Week ending 22 May 2009: A major revision in markets’ opinion of U.S. financial stability contributed to widespread USD depreciation late in the forex trading week, exaggerated by position squaring and light volumes ahead of a long weekend in the U.K. and U.S. This potential reversal of USD long positioning and risk aversion trading leaves investors seeking a new safe haven for capital flows, with commodities, commodity currencies, and “anti-dollar” trades the natural beneficiaries.

Australia’s May consumer inflation expectations slowed to 2.3% and the 1Q2009 wage cost index to 4.2%, while Westpac consumer confidence fell −4.3% m/m. AUD/USD surged 4.7% on USD weakness and commodity strength, slamming through resistance at 0.7700 and closing at 0.7838.

U.S. April housing starts declined to 458K, well below market expectations. April leading indicators rose 1.0%, mainly on surging equities markets, and May Philly Fed improved to −22.6 from −24.4.

Eurozone May PMIs printed 40.5 manufacturing, 44.7 services, and 43.9 composite. May ZEW survey improved dramatically to 28.5 economic sentiment from 11.8, and the March trade balance recorded a surplus of €0.4Bn, a deficit of €2.1Bn s.a. March construction output fell −1.0% m/m, −8.7% y/y. EUR/USD also surged as markets downplayed Eurozone economic issues, assisted by light volumes, rising 3.6% in the week to close at 1.4001.

The U.K. 1Q2009 GDP remained unrevised at −4.1% y/y, with private consumption printing −1.2%, exports −6.1%, and imports −5.9%. April CPI printed 0.2% m/m, 2.3% y/y, and 1.5% y/y core. April retail sales rose 0.9% m/m, 2.6% y/y, while 1Q2009 business investment fell −6.8% y/y. S&P shifted the U.K. foreign debt outlook to negative; however, this had little lasting market impact. GBP/USD weakened 1.5% and EUR/GBP 1.4% on the news, but both rallied off those levels, closing at 1.5906 and 0.8799, respectively.

Canada’s April CPI printed −0.1% m/m, 0.4% y/y, and 1.8% y/y core, while April leading indicators fell −1.1%. March retail sales rose 0.3% m/m but fell −0.2% less autos, and wholesale sales fell −0.6%. USD/CAD rose 5.2% in the week on a one-way street, closing at 1.1200, and AUD/CAD climbed as high as 0.8987, its highest level since the Lehman collapse, before falling to close at 0.8780.

New Zealand’s 1Q2009 PPI printed −2.5% q/q inputs, −1.4 outputs, while April services PMI fell again to 43.7 from 47.1 and net migration rose to 9,176 from 7,482. Despite the RBNZ’s calls for a weaker currency, NZD/USD climbed 6.1% in the rally, closing at 0.6205, and AUD/NZD fell to close at 1.2623.

Japan’s 1Q2009 GDP fell −15.2% annualised as the BoJ left overnight rates unchanged at 0.10% and cautiously indicated an economic bottom could be forming, the first such upgrade since June 2006. April consumer confidence rose to 33.2 from 29.6. March leading index slid to 76.3, the coincident improved to 85.1, and tertiary industries by −4.0% m/m. USD/JPY climbed early in the week and retested the neckline of the completed head and shoulders formation at 96.69 before falling as low as 93.84, closing at 94.80 on profit taking. EUR/JPY rose on risk acceptance, gaining 3.3%, punching through the 200-MA on daily charts, and closing at 132.74. AUD/JPY rose 4.0% early in the week then consolidated, closing at 74.30.