FX News & Overnight Technical Levels

· Reserve Bank of Australia lowers 2007 inflationary forecasts despite robust growth in economy. Notes that “the decline (in inflation) appears to have been a little faster than originally expected.” Australian dollar falls through 0.8200 figure.

· Australian March trade deficit widens to A$1.622 billion. February deficit revised to A$728 million shortfall.

· Eurozone PMI services survey for the month of April prints lower than expected figure at 57, below consensus estimates of 57.6.

· Eurozone retail sales rises 0.5 percent on the month, as expected. Subsequent yearly figure rises above the 2.3 percent consensus at 2.6 percent.

· German PMI Services survey released at 57.8, relatively in line with 57.9 consensus estimate.

· US Non Farm Payrolls report prints less than expected. Payrolls increase 88,000 for the month of April as the unemployment rate rises to 4.5 percent.

Watch Out For…

Euro buyers attempt to test 1.3600 in the New York morning.

Japanese Yen holding onto 120.00 figure after US non farm payrolls release.

British Pound notably finds support at the 1.9850 figure, likely to head north to 1.9900 in the near term on bidding sights.

Australian Dollar Hurt By RBA, Greenback Looks to NFPs

The Aussie was the biggest loser in overnight trade as muted RBA May commentary along with much worse than expected trade deficit, weighed on the unit throughout Asia and early European trade. The trade deficit widened to -1.6 Billion AUD vs. -1 Billion AUD projected but the steep increase was caused primarily by cyclone activity in the northwest that disrupted iron exports. The bad news in trade may have been a one off event, especially in light of the fact that when adjusted for seasonal variation, the deficit for Q1 of 2007 probably shrunk to 3.31 Billion AUD vs. 3.55 Billion the quarter prior.

The real driver behind Aussie’s plunge may have been the less than hawkish May statement from the RBA. The weak inflation results last month prompted RBA to downgrade its inflation forecast from 2.75% to 2.5%. Furthermore, the central bank projected no serious inflationary impact from the persistent drought affecting the whole continent which has resulted in higher crop prices. The central bank signaled that for now its was content to simply observe the economy without initiating any additional rate hikes. For traders who had banked on another RBA rate hike in June, the tepid tone of the statement served as a disappointment. With Aussie trading at 17 year highs fueled in large part by some of the highest interest rates in the industrialized world, the RBA appears to be cautious about stoking more carry trade demand by hiking rates further. In short, the Australian central bank let the market know that it is unwilling to raise rates higher unless it is absolutely compelled to do so by spiraling price data and as a result, Aussie longs were liquidated throughout the night.

In Europe today, the economic news was essentially in line, although the services PMI data did print a bit soft. The index registered a reading of 57 vs. 57.6 as Italian and French data slipped. All of the components with the exception of employment were higher, but the pullback in employment suggests that the higher euro may be exerting some drag on future growth. At the very least, tonight’s data indicates that expansion in the 13 member region may have hit a short term peak as the index dropped to it lowest level in 6 months. The pair hardly reacted to the news however, as the EURUSD continued to trade in a very narrow 1.3545-1.3560 range ahead of the key event this week – US Non-Farm Payrolls. With market sentiment towards the US report already sour the risks for the dollar lie to the upside, unless the number prints extraordinarily weak at less that 60K jobs. Furthermore, as always the prior month revisions will be as important as the headline itself and the prices may well whipsaw in the first few minutes post release so caution and patience are advised.

Down Dollar Helps Everybody

How do changes in the value of the dollar affect U.S. companies and U.S. exchange-traded funds? It is not as straightforward as it looks.

First, a falling dollar raises the dollar value of foreign sales. Big U.S. multinationals receive roughly half of their total sales from overseas. For S&P 500 companies, it is about 30% of their sales overseas compared with 15% for smaller companies in the Russell 2000 Index. When the dollar weakens, the value of those sales grows. Hence international “mega-cap” companies, laggards for years, have recently outperformed.

n short, a weak dollar im­proves the case for big U.S. stocks.

But look at Europe, the stronger euro has not hurt their share prices even though they are even more international in terms of sales than most American firms. One of the reasons European ETFs are doing so well this year is the stronger euro. Remember, international ETFs are not hedged against the U.S. dollar so a weaker dollar will help their returns.

f the 19 emerging market ETFs tracked by ETFXRAY.com, only one is increasing in value. It is the iShares MSCI Mexico Index Fund (amex: EWW). The other 17 positions have reversed into columns of O’s.

The iShares Dow Jones U.S. Transportation Index (amex: IYT) has also recently reversed negatively. It has hit $94 twice this year only to fall back, once in February and again in April. In three years IYT has appreciated 78% for an annualized average gain of 26%. Despite the exceptional growth there have been periods of correction such as last May through September when the ETF gave up 17% in value.

HSBC (nyse: HBC - news - people ) is a leading bank in many financial exchange-traded funds such as the Wisdom Tree Int’l Financials ETF (nyse: DRF) where it represents 7.3% of the ETF basket. Formerly known as the Hong Kong Shanghai Banking Corporation, it is a global powerhouse and earlier this year passed Citigroup (nyse: C - news - people ) as the largest bank in the world in terms of market value. This week a second Gulf investor appeared on HSBC’s share register in less than two weeks on Tuesday as DIC Asset Management, part of Dubai International Capital, said it had bought a “substantial” stake in the bank.

HSBC’s expansion strategy in China has also recently been dealt a blow by the reclassification of its Chinese partner into a significant state-owned bank, a change that would protect the Chinese lender from a foreign takeover. HSBC paid $1.75 billion three years ago for 19.9% of the Bank of Communications--the biggest stake allowed for a foreign investor under then existing Chinese rules.

According EPFR Global, money returned to U.S. equity funds during the fourth week of April as the benchmark Dow Jones index posted a series of new record highs on the back of a better than expected first-quarter earnings season. But uncertainty about China’s response to economic growth that clearly exceeds official targets may have dampened flows into emerging markets funds. And, after three weeks of solid gains, investors pulled significant amounts of money out of Western European equity funds.

The $3.77 billion that flowed into U.S. equity funds during the week ending April 25 pulled these funds back into positive territory year-to-date. Small- and large-cap blend exchange-traded funds--passively managed funds which mix growth and value investment styles--accounted for the lion’s share of the fresh money that came in during the week.

In the case of the Western European funds, investors decided to lock in profits after this fund group has put in a 9% performance gain since March 22. The perception that mergers and acquisitions activity rather than fundamentals were driving recent gains in major European equity markets triggered some of the $1.01 billion worth of redemptions from these funds, as did the growing concern about Spain’s property bubble.

Finally, Japan ETFs and funds have been hit with net redemptions seven of the past eight weeks and are once again in negative territory year to date.

Faltering US dollar poses dilemma for equity investors

Investors in US stocks have viewed the recent decline in the dollar as a green light to buy into large companies with international exposure.

MasterCard, for example, is a company with large overseas operations that has boosted its recent earnings amid a weaker dollar. Its first-quarter profit soared 70 per cent compared with a year ago, partly because of the stronger euro against the dollar. Its shares jumped 11.2 per cent to $127.67 on Wednesday after the announcement.

But analysts warn that a faltering currency looms as a double-edged sword for equity investors.

"At some point, foreign investors will either hedge their US assets or repatriate," says Dominic Konstam, head of interest rate strategy at Credit Suisse.

So far, the dollar is seen to have made an orderly decline to compensate for a divergence between US and global growth rates.

In the wake of last week's news that the US economy grew just 1.3 per cent during the first quarter, the dollar fell to a record low against the euro and multi-year lows against sterling and the Canadian, Australian and New Zealand dollars.

This, analysts say, has encouraged local and some foreign investors to buy US stocks – which now look relatively cheap in their domestic currencies.

"The lower dollar has helped equities as the currency has adjusted for the slower economy and lower US investment returns," said Mr Konstam. "If the dollar doesn't fall, stock prices would come under pressure."

While the dollar has fallen by about 2.75 per cent against the euro for the year to date, the Dow Jones Industrial Average is up 6.1 per cent and the S&P 500 is up 5.9 per cent.

But if the dollar continues to weaken substantially, there will soon come a tipping point when foreign investors will no longer be satisfied with the returns from US assets.

Jack Ablin, chief investment officer at Harris Private Bank, said he was "a little worried about a replay of 1987 where the stock market kept going higher while the dollar quietly fell, adding: "Eventually, investors stood up and noticed."

The prospect of higher inflation beckons from a lower dollar, an outcome that, if accompanied by a slowly growing economy, represents the worst environment for stocks later this year, analysts say.

Investors are likely to watch the April jobs report, due on Friday, for any evidence that the labour market is weakening.

For some foreign investors who purchased US stocks at the start of this year, the recent market gains are not as impressive when viewed in their own currencies. In terms of the euro, the Dow's gain for the year is 3.2 per cent while the S&P has returned 2.9 per cent.

The one factor keeping back the risk of a massive net selling of US stocks by foreigners is the weak yen, according to Mr Konstam.

"So long as the dollar is stable against the yen, the threat of such an outcome will stay contained. Dollar-Asia is a very important gauge of repatriation risk," he says.

Copyright 2007 Financial Times

Dollar Near Record Low vs Euro

The dollar fell to near record low against the euro on Monday as the market sentiment on the greenback remains negative under the fact that the US economy is facing a soft landing while other major industrial countries are still seen growing. The euro rose to as high as 1.3678 versus the dollar and the sterling rallied to above 2 again. The dollar index is down 1.7% in April, the biggest monthly decline since November 2006.

Today¡¯s US data were mixed, making little impact on the market. Personal income rose 0.7% in March, larger than the estimate of a 0.5% rise. Personal spending was up 0.3%, less than the forecast of 0.5%. Core PCE, an inflation gauge, rose 0.1% in March, after a 0.3% rise a month earlier. Chicago PMI fell from 61.7 to 52.9 in April, adding evidence to the fact that the manufacturing sector is slowing down.

The market will focus on Canada PPI and US manufacturing ISM due tomorrow. Besides, the Reserve Bank of Australia is scheduled to announce its interest rate decision tomorrow evening. It is widely expected to maintain rates unchanged at 6.25%.

Dollar Rose on Strong ISM

The dollar climbed against its major rivals after a stronger-than-expected manufacturing report, temporarily easing worries about US economy slow-down and the Fed interest rate outlook. The manufacturing ISM rose from 50.9 to a 11-month high at 54.7 in April. The greenback bounced from near-record low at 1.3672 to test the 1.36 handle against the euro. The sterling went off a high at 2.0073 to the 2 level versus the dollar.

The dollar rebound today was partly a result of the thin trading during the Labor Day and the lack of fresh data. This single manufacturing report was not enough to change the overall negative sentiment over the greenback. The market will focus on the employment report from the US Labor Department this Friday for more clues on the economic conditions and outlook. Besides, tomorrow¡¯s ADP job report will give some insights on the job market of private sectors.

EURUSD will face interim resistance at 1.3650, followed by 1.3670 and 1.37. Additional ceilings will emerge at 1.3730, backed by 1.3750. Support starts at 1.36, backed by 1.3580, 1.3550 and 1.3530. Subsequent floors are eyed at 1.35.

USD Extends Gains

At 3:55 AM Germany April Manufacturing PMI (exp 57.3, prev 56.9)
At 4:00 AM Eurozone April Manufacturing PMI (exp 55.7, prev 55.4)
Germany April Unemployment Rate (exp 9.1%, prev 9.2%)
Germany April Unemployment (exp 3.94 mln, prev 4.108 mln)
Germany April Unemployment Change (exp -40.0k, prev -65.0k)
At 4:30 AM UK March Consumer Credit (exp 900 mln stg, prev 919 mln stg)
At 5:00 AM Eurozone March Unemployment Rate (exp 7.2%, prev 7.3%)
At 8:15 AM US April ADP Payrolls (exp 100.0k, prev 106.0k)
At 10:00 AM US March Durable Goods Orders (exp 3.3%, prev 3.4%)
US March Factory Orders (exp 2.1%, prev 1.0%)

Markets continued to reward the dollar for yesterday’s higher than expected manufacturing report, with the greenback piercing through the 120-level versus the yen for the first time in 2-months. Trading remained choppy in the overnight session, as position squaring in the euro and sterling pushed both lower toward 1.3562 and 1.9915 respectively against USD. We anticipate these conditions will linger heading into Friday’s all-important US non-farm jobs report.

On the calendar for today, we’ll see the April ADP payrolls report and March durable goods orders. Traders will look at the ADP payrolls data as a proxy for Friday’s non-farm payrolls reading. The April figure is seen slipping to 100k, down from 106.0k previously. Meanwhile, the March durable goods orders are largely unchanged, down marginally to 3.3% versus 3.4%. Factory orders are seen edging up to 2.1% from 1.0%.

Dollar Strengthened, Eyes on US Payrolls

The greenback continued its corrective rally on Wednesday with mixed US economic data. The euro weakened to as low as 1.3562 versus the dollar, and the sterling fell from 2 to 1.9873.

Durable goods orders rose 3.7% in March, beating the estimate of 3.3%. Factory orders increased 3.1% in March, above the forecast of 2.1% and a 1.0% rise in the previous month. Combined with the stronger-than-expected manufacturing ISM index, those two manufacturing numbers helped the dollar extend the correction in thinned holiday trading conditions.

The dollar rebound was resulted from adjustments in short dollar positions rather than a change in overall negative sentiment over the dollar. The dollar is likely to maintain tight range correction before the Labor Department employment report due Friday. US ADP job report today showed that private sectors added 64k jobs in April, far below the forecast of 100k. Though ADP report has no correlation with the Labor Department report, the market will keep cautious ahead of Friday payrolls.

FX Consolidates Ahead of Data

At 8:30 AM US Q1 Productivity (exp 1.0%, prev 1.6%)
US Q1 Labor Costs (exp 4.0%, prev 6.6%)
US Weekly Jobless Claims (exp 325k, prev 321k)
At 10:00 AM US April non-manufacturing ISM (exp 53.0, prev 52.4)

Currencies remained confined within recent ranges with a lack of fresh impetus and traders sidelined ahead of Friday’s US jobs data. The greenback was mixed overnight, holding firm above the 120-level against the yen while relinquishing the 1.36-mark versus the euro.

Economic data will be the focus today, with productivity, labor costs, jobless claims and services ISM due out. The Q1 productivity number is forecasted to drop to 1.0%, from 1.6% while labor costs are seen slipping to 4.0%. Weekly jobless are largely unchanged at 325k, up slightly from the prior week at 321k. Lastly, we have non-manufacturing ISM for April, estimated to improve to 53.0 from a 52.4 reading from March.