Commodities FX Ride Risk Appetite, Euro Falls, China Data Ahead

Sentiment rebounded in Thursdays session sending commodity currencies higher and pushing down the low-yielding JPY and CHF. The euro fell on the long-term rates outlook and discord about Greece. The upcoming session features the always crucial Chinese trade data.

A relief rally after six days of losses boosted the S&P 500 by 0.7% and helped commodity currencies. The index fell 4.9% during the losing streak. AUD recovered all of its post-employment losses against JPY and has nearly done the same versus USD.

Trichet indicated a July rate hike by saying strong vigilance but tempered speculation of further rate rises by saying the ECB had not raised its 1.7% inflation forecast for 2012. The euro also fell after Germany reportedly demanded primate sector participation in the Greek bailout, something the ECB continues to rail against. MOODY's ALSO PLACED SEVERAL PORTUGUESE BANKS on review for a downgrade.

A SOFT T-BOND AUCTION pushed up yields and helped USD. A headline detailing that THE FED IS NOW THE LARGEST US CREDITOR, holding 14% of Treasury supply (compared to China at 12%) also pushed up yields.

Economic data was mixed with US initial JOBLESS CLAIMS increasing 1K to 427K compared to the 419K expected. The US TRADE DEFICIT, however, was much lower than expected at $43.7B due in part to a backlog of orders from quake-stricken Japan.

Talk of HOUSING problems in the US failed to sway optimism. The Feds Yellen said the recovery in the sector will be long and drawn-out. Case-Shiller Index co-founder Robert Shiller said a decline of 10-25% in housing over the next five years wouldnt surprise me at all.

CHINESE TRADE BALANCE AHEAD

Look to Chinas trade balance report at 0200 GMT clues about sentiment for the remainder of the session. Economists forecast a $19.8B surplus in May after a $11.4B surplus in April. On Thursday the US reported a $21.6B deficit with China compared to $18.1B in April. Australia also showed a rising deficit with China. That probably puts an upside bias on report. We emphasize, however that the surplus is far less important than VOLUME of imports and exports. Exports are expected up 29.9% y/y and imports up 21.8% y/y. Of the two, FOCUS ON IMPORTS. Chinese importers of raw materials are on the front lines in anticipating global demand. When China imports slow it means they are anticipating diminishing demand for exports and/or a slowing domestic economy. Either of these things are bad signs for commodity currencies, especially AUD.

Coming up later this evening is in-depth trading/chart ideas on US crude relative to other commodities. Stay tuned.