» European Morning Update 16th May 2008

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European Morning Update 16th May 2008

The Dollar edges lower in Asian trading

Releases from Japan:
                                                        Forecast        Actual
Q1 GDP                                  (QoQ)   +0.6%         +0.8%
Q1 GDP                                   (YoY)   +2.5%         +3.3%

March Industrial Production (F) (MoM)   - 3.1%        - 3.4%
March Industrial Production (F)   (YoY)   - 0.4%        - 0.7%
April Consumer Confidence                     36.7 (prior)   35.2

Japan has taken a leaf out of Europe’s book by seeing Q1 GDP rising faster than had previously been thought. It seems exports to Europe and Asia were still reasonably buoyant and consumer spending firm at 0.8% QoQ.

However, just as in Europe no one is anticipating a repeat performance in Q2 and recent numbers have echoed this loudly through the dusty corridors of the BOJ. Since March price hikes suddenly became commonplace and as fuel and food costs rocket the balance of spending has narrowed significantly.

Equally Japan’s exporters are facing tough times with the Yen at high levels and even exports to China have slowed to 3.2% from 14.9% which is the lowest pace since June 2005.

Domestically, the housing market is contracting with non-residential investment dropping 0.9% in Q1 – a sector that represents 15% of the economy. Separately NLI Research is forecasting Q2 to be close to zero growth.

The market is not getting excited about the numbers and nor are the public which saw the government’s consumer confidence index drop further to 35.2 in April. With consumer spending accounting for 55% of GDP the outlook isn’t that bright…

The following economic releases are due today:

Q1
French Wages (QoQ) +0.8%
French Non-Farm Payrolls (QoQ) +0.3%

March
Swiss Adjusted Retail Sales      (YoY)     +3.0%
Italian Trade Balance (Total)     EUR    -860mn
Italian Trade Balance (EU)        EUR      377mn

April
U.S. Housing Starts                                935K
U.S. Building Permits                              910K
U.S. University of Michigan Confidence       62.5

I think I’m just about ready to change my view that we could see one last Dollar high. Yesterday seemed a fairly insignificant day in many respects but that was the problem. If we are to see marginal new highs then this degree of range trading does seem inconsistent with a bullish view. The fact that the Pound, while remaining below key resistance at 1.9505, didn’t make a stronger attempt lower following that test does seem to take the steam out of the downside…

The Swissie is less convincing but can have a habit of generating weak final extremes so this is an area where I can give some leeway. However, Dollar-Yen still provides me with some conflict since until 103.65-00 breaks the upside to 106.82 still remains a potential target.

The only point that concerns me is the bearish expectation in Euro-Yen which does appear to be in conflict with a Dollar-Yen rally to 106.82… So watch the cross carefully…

As things stand across several currency pairs we do seem to be at risk of another tight range day again. In many ways, while not being particularly satisfying it could generate a stronger pattern from which we can trade the break out.

What was somewhat surprising was that with the half decent European growth numbers (though no one is getting fooled into thinking Q2 will be anywhere near as good) the U.S. numbers were almost uniformly disappointing but didn’t really generate any Dollar losses. With a quiet schedule today a repeat of yesterday seems the likely scenario but again, to me would appear to suggest that the Dollar should be making losses next week.

Note important support and resistance areas:

          USDJPY        EURUSD       USDCHF       GBPUSD
Res: 105.68-85    1.5569-10    1.0664-94    1.9594-31
Res: 104.90-00    1.5505-25    1.0592-23    1.9505-38

Spt: 104.00-42 1.5394-35 1.0504-13 1.9424-52
Spt: 103.40-65 1.5303-33 1.0433-70 1.9340-63