• USD: Higher, risk appetite improves, trade balance widens, concern over EU aid plan
• JPY: Lower, tracking stocks, MOF will seek to extend Japan’s debt maturities will
• EUR: Mixed, cost of funding EU debt drops, GDP and industrial output beat expectations
• GBP: Lower, dovish BOE inflation report, Conservatives pledge quick action on the budget
• CAD and AUD: AUD lower & CAD mixed, gold trades at record high, Australian budget to return to surplus

Overview  
After recent volatility a relative calm has returned to the global equity and financial markets as ECB purchase of sovereign debt in peripheral European nations helps to reduce the cost of debt financing in Europe. The decline in the cost of debt financing in Europe contributes to a slight easing of worries about the EU debt crisis. EUR traded higher supported by easing EU debt worries and in reaction to report of better than expected EU Q1 GDP and strong EU industrial output. In addition, Spain has announced that it is taking measures to cut wages and reduce its budget deficit. Spain’s action to try and reduce its deficit may reduce some of the fear of debt contagion in Europe. GBP traded mixed initially supported by report that the Conservative Party will head the new UK government. Conservative Party leader Cameron will become the new UK PM. The Conservative Party pledged to take action within weeks to begin reducing the UK budget deficit. The impact of positive UK political news was offset by a dovish BOE inflation report and the statement from BOE Governor King that the central bank has not ruled out further bond purchases. Commodity currencies initially traded higher and the JPY traded lower as equities rally and risk appetite returns. Commodity currencies were also supported by a rise to a record high in the price of gold. Canada’s trade surplus narrowed and the housing price index rose. AUD gains were limited by concern about China’s economy and fear of a credit bubble in China. CAD gains were limited by weaker crude prices. US economic data was mixed with the trade balance widening to its highest level since October 2008 Exports rose by 3.2% and imports by 3.1%.USD is closely tracking risk sentiment and the direction of equities.

Today’s US data:
March trade balance widened to -40.42bln, a reading of -40bln was expected.

Upcoming US data:
On May 13th April import prices and jobless claims for week ending 05/08 will be released. Import prices are expected to rise by 0.8% compared to 0.7% last month. Jobless claims are expected to fall to 438k from 444k last week. On May 14th April retail sales industrial production, capacity utilization and University of Michigan sentiment will be released along with March business inventories. Retail sales are expected to rise by 0.3% compared 1.6% last month. Industrial production is expected to rise by 0.5% compared to 0.1% last month. Capacity utilization is expected at 73.6 compared to 73.2 last month. Michigan consumer sentiment is expected at 73.2 compared to 72.2 last month. Business inventories are expected to rise by 0.3% compared to 0.5% last month.

 JPY
JPY traded lower as stocks rebound and risk appetite improves. A modest decline in the cost of financing EU debt supported equity markets and risk appetite. There was limited reaction to a statement from MOF official Kaizuka that Japan plans to take action to extend the maturity of its debt to reduce funding risks. Kaizuka said that Japan will not be the next Greece because Japan can service its debt domestically by tapping Japan’s huge domestic savings. Shifting to longer dated maturities will help Japan mitigate some of the cost risk for funding its budget deficit. Tuesday Japan’s Finance Minister Kan said that he seeks a cap Japan’s debt issuance. Ratings agencies have warned that Japan’s sovereign debt rating could be cut if JGB bond issuance continues to rise. According to Kan Japan’s new fiscal year bond issuance should not top ¥44.3 trillion. This is close to the threshold that may trigger a downgrade of Japan’s debt rating.  Japan’s economic data was mixed with March leading indicator rising by +4.4 and the coincident indicator at +1.1. JPY direction is expected to trade inversely to equities and risk sentiment.

On May 13th March current account will be released expected at ¥2.15trln compared with ¥1.47trln last month. April money supply and bank lending will also be released on May 13th. Money supply is expected to rise by 0.1% compared to 0.2% last month and bank lending is expected to rise by 0.4% compared to 0.2% last month.

Key technical levels to watch in USD/JPY include support at 92.21 the May 11th low with resistance at 93.55 the May 10h high.

EUR
EUR traded higher supported by easing worries about the EU debt crisis as the cost of funding EU debt falls and Spain takes action to reduce its deficit. The ECB has been buying sovereign debt of peripheral European nations for last few days and these bond purchases have helped to reduce the cost of financing EU debt. The ECB says that it will not announce the size of its bond purchases and there is some confusion over whether the ECB plans to sterilize all of its bond purchases but for the moment the speculative assault on the European bond markets has slowed. The ECB bond purchases could create credibility issues for the ECB if the bond purchases disrupt price stability. EUR was also supported by report of better than expected EU Q1 GDP and strong EU industrial output. EU Q1 GDP rose by 0.2% and March industrial output rose by 1.3%. The impact of these reports was limited as investors are concerned that the momentum of the EU recovery will likely slow as peripheral European nations introduce austerity measures to cut budget deficits. Wednesday Spain announced a series of measures to cut its deficit which include a cut of public-sector wages by 5% this year and a freeze on wages in 2011. Increases in pensions will be suspended next year and public investment will be cut by €6bln.Spainih unions are protesting wage cuts and investors will be monitoring the protests to see if violence erupts as it did in Greece. EUR gains will likely be limited by continued uncertainty about the EU debt crisis and questions about the sustainability of the EU recovery.

On May 13th German Q1 GDP will be released expected at 0.3%.

The technical outlook for the EUR is mixed as EUR consolidates near 1.2700. Expect EUR support at 1.2586 the May 7th low with resistance at 1.2803 the May 11th high.

GBP
GBP traded mixed initially supported by the latest UK political news which finds that the UK has a new government and prime minister. The Conservative Party is the new ruling party of the UK and the leader of the Conservative Party, Cameron is the UK’s new prime minister. The Conservative Party has pledged to take quick action to reduce the UK budget deficit. The positive news on the UK budget deficit reduction plans was offset by a dovish BOE inflation report and a statement from BOE Governor King that the central bank has not ruled out additional bond purchases. King went on to say that it’s too early to consider tightening of monetary policy The BOE inflation report said that UK inflation is expected to fall below the 2% target within two years. King’s comments and diminishing UK inflation risk opens the door for additional easing by the BOE. GBP gains were also limited by a statement from a UK government source that the UK has no plans to join the European Monetary Union. The Daily Telegraph reports that Europe will not help the UK in event of a GBP crisis. UK economic data was mixed with April claimant count declining by 27,100 and weekly earnings reported at +4%. Investors will monitor how the UK governments addresses the UK deficit and how the BOE responds to the government austerity measures. A new budget is expected within 50 days.

 On May 13th March trade balance will be released expected to widen to -7.2bln from -6.2bln in March.

 The technical outlook for GBP is negative as GBP trades below 1.5000. Expect near-term support at 1.4720 the May 11h low with resistance at 1.5054 the May 10th high.

CAD
CAD traded higher supported by improving risk appetite as equity markets rally and in reaction to a record rise in the price of gold. Equity markets were supported by declining cost of funding of EU debt. Canadian economic data was mixed with the trade surplus widening by less than expected and home prices coming in line with expectation. Canada’s March trade balance widened by C$245mln, a C$1.55bln surplus was expected. A smaller than expected Canadian trade surplus reflects the impact of the strong CAD on Canada’s export sales and weaker energy prices. The March new housing price index posted its ninth monthly gain reported up 0.3%.CAD gave back  early gains after the release of today data and in reaction to a sharp drop in crude prices Today’s Canadian economic data may increase the risk of intervention but should not dampen speculation of an earlier BOC rate hike. Canadian officials have stated that the strength of the CAD is a risk to the Canadian recovery. Investors will be watching to see whether Canadian officials try to talk the CAD lower. Recent Canadian economic data has been strong with last Friday’s report of a record monthly rise in employment growth. The combination of stronger employment growth and rising house prices may increase pressure on the BOC to consider a June rate hike. The main obstacle to a June the BOC rate hike may be developments from the Greek debt crisis and concern that a rate hike may boost demand for the CAD. The BOC is likely to consider a June rate hike barring any substantial new fallout from the EU sovereign debt crisis. Canada may have to learn to live with a stronger CAD as the economic recovery gains momentum.

On May 14th March manufacturing shipments and new motor vehicle sales will be released. Manufacturing shipments are expected up 0.6% compared to 0.1% last month. Motor vehicle sales are expected to rise by 3% compared to 8.1% last month.

The technical outlook for CAD is mixed as USD/CAD trades below 1.0300. Look for near-term support at 1.0101 the May 3rd low with resistance at 1.0360.

AUD
AUD opened higher supported by firmer equity markets and improving risk sentiment. European and US equity markets posted modest gains as EU debt worries ease. AUD was also supported by the Australian budget outlook which is in much better shape than many of the G-7 nations. Australia’s Treasury Secretary Swan said that Australia’s debt size is the envy of the world and the Australian budget deficit is expected to return surplus within the next two years. The reduction in the deficit will partly reflect stronger growth. Australia’s debt is expected to be paid off by 2019. AUD gains were limited by reported weaker than expected Australian housing finance report. Australia’s March housing finance declined by 3.4% a 3% rise was expected. Monday, Australia reported that April NAB business conditions index declined to +8 from +13 last month and Australia’s April job ads declined by 1.2%. Weaker business conditions, the drop in job ads and weaker hosing finance may reflect recent tightening of monetary policy by the RBA. These reports may also contribute to speculation that the RBA will pause its tightening cycle. The RBA Monetary Policy report released last Friday states that the RBA believes interest rates are near average level. This suggests that the RBA plans to soon pause in its rate hike cycle. Diminished RBA rate hike speculation is negative for the AUD. 

On May 13th April employment growth and unemployment rate would be released. Employment growth is expected at 25k compared to 19.6k last month. The unemployment rate is expected to fall to 5.2% from 5.3% last month.

The technical outlook for the AUD is mixed as the AUD trades above 9000. Expect AUD support at 8803 the May 7th low with resistance at 9080 the May 10th high.

• USD: Higher, risk appetite improves, trade balance widens, concern over EU aid plan
• JPY: Lower, tracking stocks, MOF will seek to extend Japan’s debt maturities will
• EUR: Mixed, cost of funding EU debt drops, GDP and industrial output beat expectations
• GBP: Lower, dovish BOE inflation report, Conservatives pledge quick action on the budget
• CAD and AUD: AUD lower & CAD mixed, gold trades at record high, Australian budget to return to surplus

Overview  
After recent volatility a relative calm has returned to the global equity and financial markets as ECB purchase of sovereign debt in peripheral European nations helps to reduce the cost of debt financing in Europe. The decline in the cost of debt financing in Europe contributes to a slight easing of worries about the EU debt crisis. EUR traded higher supported by easing EU debt worries and in reaction to report of better than expected EU Q1 GDP and strong EU industrial output. In addition, Spain has announced that it is taking measures to cut wages and reduce its budget deficit. Spain’s action to try and reduce its deficit may reduce some of the fear of debt contagion in Europe. GBP traded mixed initially supported by report that the Conservative Party will head the new UK government. Conservative Party leader Cameron will become the new UK PM. The Conservative Party pledged to take action within weeks to begin reducing the UK budget deficit. The impact of positive UK political news was offset by a dovish BOE inflation report and the statement from BOE Governor King that the central bank has not ruled out further bond purchases. Commodity currencies initially traded higher and the JPY traded lower as equities rally and risk appetite returns. Commodity currencies were also supported by a rise to a record high in the price of gold. Canada’s trade surplus narrowed and the housing price index rose. AUD gains were limited by concern about China’s economy and fear of a credit bubble in China. CAD gains were limited by weaker crude prices. US economic data was mixed with the trade balance widening to its highest level since October 2008 Exports rose by 3.2% and imports by 3.1%.USD is closely tracking risk sentiment and the direction of equities.

Today’s US data:
March trade balance widened to -40.42bln, a reading of -40bln was expected.

Upcoming US data:
On May 13th April import prices and jobless claims for week ending 05/08 will be released. Import prices are expected to rise by 0.8% compared to 0.7% last month. Jobless claims are expected to fall to 438k from 444k last week. On May 14th April retail sales industrial production, capacity utilization and University of Michigan sentiment will be released along with March business inventories. Retail sales are expected to rise by 0.3% compared 1.6% last month. Industrial production is expected to rise by 0.5% compared to 0.1% last month. Capacity utilization is expected at 73.6 compared to 73.2 last month. Michigan consumer sentiment is expected at 73.2 compared to 72.2 last month. Business inventories are expected to rise by 0.3% compared to 0.5% last month.

 JPY
JPY traded lower as stocks rebound and risk appetite improves. A modest decline in the cost of financing EU debt supported equity markets and risk appetite. There was limited reaction to a statement from MOF official Kaizuka that Japan plans to take action to extend the maturity of its debt to reduce funding risks. Kaizuka said that Japan will not be the next Greece because Japan can service its debt domestically by tapping Japan’s huge domestic savings. Shifting to longer dated maturities will help Japan mitigate some of the cost risk for funding its budget deficit. Tuesday Japan’s Finance Minister Kan said that he seeks a cap Japan’s debt issuance. Ratings agencies have warned that Japan’s sovereign debt rating could be cut if JGB bond issuance continues to rise. According to Kan Japan’s new fiscal year bond issuance should not top ¥44.3 trillion. This is close to the threshold that may trigger a downgrade of Japan’s debt rating.  Japan’s economic data was mixed with March leading indicator rising by +4.4 and the coincident indicator at +1.1. JPY direction is expected to trade inversely to equities and risk sentiment.

On May 13th March current account will be released expected at ¥2.15trln compared with ¥1.47trln last month. April money supply and bank lending will also be released on May 13th. Money supply is expected to rise by 0.1% compared to 0.2% last month and bank lending is expected to rise by 0.4% compared to 0.2% last month.

Key technical levels to watch in USD/JPY include support at 92.21 the May 11th low with resistance at 93.55 the May 10h high.

EUR
EUR traded higher supported by easing worries about the EU debt crisis as the cost of funding EU debt falls and Spain takes action to reduce its deficit. The ECB has been buying sovereign debt of peripheral European nations for last few days and these bond purchases have helped to reduce the cost of financing EU debt. The ECB says that it will not announce the size of its bond purchases and there is some confusion over whether the ECB plans to sterilize all of its bond purchases but for the moment the speculative assault on the European bond markets has slowed. The ECB bond purchases could create credibility issues for the ECB if the bond purchases disrupt price stability. EUR was also supported by report of better than expected EU Q1 GDP and strong EU industrial output. EU Q1 GDP rose by 0.2% and March industrial output rose by 1.3%. The impact of these reports was limited as investors are concerned that the momentum of the EU recovery will likely slow as peripheral European nations introduce austerity measures to cut budget deficits. Wednesday Spain announced a series of measures to cut its deficit which include a cut of public-sector wages by 5% this year and a freeze on wages in 2011. Increases in pensions will be suspended next year and public investment will be cut by €6bln.Spainih unions are protesting wage cuts and investors will be monitoring the protests to see if violence erupts as it did in Greece. EUR gains will likely be limited by continued uncertainty about the EU debt crisis and questions about the sustainability of the EU recovery.

On May 13th German Q1 GDP will be released expected at 0.3%.

The technical outlook for the EUR is mixed as EUR consolidates near 1.2700. Expect EUR support at 1.2586 the May 7th low with resistance at 1.2803 the May 11th high.

GBP
GBP traded mixed initially supported by the latest UK political news which finds that the UK has a new government and prime minister. The Conservative Party is the new ruling party of the UK and the leader of the Conservative Party, Cameron is the UK’s new prime minister. The Conservative Party has pledged to take quick action to reduce the UK budget deficit. The positive news on the UK budget deficit reduction plans was offset by a dovish BOE inflation report and a statement from BOE Governor King that the central bank has not ruled out additional bond purchases. King went on to say that it’s too early to consider tightening of monetary policy The BOE inflation report said that UK inflation is expected to fall below the 2% target within two years. King’s comments and diminishing UK inflation risk opens the door for additional easing by the BOE. GBP gains were also limited by a statement from a UK government source that the UK has no plans to join the European Monetary Union. The Daily Telegraph reports that Europe will not help the UK in event of a GBP crisis. UK economic data was mixed with April claimant count declining by 27,100 and weekly earnings reported at +4%. Investors will monitor how the UK governments addresses the UK deficit and how the BOE responds to the government austerity measures. A new budget is expected within 50 days.

 On May 13th March trade balance will be released expected to widen to -7.2bln from -6.2bln in March.

 The technical outlook for GBP is negative as GBP trades below 1.5000. Expect near-term support at 1.4720 the May 11h low with resistance at 1.5054 the May 10th high.

CAD
CAD traded higher supported by improving risk appetite as equity markets rally and in reaction to a record rise in the price of gold. Equity markets were supported by declining cost of funding of EU debt. Canadian economic data was mixed with the trade surplus widening by less than expected and home prices coming in line with expectation. Canada’s March trade balance widened by C$245mln, a C$1.55bln surplus was expected. A smaller than expected Canadian trade surplus reflects the impact of the strong CAD on Canada’s export sales and weaker energy prices. The March new housing price index posted its ninth monthly gain reported up 0.3%.CAD gave back  early gains after the release of today data and in reaction to a sharp drop in crude prices Today’s Canadian economic data may increase the risk of intervention but should not dampen speculation of an earlier BOC rate hike. Canadian officials have stated that the strength of the CAD is a risk to the Canadian recovery. Investors will be watching to see whether Canadian officials try to talk the CAD lower. Recent Canadian economic data has been strong with last Friday’s report of a record monthly rise in employment growth. The combination of stronger employment growth and rising house prices may increase pressure on the BOC to consider a June rate hike. The main obstacle to a June the BOC rate hike may be developments from the Greek debt crisis and concern that a rate hike may boost demand for the CAD. The BOC is likely to consider a June rate hike barring any substantial new fallout from the EU sovereign debt crisis. Canada may have to learn to live with a stronger CAD as the economic recovery gains momentum.

On May 14th March manufacturing shipments and new motor vehicle sales will be released. Manufacturing shipments are expected up 0.6% compared to 0.1% last month. Motor vehicle sales are expected to rise by 3% compared to 8.1% last month.

The technical outlook for CAD is mixed as USD/CAD trades below 1.0300. Look for near-term support at 1.0101 the May 3rd low with resistance at 1.0360.

AUD
AUD opened higher supported by firmer equity markets and improving risk sentiment. European and US equity markets posted modest gains as EU debt worries ease. AUD was also supported by the Australian budget outlook which is in much better shape than many of the G-7 nations. Australia’s Treasury Secretary Swan said that Australia’s debt size is the envy of the world and the Australian budget deficit is expected to return surplus within the next two years. The reduction in the deficit will partly reflect stronger growth. Australia’s debt is expected to be paid off by 2019. AUD gains were limited by reported weaker than expected Australian housing finance report. Australia’s March housing finance declined by 3.4% a 3% rise was expected. Monday, Australia reported that April NAB business conditions index declined to +8 from +13 last month and Australia’s April job ads declined by 1.2%. Weaker business conditions, the drop in job ads and weaker hosing finance may reflect recent tightening of monetary policy by the RBA. These reports may also contribute to speculation that the RBA will pause its tightening cycle. The RBA Monetary Policy report released last Friday states that the RBA believes interest rates are near average level. This suggests that the RBA plans to soon pause in its rate hike cycle. Diminished RBA rate hike speculation is negative for the AUD. 

On May 13th April employment growth and unemployment rate would be released. Employment growth is expected at 25k compared to 19.6k last month. The unemployment rate is expected to fall to 5.2% from 5.3% last month.

The technical outlook for the AUD is mixed as the AUD trades above 9000. Expect AUD support at 8803 the May 7th low with resistance at 9080 the May 10th high.

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The JPY is one of the main beneficiaries of safe haven flows related to the EU sovereign debt crisis. JPY continues to trade inversely to risk sentiment and the direction of equities. A stronger JPY contributes to tighter monetary conditions and complicates Japan’s effort to combat deflationary pressures. The Japanese government has been pressuring the BOJ to take more aggressive action to combat deflation. Japan’s inflation rate declined for the 13th consecutive month falling 1.2% in March. A panel in Japan recently called upon the BOJ to set an inflation target and a target for the JPY. The BOJ has rejected the call for setting an inflation target and has been noncommittal about the need for intervention to try and cap JPY appreciation. At the beginning of 2010 the BOJ announced a plan to increase its loan program by ¥20 trillion and provide short-term loans to commercial banks for three months at an interest rate of zero. This liquidity add falls short of what the government would like to see from the BOJ. Recent improvement in Japans economy makes the BOJ reluctant to take more aggressive policy measures like buying government bonds.

 In that press conference following the April BOJ policy meeting BOJ governor Shirakawa said that deflation cannot be ended by the central bank. In its policy statement the BOJ said that the economy is picking up but faces headwinds from declining public investment, unemployment and continued tight credit conditions. The BOJ went on to say business investment is showing signs of improvement. Japan’s economic recovery remains mainly export led. Japan’s exports climbed 43.5% in March. This marks the fourth consecutive month of improvement in Japan’s export growth. Demand for Japanese exports is attributed to stronger economic outlook in Asia. Japan’s GDP growth has been weaker than expected as business spending is weak and the export recovery has yet to spread to the domestic economy. The quarterly deflator declined by 3%.A strengthening JPY not only contributes to deflationary pressures but may hurt Japans export sales. Strong JPY puts Japan’s recovery at risk. This may increase the risk of intervention if JPY continues to rise. The BOJ aggressively pumped liquidity into the money markets Monday as part of the reopening of a swap facility G-7 central banks pledged to help reduce tensions in the EU financial markets. The liquidity add and firmer equity markets sparked selling of JPY Monday.

The Japanese government wants to reduce Japans dependence on export sales for economic growth. The Japanese government seeks to increase spending to try and boost domestic growth and consumption. The increased government spending raises questions about Japan’s sovereign debt outlook. Japan is one of the most indebted industrialized nations. Japan public debt is forecast to reach 200% of GDP by end 2011. Because Japan has a large pool of domestic savings domestic investors can and do support the budget deficit. Ratings agencies warn that Japan’s debt rating may be downgraded if the government continues to increase its issuance of JGB bonds to finance the budget deficit. The Greek debt crisis shines light on the Japanese fiscal outlook.

Tuesday, Japan’s Finance Minister Kan said that next year’s government bond issuance should not exceed the current year sales of ¥44.3trln. Kan recommends a cap on certain government spending. Rating agencies have warned that Japan’s JGB bond issuance should not exceed the ¥44trln. Ratings agencies state that Japan’s sovereign debt rating could be cut if its JGB bond issuance continues to rise. The Japanese government and Finance Ministry are not on the same page in regard to the size of Japan’s debt issuance. According to Kan, Japan’s bond issuance in the new fiscal year should not top ¥44.3trln. This is close to the threshold that may trigger a downgrade of Japan’s debt rating. Japan’s PM Hatoyama said that comments on limiting JGB issuance is not official government policy. If the Japanese government pushes for increased spending and larger issuance of JGB bonds investors may turn away from the JPY. Japan’s Strategy Minister Sengoku says that investors may start taking note of Japan’s debt burden and Japans debt may unsettle markets. Sengoku went on to say “Japan needs to draw a lesson from Greece’s problems and to take steps on fiscal discipline with a stronger sense of crisis than before.”

Much of the impact of the EU sovereign debt crisis has been played out in the EUR/JPY cross. The cross experienced a sharp decline as equity markets plunged Thursday. The EUR/JPY cross could experience a reversal in price direction if investors begin to focus on sovereign debt risk in Japan. A shift in focus to sovereign debt risk in Japan will depend on Japanese government spending plans. If the Japanese government fails to heed Kans’ warning on debt issuance the JPY may soon experience a de-linking from risk sentiment and begin weakening versus USD and EUR.

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The JPY is one of the main beneficiaries of safe haven flows related to the EU sovereign debt crisis. JPY continues to trade inversely to risk sentiment and the direction of equities. A stronger JPY contributes to tighter monetary conditions and complicates Japan’s effort to combat deflationary pressures. The Japanese government has been pressuring the BOJ to take more aggressive action to combat deflation. Japan’s inflation rate declined for the 13th consecutive month falling 1.2% in March. A panel in Japan recently called upon the BOJ to set an inflation target and a target for the JPY. The BOJ has rejected the call for setting an inflation target and has been noncommittal about the need for intervention to try and cap JPY appreciation. At the beginning of 2010 the BOJ announced a plan to increase its loan program by ¥20 trillion and provide short-term loans to commercial banks for three months at an interest rate of zero. This liquidity add falls short of what the government would like to see from the BOJ. Recent improvement in Japans economy makes the BOJ reluctant to take more aggressive policy measures like buying government bonds.

 In that press conference following the April BOJ policy meeting BOJ governor Shirakawa said that deflation cannot be ended by the central bank. In its policy statement the BOJ said that the economy is picking up but faces headwinds from declining public investment, unemployment and continued tight credit conditions. The BOJ went on to say business investment is showing signs of improvement. Japan’s economic recovery remains mainly export led. Japan’s exports climbed 43.5% in March. This marks the fourth consecutive month of improvement in Japan’s export growth. Demand for Japanese exports is attributed to stronger economic outlook in Asia. Japan’s GDP growth has been weaker than expected as business spending is weak and the export recovery has yet to spread to the domestic economy. The quarterly deflator declined by 3%.A strengthening JPY not only contributes to deflationary pressures but may hurt Japans export sales. Strong JPY puts Japan’s recovery at risk. This may increase the risk of intervention if JPY continues to rise. The BOJ aggressively pumped liquidity into the money markets Monday as part of the reopening of a swap facility G-7 central banks pledged to help reduce tensions in the EU financial markets. The liquidity add and firmer equity markets sparked selling of JPY Monday.

The Japanese government wants to reduce Japans dependence on export sales for economic growth. The Japanese government seeks to increase spending to try and boost domestic growth and consumption. The increased government spending raises questions about Japan’s sovereign debt outlook. Japan is one of the most indebted industrialized nations. Japan public debt is forecast to reach 200% of GDP by end 2011. Because Japan has a large pool of domestic savings domestic investors can and do support the budget deficit. Ratings agencies warn that Japan’s debt rating may be downgraded if the government continues to increase its issuance of JGB bonds to finance the budget deficit. The Greek debt crisis shines light on the Japanese fiscal outlook.

Tuesday, Japan’s Finance Minister Kan said that next year’s government bond issuance should not exceed the current year sales of ¥44.3trln. Kan recommends a cap on certain government spending. Rating agencies have warned that Japan’s JGB bond issuance should not exceed the ¥44trln. Ratings agencies state that Japan’s sovereign debt rating could be cut if its JGB bond issuance continues to rise. The Japanese government and Finance Ministry are not on the same page in regard to the size of Japan’s debt issuance. According to Kan, Japan’s bond issuance in the new fiscal year should not top ¥44.3trln. This is close to the threshold that may trigger a downgrade of Japan’s debt rating. Japan’s PM Hatoyama said that comments on limiting JGB issuance is not official government policy. If the Japanese government pushes for increased spending and larger issuance of JGB bonds investors may turn away from the JPY. Japan’s Strategy Minister Sengoku says that investors may start taking note of Japan’s debt burden and Japans debt may unsettle markets. Sengoku went on to say “Japan needs to draw a lesson from Greece’s problems and to take steps on fiscal discipline with a stronger sense of crisis than before.”

Much of the impact of the EU sovereign debt crisis has been played out in the EUR/JPY cross. The cross experienced a sharp decline as equity markets plunged Thursday. The EUR/JPY cross could experience a reversal in price direction if investors begin to focus on sovereign debt risk in Japan. A shift in focus to sovereign debt risk in Japan will depend on Japanese government spending plans. If the Japanese government fails to heed Kans’ warning on debt issuance the JPY may soon experience a de-linking from risk sentiment and begin weakening versus USD and EUR.

• USD: Higher, skepticism about the EU rescue plan, wholesale sales rise, Lacker warns on rates
• JPY: Higher, tracking stocks, Japan may seek a debt cap, Yuan revaluation speculation
• EUR: Lower, concern about slowing growth, widening deficits and potential new debt downgrades
• GBP: Lower, political uncertainty, retail sales drop, house prices rise, industrial production jumps
• CAD and AUD: AUD lower & CAD higher, weaker equity and commodity markets, China rate hike threat

Overview
The USD traded higher Tuesday supported by doubt that the $1trln EU/IMF rescue plan announced Monday will contain sovereign debt risk from spreading in Europe and in reaction to accelerating inflation in China. There are numerous concerns about the impact of the EU/IMF rescue package. In order for countries to receive aid they must adopt extreme austerity measures. The austerity measures are likely to hurt the EU recovery. There also is concern that the ECB plan to buy bonds could be inflationary. ECB officials say that bond purchases will be sterilized. The EU/IMF rescue plan may not prevent future sovereign debt ratings downgrades in peripheral European nations. EUR was also pressured by speculation that the EU sovereign debt crisis will force the ECB to maintain accommodative monetary policy. As the US economy shows signs of recovery and the Fed is likely to consider a hike before year-end, yield and growth differential are moving in favor of the USD. USD was also supported by a spike in risk aversion as equity markets trade lower and accelerating inflation in China generates the risk of further tightening of monetary conditions in China. China’s inflation rate rose at its fastest pace in 18 months to 2.8%. The Shanghai index closed 1.8% lower partly on fear of tightening of monetary policy in China. The commodity currencies traded lower pressured by weaker equities and threat of tightening in China. CAD downside was limited by gains in cross trade to the EUR. GBP traded lower in volatile trade mainly pressured by UK political uncertainty as the UK political parties try to form a new coalition government. The latest report is that the Liberal Democrats and Labor Party are trying to form a coalition government. This coalition could be a negative for the UK budget outlook and may increase the risk of a downgrade in the UK sovereign debt rating. JPY traded higher supported by safe haven demand sparked by weaker equities and skepticism about the Greek rescue plan. JPY was also supported by a statement from Japan’s finance minister that Japan is considering a debt cap and in reaction to the Reuters report which says China is moving closer to a decision to allow Yuan revaluation. US economic data was mixed with wholesale sales rising more than expected. USD is closely tracking risk sentiment and the direction of equities.

Today’s US data:
March wholesale inventories rose by 0.4%, a rise of 0.5% was expected. March wholesale sales rose by 2.4%, a rise 0.7% was expected.

Upcoming US data:
On May 12th March trade balance will be released along with the April treasury budget. The trade balance is expected to widen to -40bln from -39.7bln last month. On May 13th April import prices and jobless claims for week ending 05/08 will be released. Import prices are expected to rise by 0.8% compared to 0.7% last month. Jobless claims are expected to fall to 438k from 444k last week. On May 14th April retail sales industrial production, capacity utilization and University of Michigan sentiment will be released along with March business inventories. Retail sales are expected to rise by 0.3% compared 1.6% last month. Industrial production is expected to rise by 0.5% compared to 0.1% last month. Capacity utilization is expected at 73.6 compared to 73.2 last month. Michigan consumer sentiment is expected at 73.2 compared to 72.2 last month. Business inventories are expected to rise by 0.3% compared to 0.5% last month.

JPY
JPY traded  higher supported by a spike in risk aversion as equity markets decline in reaction to doubt about the Greek rescue plan and in reaction to report of accelerating inflation in China. Euphoria about the EU/IMF Greek rescue plan has faded as investor’s question how the plan will be paid for and whether the plan will contain contagion at risk from spreading. Acceleration in China’s inflation rate generates concern that China will take additional measures to tighten lending conditions. This could be a drag on the global recovery. JPY was also supported by a statement from Japan’s Finance Minister Kan that Japan is considering a cap on debt issuance. Ratings agencies have warned that Japan’s sovereign debt rating could be cut if JGB bond issuance continues to rise. According to Kan Japan’s the new fiscal year bond issuance should not top ¥44.3 trillion. This is close to the threshold that may trigger a downgrade of Japan’s debt rating. The impact of Kans statement was partly diminished by a statement from Japan’s PM Hatoyama that comments on limiting debt issuance is not official government policy. Reuters reports that a Chinese bank official says that China is ready for a Yuan move. The Reuters report said that this Chinese official referred to a basket of currencies in its monetary policy report which could mean China is moving closer towards allowing Yuan revaluation. JPY and other Asian currencies sometimes trade as a proxy for Yuan revaluation. JPY direction is expected to trade inversely to equities and risk sentiment.

On May 12th March leading indicators will be released expected at 1% compared to 1.2% last month. On May 13th March current account will be released expected at ¥2.15trln compared with ¥1.47trln last month. April money supply and bank lending will also be released on May 13th. Money supply is expected to rise by 0.1% compared to 0.2% last month and bank lending is expected to rise by 0.4% compared to 0.2% last month.

Key technical levels to watch in USD/JPY include support at 91.84 the May 10th low with resistance at 93.55 the May 10h high.

EUR
EUR traded lower pressured by concern that the EU/IMF bailout may fail to contain sovereign debt risk in Europe. The size of the EU/IMF plan is likely to offer a temporary respite to the cost of funding government debt in Europe. The cost of debt financing has dropped over the last few days. The drop in the cost of funding the EU sovereign debt may not be enough to boost demand for the EUR because of concern that EU deficits may continue to widen, growth is likely to slow and the ECB will be forced to maintain accommodative monetary policy. In order for the EU nations to qualify for aid governments must take significant austerity measures to reduce deficits. This will require large spending cuts and tax hikes. Spending cuts and tax hikes are seen as a drag on the EU recovery. Additionally the ECB has pledged to buy bonds. This is essentially a quantitative ease by the ECB. The ECB bond purchases generate concern about price stability and inflation risk. The ECB plans to sterilize its bond purchases but how the ECB will implement the bond purchase plan remains somewhat uncertain. Germany reported that April CPI contracted by 0.1% and wholesale prices rose 1.7%. The EU debt crisis will prevent the ECB from an early exit from liquidity measures and force the ECB to maintain accommodative monetary policy. This may raise credibility issues for the ECB as inflationary pressures may be building. The Feds Lacker today said that the US recovery is on a sustainable path and that inflation is unlikely to stay low. He warned that the Fed cannot wait too long before raising interest rates. Based on the outlook for continued accommodation by the ECB and increased pressure on the Fed to normalize monetary policy, growth and yield differential is moving in favor of the USD. Focus turns to Wednesday’s release of EU Q1 GDP. The EU GDP report will give a good read of how the debt crisis has impacted the EU economy.

On the 12th EU Q1 GDP and industrial production for March will be released. GDP is expected to rise by 0.4% and industrial production is expected at 1.1% to 0.9% last month. On May 13th German Q1 GDP will be released expected at 0.3%.

The technical outlook for the EUR is mixed as EUR trades above 1.2900. Expect EUR support at 1.2586 the May 7th low with resistance at 1.3803 the May 11th high.

GBP
GBP traded lower pressured by UK political uncertainty as UK political parties struggle to form a coalition government. Monday UK PM Brown said that he will stand down and resign by September. The latest reports out of the UK suggest that the Liberal Democrats and Labor Party are moving towards the formation of a coalition government. This coalition could be a negative for GBP because the coalition may not be as aggressive as needed to reduce the UK record budget deficit. Ratings agencies have warned the UK AAA sovereign debt rating is at risk for downgrade if quick action after the election is not taken to reduce the deficit. The Labor Party has expressed concern that rapid deficit reduction could hurt the recovery. It remains to be seen whether the Conservative Party can form a coalition with the Liberal Democrats. This coalition might be a modest positive for the GBP because the Conservatives have pledged to take quick action on the deficit. UK economic data was mixed with retail sales week, house prices rising and manufacturing output strong. April BRC retail sales declined by 2.3%, April RICS house price balance improved +17 from +9 in March and March manufacturing output rose by 2.3%. Monday the BOE elected to hold monetary policy steady and the level of asset purchases unchanged. The BOE is unlikely to make any new policy changes until the political situation in the UK stabilizes. The trade will continue to monitor political news from the UK.

On May 12th March unemployment, average earnings claimant count will be released. On May 13th March trade will be released expected to widen to -7.2bln from -6.2bln in March.

The technical outlook for GBP is negative as GBP trades below 1.5000. Expect near-term support at 1.4475 the May 7th low with resistance at 1.5054 the May 10th high.

CAD
CAD opened lower as risk appetite falls along with weaker equity markets. Equity markets were pressured by skepticism about the EU/IMF rescue plan and threat of tightening policy in China as China’s inflation accelerates. Commodity prices were mixed with gold rising and crude prices weakening. Gold benefits from concern about fallout from sovereign debt risk in Europe. Crude prices were pressured by concern that tightening in China may slow global growth and demand for commodities. CAD turned higher supported by gains in cross trade to the EUR. CAD traded higher Monday supported by a surge in commodity prices and firmer equity markets sparked by news of a mega bailout for the EU. CAD should remain well supported on breaks by BOC rate hike speculation. Last Friday Canada reported a single monthly record rise in employment growth. Canada’s unemployment rate declined to 8.1% from 8.2%. Employment growth rose by a record monthly amount of 108.7k, a 25k rise was expected. The Canadian employment report confirms that the Canadian recovery is gaining momentum. Strong Canadian employment report will likely increase the odds of an earlier BOC rate hike. How the Greek debt crisis impacts global growth outlook will be an important consideration in upcoming BOC monetary policy decisions.  Based on Canada’s domestic growth the BOC is likely to consider a June rate hike barring any substantial new fallout from the EU sovereign debt crisis. BOC rate hike speculation and growth outlook fuels CAD gains versus EUR.EUR/CAD traded at a new low for the move. Focus turns to Wednesday’s release of Canada’s trade balance. The trade balance report is expected to show that strengthening of the global economy has increased demand for Canadian exports.

On May 12th March trade balance will be released expected at 1.7bln compared to 1.4bln last month along with March new housing price index expected at 0.3% compared to 0.1% last month. On May 14th March manufacturing shipments and new motor vehicle sales will be released. Manufacturing shipments are expected up 0.6% compared to 0.1% last month. Motor vehicle sales are expected to rise by 3% compared to 8.1% last month.

The technical outlook for CAD is mixed as USD/CAD trades below 1.0300. Look for near-term support at 1.0101 the May 3rd low with resistance at 1.0571 May 7th high.

AUD
AUD traded lower pressured by declining commodity prices and weaker equity markets. Acceleration in China’s inflation rate and skepticism about the EU/IMF rescue plan dampens risk appetite and sparked selling of commodities and equities. In addition there is a Reuter’s report that China may be moving closer to allowing the Yuan to appreciate. Yuan appreciation could be used as another tool by China to try to combat inflationary pressures and slow growth. The Shanghai index closed 1.9% lower and is down 20% for the year. There were no major Australian economic reports released today. Monday, Australia reported that April NAB business conditions index declined to +8 from +13 last month and Australia’s April job ads declined by 1.2%. Weaker business conditions and the drop in job ads may reflect recent tightening of monetary policy by the RBA. These reports may also contribute to speculation that the RBA will pause its tightening cycle. The RBA Monetary Policy report released Friday states that the RBA believes interest rates are near average level. This suggests that the RBA plans to soon pause in its rate hike cycle. Diminished RBA rate hike speculation is negative for the AUD. The RBA Monetary Policy statement also said that inflation pressures are rising faster than expected. This could mean that the RBA will still leave the door open for possible future rate hikes if inflationary pressures continue. AUD price direction remains closely tied to risk appetite. It remains to be seen if the EU bailout announcement will be sufficient to stop the recent deleveraging in commodities, equities and currency markets. There was little reaction to report that the Australian budget will return surplus ahead of schedule. Focus turns to Wednesday’s release Australia’s housing finance for March. Economic data may be overshadowed by news from Europe in regard to EU sovereign debt and the UK political landscape. USD strength versus Europe appeared to spillover into the today’s AUD trade. AUD rallied from today’s lows as US equities trade higher after the release of a sharp rise in US wholesale sales.

On May 12th March housing finance will be released expected at -1% compared to-1.8% last month. On May 13th April employment growth and unemployment rate would be released. Employment growth is expected at 25k compared to 19.6 K. last month. The unemployment rate is expected to fall to 5.2% from 5.3% last month.

The technical outlook for the AUD is mixed as the AUD trades above 9000. Expect AUD support at 8803 the May 7th low with resistance at 9080 the May 10th high.

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