Forex Analysis & Today's Strategy GBPUSD May 6th, 2008

USD lower again as crude oil posts new record highs. USDJPY can't hold above 105.00 - time for a new sell-off?

The USD is weakening after very weak US Vehicle Sales. Watch out for E-Z PPI today and Rate Decisions from BoE and ECB tomorrow...

Overnight News Bullets

* US Domestic Vehicle Sales (Apr) out at 10.6M vs. 11.4M expected.
* NO PMI sa (Apr) out at 54.4 vs. 52.3 expected.
* NO Unemployment Rate (Apr) out at 1.6% as expected.
* E-Z Sentix Investor Confidence (May) out at 3.5 vs. 3.9 expected.
* US ISM Nonmanufacturing Composite (Apr) out at 52.0 vs. 49.1 expected.
* Bernanke spoke yesterday, acknowleding the weakness in housing and a severe increase in mortgage delinquencies.
* AU Trade Balance (Mar) out at -2736M vs. -2900M expected.
* AU RBA Cash Target out at 7.25% (unchanged) as expected.

O/N Data Heat map:

EU	US	JP	UK	SZ	AU	CA	NZ	NO	SE	FR
	+				+			+

Calendar
Today's Highlights:

Time (GMT) Region Release Consensus
05:45 SZ CPI MoM/YoY (Apr) 0.9%/2.4%
07:45 – 08:00 E-Z A streak of E-Z PMI Services
08:30 UK PMI Services (Apr) 51.7
09:00 E-Z PPI MoM/YoY (Mar) 0.7%/5.6%
12:30 CA Building Permits MoM (Mar) 1.2%
14:00 CA Ivey PMI (Apr) 54.0
21:00 US ABC Consumer Confidence -41
23:01 UK Nationwide Consumer Confidence (Apr) 74
23:30 AU AiG Performance of Construction Confidence (Apr) 48.4 (prior)

This and Next Week’s Highlights:

Date Region Release
May 7 UK Industrial Production, Manufacturing Production
May 7 E-Z Retail Sales
May 7 GE Factory Orders
May 7 US MBA Mortgage Applications, Nonfarm Productivity, Unit Labor Costs, Pending Home Sales, DOE/API Inventories
May 7 NZ Unemployment Rate
May 8 AU Employment Change, Unemployment Rate
May 8 SZ Unemployment Rate
May 8 GE Trade Balance, Current Account
May 8 SE Industrial Production, Industrial Orders
May 8 NO Industrial Production
May 8 GE Industrial Production
May 8 UK BOE announces Rates
May 8 E-Z ECB announces Rates
May 8 CA Housing Starts
May 8 US Initial Jobless Claims, Continuing Claims, Wholesale Inventories, EIA Nat gas storage change

What's going on?

* Having announced a Q1 loss of 11-5B francs, UBS has also stated that it would cut as many as 2,600 jobs, or 12% of the securities unit with total potential cuts amounting to 8,000 jobs, underpinning the troubles faced by the European bank with the highest losses from the subprime losses.
* U.S. Total Vehicle Sales have hit the lowest level since July 1998, as high fuel prices continue to take a toll on demand for high energy consuming pickup trucks and sport-utility vehicles.
* In his speech to Columbia University in New York, Fed Chairman Bernanke said high delinquency and foreclosure rates have hurt the broader economy, highlighting the spillover effects on the housing and financial sectors.
* The crude oil has touched another record high at $120.36 a barrel on speculation of growing demand during the peak summer driving season in the U.S. Next big levels to watch become $122.50 on the upside and $117.00 on the downside.

FX
Break-Out Trade in GBPUSD

EUR	USD	JPY	GBP	CHF	AUD	CAD	NZD	NOK	SEK	PLN
			-		-		-		+

FX Trading Strategies

Pair Supp. Resis. Comments
GBPUSD 1.96 1.98 With lack of liquidity yesterday due to UK and Japan closed, trading
was very spiky. Strong US figures might still have some follow-through.
We have placed an order to sell at 1.9723 offer, targeting 1.9670. Stop
if bid at 1.9734.

MAJOR HEADLINES – PREVIOUS SESSION
- Australia Mar. Trade Balance out at -2736M vs. -2900M expected and -3261M in Feb.
-Australia RBA left Cash Target unchanged at 7.25% as expected.
-Switzerland Apr. CPI out at 0.8% vs. 0.9% expected

THEMES TO WATCH – UPCOMING SESSION

Key Risk Events (All times in GMT)

* EuroZone ECB's Trichet to speak (0730)
* EuroZone Apr. Services PMIs (beginning 0745)
* UK Apr. Services PMI (0830)
* EuroZone Mar. PPI (0900)
* Canada Mar. Building Permits (1230)
* Canada Apr. Ivey PMI (1400)
* US Weekly Crude Oil and Product Inventories (1430)
* EuroZone ECB's Tumpel-Gugerell to speak (1730)
* US Weekly ABC Consumer Confidence (2100)
* UK Apr. Nationwide Consumer Confidence (2301)
* Australia Apr. Performance of Construction (2330)
* US Fed's Hoenig to speak (0130)

Market Comments

Yesterday's ISM Non-manufacturing figure came out far better than expected at 52.0 vs. 49.1 expected. This was the first reading above the key 50.0 level since December of last year and is especially surprising to us and the market given the moribund state of many of the other available indicators. Looking at the internals of the reading, there was less to get excited about, with a strong rise in "supplier deliveries" and a stabilization of the employment sub-index causing the rise above the 50 mark. The business activity index fell to 50.9 from 52.2 and new orders dropped to 50.1 from 50.2. Next month's report is unlikely to offer the same kind of upside surprise.

The USD failed to respond to the positive data just as it failed to respond on Friday and weakened slightly. EURUSD nudged higher, closing just shy of the 55-day moving average, and USDJPY eased back below 105.00. USDJPY is the more interesting chart due to the inability to hold the new highs and we wonder if it is time for a new sell-off. Adding to the USD's woes was the huge rally in crude, which even notched a new all-time record above 120 after trading closer to 110 just a few trading days ago. High oil prices are not good news for the economy or the USD, considering the implications for the trade deficit. Keep an eye on the US weekly crude oil inventory data today. Another big spike in oil could change the game plan across markets, and would certainly risk delaying any USD comeback that we would otherwise anticipate soon.

The Reserve Bank of Australia left rates unchanged as expected and the guidance from governor Stevens suggested little impetus for raising rates further. The market has priced in about a 30% chance of another hike by late fall, but there was little from the RBA to support this notion. "Given the opposing forces at work, considerable uncertainty remains about the outlook for demand and inflation." Their basic outlook is that the economy will slow and inflation will moderate. AUDUSD is off its highs from overnight, but took the news in stride. A better than expected trade deficit number and sharp rise in gold yesterday are lending the Aussie some support. Again, the scenario there looks like a try for the top (and extension to new highs as long as no one steals the punch bowl away from the rally in risk appetite), but we urge caution.

USDJPY reversed back below 105.00 yesterday after probing above this key resistance level on Friday. While the reversal was somewhat tentative, the bulls need to prove themselves now or the odds will continue to tilt to the downside, especially if the rising line of consolidation gives way. As always, watch equity markets for direction.

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