Forex Afternoon Wrap – 05/05

Key Notes:

• Australia AIG services index 49.7 vs. 50.2 previously
• Australia trade balance -1.32bn vs. -0.98bn
• RBA cash rate 2% as expected
• Spain unemployment change -118.9k vs. -64.8k
• UK Construction PMI 54.2 vs. 57.6
• EU economic forecasts
• Eurozone PPI m/m 0.2%
• Canada trade balance -3bn bn vs. -0.8bn
• US trade balance -51.4bn vs. -41.2bn

Later:

• US ISM non-manufacturing PMI
• US IBD/TIPP economic optimism
• New Zealand Global Dairy Price Index

RBA cuts interest rates to 2%. Aussie rallies!

The Asian session geared up for the RBA’s interest rate decision. The board, decided cut rates by 25bps but maintained a neutral tone in its statement. The Aussie, which initially weakened on the news, saw a strong reversal across the board and was at one point trading back near the 0.78 handle.

The Kiwi Dollar continued its decline and was one of the weaker currencies today. The key risk to the Kiwi comes from the Global dairy price index due to be released some time later this evening. With last month’s numbers better than expected, albeit still in the negative, a positive reading during today’s GDT auction could help the Kiwi to pare some of its losses since the RBNZ meeting last week.

The Euro continued to post losses today as the single currency continued to drift lower after failing to break above the previous highs of 1.125 levels. The next major support comes at 1.10 for the EURUSD. The European commission released its economic forecasts and upgraded growth for the region to 1.5% from 1.3% previously. The upward revised forecasts, if true could beat the US and UK GDP’s. EURGBP was also looking weaker today after the currency managed to stage an impressive rally to 0.741.

From the UK, British Construction PMI fell to a 22-year low to 54.2, from 57.8 in March. The fall in construction PMI comes after last week’s manufacturing PMI fell to 54.2, down from 57.8 and also marks the weak first quarter GDP growth in the UK, albeit the data being only the first estimate. The outlook for the British Pound is starting to look bleak in light of the UK general elections this Thursday besides the weak economic data followed by the major risk events from the US later this week.

The US Dollar Index continued its gradual rally posting gains for the third consecutive day. At the time of writing, the Dollar Index was trading at 95.77, above the support at 95.5. As long as support holds here, the Dollar Index could eye higher with an initial target to 96.42 – 96.5 region. However, only a close above these levels will shift the basis back to a resumption of the bullish trend. In the event the Greenback fails to hold its gains above 96.5, a decline to 95.5 and lower is inevitable.

The US trading session saw the release of the Canadian and US trade balance data both of which exceeded expectations. The Greenback did not react much to the news ahead of the ISM non-manufacturing PMI due later in the evening.