- The dollar rose against its rivals on Monday and benefited from safe haven flows as US stocks fell on concerns over the banking sector. The Dow fell 43 points to 7976. US equities, having rallied for four weeks, are prone to some consolidation ahead of the upcoming earnings season. However, there remains a lot of bearish sentiment and money on the sideline so we believe any consolidation will be brief and shallow. Risk sentiment remains a main driver in the FX market and the outlook for the dollar and yen will hinge on risk appetite and stock prices. The yen fell to new yearly lows against major currencies overnight but recovered somewhat as risk aversion returned today. The Bank of Japan is expected to maintain its key interest rate at 0.10% and may announce bond purchases at its Tuesday meeting to stimulate the struggling Japanese economy. Sterling declined on increased risk aversion after failing to penetrate the resistance in the 1.49-1.50 area. The commodity currencies fell as commodity prices and equities dropped. Reserve Bank of Australia rate-cut speculation and another big drop in help-wanted ads pressured the Australian dollar. The Canadian dollar declined on a sharp fall in Canadian building permits and weaker-than-expected Canadian manufacturing PMI, increasing the risk of quantitative easing by the Bank of Canada.
- The EUR/USD fell following reports of weaker-than-expected eurozone retail sales and declining eurozone producer-price inflation. The recent increase in risk appetite supported the pair. If the risk appetite erodes, the EUR/USD will suffer. If the support from the recent uptrend is broken, the EUR/USD may fall to the 1.30 area.
Financial and Economic News and Comments
US & Canada
- The Federal Reserve, the Bank of England, the European Central Bank, the Bank of Japan, and the Swiss National Bank announced swap arrangements that will give the Fed access to as much as $285 billion in euro, yen, sterling and Swiss francs. Today's fed statement read: “Should the need arise, euro, yen, sterling and Swiss francs would be provided to the Federal Reserve via these additional swap agreements with the relevant central banks. Central banks continue to work together and are taking steps as appropriate to foster stability in global financial markets….If drawn upon, these arrangements would support operations by the Federal Reserve to provide liquidity in sterling in amounts of up to £30 billion, in euro in amounts of up to €80 billion, in yen in amounts of up to ¥10 trillion, and in Swiss francs in amounts of up to CHF 40 billion.” The plan “would enable the provision of foreign currency liquidity” by the Fed to US financial institutions, the Fed said.
- Canadian building permits fell for a fifth consecutive month in February, dropping a more-than-expected 15.9% m/m to C$3.7 billion ($2.99 billion), the lowest level since January 2002, led by a decrease in the nonresidential sector in Ontario, following a downwardly revised 6.0% m/m decline in January, data from Statistics Canada showed. Residential building permits were down 0.3% m/m to C$2.1 billion in February, while nonresidential permits fell 30.5% m/m to C$1.6 billion. Total building permits in February dropped 37.3% y/y.
- The Ivey PMI unexpectedly declined to 43.2 in March, indicating Canada's business and government spending dropped for a fifth consecutive month, from 45.2 in February, according to the Purchasing Management Association of Canada and the Richard Ivey School of Business.
- Eurozone investor confidence rebounded more than anticipated in April, with the Sentix investor confidence index increasing to -35.3 from March's record low of -42.7, Sentix reported. The current economic situation index increased to -55.25 in April from -59.75 in March, while the future expectations index improved to -12.5 from -23.5. “The euro region's economy apparently is passing through the trough,” Sentix said.
- Eurozone producer prices declined 0.5% m/m in February, as forecast, after a downwardly revised 1.1% m/m decrease in January, according to Eurostat. Producer prices fell a more-than-expected 1.8% y/y, the most since April 1999, following January's downwardly revised 0.7% y/y decline. The figures add to evidence that inflationary pressures are easing in the eurozone.
- Eurozone retail sales declined a more-than-expected 0.6% m/m in February after a 0.1% m/m increase in January, data from Eurostat showed. Retail sales fell a record 4.0% y/y, following January's upwardly revised 1.7% y/y decline.
- Current and future economic conditions in Japan continued to deteriorate in February, according preliminary data from the Cabinet Office's Economic and Social Research Institute. The Japanese leading index, measuring future economic activity, declined slightly more than expected to 75.2 in February from 77.2 in January. The coincident index, measuring current economic activity, fell further to 86.8 from January's 89.6.
- Job advertisements in Australia declined 8.5% m/m in March after falling 10.4% m/m in February, according to Australia and New Zealand Banking Group Ltd.
FX Strategy Update