Forex Investment and Currency Trading

Developed Markets
Eurozone 1Q Real GDP growth came in way above consensus 0.7% qoq, from 0.4% in 4Q, driven by strong German data and a better-than-expected French reading. To be sure, German GDP rose 1.5% qoq in 1Q vs. 0.7% expected and 0.3% in 4Q. The German statistics office attributed the strong gain to investment and, to a lesser extent, consumption. French GDP recorded at
0.6% qoq in 1Q from a downward revised 0.3% in the previous quarter, a touch higher than expectations. Meanwhile, Eurozone April inflation was confirmed at 3.3%yoy for headline, but the core rate dropped to 1.6% yoy from 2.0%. With current oil prices, the headline CPI could surge to 3.9% yoy in May, in market’s view. As for the ECB, such a combination of record inflation and above-trend growth for 1Q means that rates are firmly on hold for now. However, as economic data for 2Q-3Q could be much weaker, and if inflation falls back later this year, the rate cut debate may still be open for 4Q.

Japan The US Treasury will release its semiannual report to Congress on potential currency manipulation by trading partners on Thursday, but not much market impact is expected. Following hedge selling, the 5-year JGB auction was barely safely passed with a narrower tail (9 cents vs. 12 cents previously) and a lower-than-expected tail price (Y99.91). Bearish sentiment persisted in the JGB market. Core private machinery orders (excluding ships and electric power) dropped by a larger-than-consensus 8.3% mom in March (down by 12.3% mom in February). Core private orders gained by 2.2% qoq gain in 1Q 2008, but the Cabinet Office’s forecast shows a 10.3% qoq plunge for 2Q. The sum of total private orders and orders via agencies (from small firms) rose by 1.5% qoq in 4Q 2007 and 2.8% qoq in 1Q but are expected to decline by 9.7% qoq in 2Q. To be sure, the Cabinet Office’s forecasts are not very accurate, and there is a downside bias to the 2Q forecast of core private orders due to a realization ratio of 94.8% in the last three quarters. However, weak readings of 2Q private machinery orders projections are consistent with the view that the ongoing corporate profit squeeze is leading to cost-saving measures, including capital spending cutbacks. Market continues to expect a significant slowdown of the domestic economy during 2Q-3Q 2008, although relatively high inflation readings by Japan’s standards and limited room for rate cuts will probably deter the BoJ Policy Board from cutting rates.

NZ NZD/USD broke below the 76.4% retracement of the upward move from the January low to the February-March double-top high at 0.7580 on weaker-than-expected retail sales data. Retail sales dropped by a larger-than-consensus 1.2% mom in March following a 0.6% mom decline in February, and ex-auto retail sales fell by a slightly larger-than-consensus 0.5% mom in March and more than offset February’s 0.1% mom gain. Real retail sales fell by 1.2% qoq in 1Q, more than offsetting the 0.3% qoq gain in 4Q. FM Cullen reiterated that in the May 22 budget income tax cuts would be delivered, ahead of a general election, which
must be held by November 15. However, he added that tax cuts cannot be huge.