Intraday Market Thoughts

Risk Holds Up at Key Support, onto Japan, UK Data

by Ashraf Laidi
May 18, 2011 22:23

Indications that the Federal Reserve expects to see a stronger recovery before taking action helped to spark risk appetite on Wednesday. The pound underperformed on dovish BOE minutes while the kiwi dollar was the market leader. The Asia-Pacific session features Japan's Q1 GDP report.

USD/JPY slid through Asia and early European trading but climbed steadily higher in US trading as sentiment improved. Risk appetite was boosted by stocks as they bounced off key support levels. A commodities rally was led by grains and oil.

The FOMC minutes will diminish in importance because of the newly enshrined post-meeting press conference, but this edition shed light on the Fed's exit strategy. The minutes said the first step will be to halt the reinvestment of expiring securities. The second step "most" officials prefer is to hike rates which will then be followed by selling securities. This begs the question about when "extended period" will be removed, before or after re-investment ends?

The dollar slipped slightly in reaction to the overall tone of the minutes, which continued to stress that inflation was transitory. At the margins, this pushed out the horizon for rate hikes and spurred risk assets.

Asia-Pacific Preview

GBP was also hurt by ts own mcro data (Jobs & neutral stance in May minutes). GBP traders will be waiting for NATIONWIDE CONSUMER FIGURES at 1101 GMT. The market expects an improvement to 48 from 44. Confidence has been gradually declining since March 2010 and last month marked the first time confidence improved two months in a row.

JAPAN RELEASES ITS FIRST REPORT on Q1 GDP at 2350 GMT. Annualized GDP is expected at -1.8% after a -1.6% reading in Q42010. In quarterly terms, the expectation is -0.5% after a -0.3% prior. This should mark the official return to recession for Japan. The earthquake did not hit until mid-March and with the sharp declines in data since the disaster, the pain will continue as the regions badly affected by the tsunami contribute about 6.2% of Japans GDP. Expect a soft reading to be reflected in commodity currency declines and risk aversion, rather than JPY selling. Released at the same time is the broadest measure of y/y inflation in Japan, the GDP price index. Deflation is expected to worsen to -1.9% y/y from the last reading of -1.6%.


By AB - Staff


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