While markets are logically focused on the ECB and G20 meetings, perhaps one of the smaller economic releases is flying below the radar. Yesterday S&P/Case-Schiller Index dropped -18.97% y/y in January. While the slide in US housing prices was inline with analyst expectations, it clearly highlights a threat to the US economy and recent calls of stability. The combination of rising unemployment rate and declining home prices is a volatile concoction which could easily destabilize a fragile financial sector.

We see risk appetite, as tentative at best, with the USD as the primary recipient (EUR primary loser) to risk aversion. The USDJPY continued to push higher, temporarily breaking the 99.18 resistance while the EURUSD is consolidating between the 1.3343 - 1.3127 levels. The AUDNZD jumped over 2 big figures as RBNZ Governor Bollard expressed concern over excessive selling of New Zealand rates. The comments had traders adjusting their views on AUDNZD interest rate differentials as we are now expecting the RBA to hold rates next week and the RBNZ cuts them in late April. Risk sentiment has been pushed down by concerns over the US car makers. However, Nikkei was 2.98% higher as bad news for US car makers should mean good news for their Japanese competitors. A media report that the Obama administration considers a pre-packaged bankruptcy for a major US carmaker killed any rally in risk sentiment.

In Japan the BoJ Tankan survey came in worse than expected with a decline in business conditions at -58 vs. -55 exp, -24 prior. Perhaps addressing the issue of Japanese rapid deterioration, Prime Minister Aso announced a new stimulus package yesterday, which will likely run for three years, may be worth 20 trn yen and would be well over 2% of Japan 's GDP. Thursday's ECB meeting should be a trading day to remember. While a 50bp cut to 1.00% is already priced into the market, traders will be focused on the subsequent press conference at any mention of whether the ECB will adopt unorthodox monetary policy measures.

There is mounting evidence from an economic standpoint (today EuroZone unemployment jumped to 8.5% vs. 8.3% exp) that the ECB must act and just easing rates will not suffice. However, comments of several ECB officials such as Trichet, Juncker and Ordonez provided no clarity on the critical subject. This in our view reinforces the event risk tomorrow. For today, the US session ADP survey for March will capture the markets' attention. Traders are becoming increasingly reliant on this data as an indicator for NFA (Friday). However we still see an exaggeration above or below NFP with no recognizable pattern.

Advanced

Today Key Issues (time in GMT):

  • 07:58 EUR Manufacturing PMI (Mar Final) 34.0 exp, 34.0p prior
  • 08:30 GBP CIPS/Markit report on Manufacturing (Mar) 35.0 exp, 34.7 prior
  • 09:00 EUR Unemployment Rate (Feb) 8.3% exp, 8.2% prior
  • 12:15 USD ADP Change in Employment (Mar) -663 exp, -697 prior
  • 14:00 USD ISM Manufacturing Index (Mar) 36.0 exp, 35.8 prior
  • 14:00 USD Pending Home Sales Index (Feb) 0.0% exp, -7.7% prior
  • 14:00 USD Construction Spending (Feb) -2.0% exp, -3.3% prior

The Risk today:

EurUsd Declining channel confirms return of risk aversion as dollar steadily pushes higher ahead of G20 summit tomorrow. Initial support (and range floor) stands at 1.3116 (1.3116 - 1.3097 range is crucial test). A break below this level unlocks potential for 1.2457 in the medium term, via 1.2945. On the upside a correction would see initial strong resistance at 1.3342 with a soft level at 1.3225 (23.60% Fibonacci retracement).

GbpUsd Head and shoulders neckline stands at 1.4424 (keylevel). Bearish trend rebounded off 1.4110 to falter at 1.4364 (38.20% fib level on 1.4774 - 1.4110 move), a level we are expected to test again if current move continues. If correction fails to confirm a rebound bearish trend will resume past 1.4110 and head for 1.3958.

UsdJpy Head and shoulders bottom anticipates further dollar strength as we pass but fail to distance neckline at 98.93, which would focus on recent high of 99.69 then 100.00 as a purely psychological barrier. One must remember that the recent return of risk aversion allows for Yen to defy dollar strength, further pair weakness not to be discounted. Immediate resistance at 97.73 then 95.99 (March 30th low).

UsdChf Textbook bull flag in formation as the pair consolidates recent break from 1.1162 - 1.1330 range. Initial resistance at bottom of flag at 1.1359. Continued dollar strength will see firm test at 1.1549 (top of flag), break higher would be uncapped before 1.1684. On the downside 1.1359 - 1.1330 range is seen as initial support.

EURUSDGBPUSDUSDJPYUSDCHF
1.35861.47741001.1684
1.33421.442499.71.1549
1.32251.436498.931.1473
1.31991.438198.931.1452
1.31161.426798.141.1359
1.29451.41197.731.1228
1.24571.395895.991.1162
S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot