "a 1.5% rise in unemployment within 12 months".

Looking at the recent macroeconomic data, we see that Japanese GDP has not met this condition yet as the rising sun economy grew a 1.10% in the last quarter of 2010. "Therefore we consider this is just a momentary shock in growth due to tsunami impact in economy. Probably the effect will extend into the second quarter too but we have to consider this as an exogenous shock in economy rather than a recession. A recovery in consumer spending in the next months will confirm this hypothesis, as Japanese economy is expected to recover on the second half of the year, once the effects of the shock have been absorbed by the economy" explains Alberto Muñoz, analyst with

Spanish elections bring uncertainty; debt fears re−emerge

recursFacing a 21% unemployment rate, debt concerns, slowness in reacting to the economic crisis and with the young people taking the main squares in Madrid, Barcelona and Valencia among other cities around the whole kingdom, Spain will vote Sunday with all eyes put over possible changes as socialists risk to lose key areas. That could provoke changes in the Spanish economic policies.

The euro zone will face another challenge this weekend, with local elections in Spain. The Socialist ruling party is not only facing the risk to lose power over several cities, but it is also suspected of hiding piles of undisclosed debt, which could undercut the country's effort to avoid an international bailout. 

Last Sunday, May 15, under slogans as “Another World is Possible” and “Don't vote for them”, groups of young people took the 'Puerta del Sol' square in Madrid and 'Plaça Catalunya' in Barcelona. Since then, they've been followed by many other cities. Protesting against politics practices of all parties (PSOE, José Luís Rodríguez Zapatero's party, but also the opposition Partido Popular), they are calling their fellow citizens to reject and stand up against the traditional economic policies. Now the election results may be a little bit different than what polls previously estimated and experts will eye Spanish elections to see how the market could react on Monday and with the perspective of a general elections in the 2012 Spring season.

Losing elections will probably make Zapatero government collapse which will increase risk aversion all over the euro zone. If debt suspicion becomes true, Spain may need the bailout that it has been denying lately, sending the euro even lower against major rivals.

The Euro depends on Spanish stability. "Spain is the bigger risk in our opinion. There are two risks from Sunday’s election results. Firstly, that they may deliver the ruling Socialist government a big defeat causing the Zapatero government to collapse," says Kathleen Brooks, Research Director UK and EMEA for "Political turmoil would be greeted negatively by the bond market, which thrives on stability. The opposition People’s Party (PP) is expected to perform well and if they receive a large enough share of this Sunday’s votes they may demand a general election and the resignation of the government."

Debt concerns are over the table again in Spain. Suspicions started 5 months ago when a government change in Spain’s Catalonia region revealed a budget deficit more than twice as big as previously reported. Most of the regional Autonomies had in 2010 a budget deficit more than the target of 2.4% of regional GDP and almost the 6.4% in the case of Castilla La Mancha. 

"Right now we think that the Spanish elections are the biggest event risk for the Eurozone and the single currency over the next few days," Brooks continues. "Although EURUSD has come off, it remains well supported above 1.4000 – a key psychological level for investors. If investors start to lose faith in Spain that could see us quickly back to the 1.1800 lows we experienced this time last year during the first Greek bailout."

Majors on focus

Dollar is currently back higher against most European rivals, ahead of the risk events of the weekend above mentioned, following stocks and commodities sinking on Bundesbank Greece risky outlook. "EUR/USD is back below 1.4250 static resistance area, after failing to hold gains above 1.4300 again," comments Valeria Bednarik, Chief Analyst. "Bearish pressure increases as the pair approaches to 1.4140/50 static Fibonacci support area, while past week low at 1.4040 seems now the key level to break to see a stronger slide in the cross probably towards 1.3850 in the upcoming week. As long as capped by 1.4300, bearish bias will prevail. Only above the still distant 1.4440 area, the bullish momentum will resume."

GBP/USD continues limited to the upside by the daily ascendant trend line broken last week, now around 1.6300, and with an increasing bearish momentum. "Heading towards 1.5970, the market attention remains focused on rates, so as long as the BOE stance remains unchanged, the Pound will pay the consequences," continues Bednarik. "A clear recovery above 1.6350 is now needed only to ease the bearish pressure, while 1.6550 will likely keep the upside limited."

USD/CHF bearish tone remains unchanged, "as Swiss Franc strength on risk aversion runs overcomes the dollar ones. Hovering around 0.8800, and as long as below 0.8940 recent highs, the pair is expected to extend dominant trend to fresh record lows around the 0.8400 area," Bednarik says.

"The greenback is also higher against the rest of the European currencies today," concludes Bednarik, "although well below past April highs, keeping the long term trend against the dollar alive."
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