USD Higher, Boosted by US Auto Troubles, Risk Aversion

  • USD : Higher, flight to safety on report that the US rejects additional bailout money for GM and Chrysler
  • JPY : Higher , supported by rising risk aversion, falling global equity markets, industrial production falls
  • EUR : Lower, EU business sentiment falls to record low, Spain conducts first bank rescue since 1993
  • CHF : Lower, downside limited by safe haven gains in cross trade, SNB expected to defend 1.51 EUR/CHF
  • GBP : Lower, tracking weaker equity markets, CBI forecasts more job losses in the financial sector
  • CAD and AUD : AUD & CAD lower, pressured by rising risk aversion and lower crude oil prices

Overview

USD and the JPY traded higher supported by rising risk aversion and falling equity markets sparked by news that the US task force has rejected additional bailout money for GM and Chrysler. If GM and Chrysler do not take significant measures to restructure there is a possibility these auto makers may wind up in bankruptcy. The USD was also supported by safe haven flows inspired by news that Spain took action for the first time since 1993 to support troubled Spanish banks. EUR was pressured by report that EU March business sentiment dropped to a record low. GBP was pressured by report from the CBI that the UK financial services industry may cut up to 25% of the workforce in Q2 to 2009. The commodity currencies were pressured by weaker CRB and rising risk aversion as global equity markets trade lower on the news that the US automakers will not be getting fresh bailout money. For the past two weeks optimism about a potential bottom in the US economy coupled with China's proposal to replace the USD with a sovereign reserve currency tied to the SDR of the IMF pressured the USD. Late last week and into the start of this week's trade optimism about the US and global recovery has been dented by fresh selling pressure in global equity markets and uncertainty about the global economic outlook. The USD has re-emerged as the safe haven currency of choice with the JPY also attracting safe haven demand.

This week's US economic calendar includes the March 31st release of March Chicago PMI expected at 34 compared to 34.2 last month. March consumer confidence will also be released on March 31st expected at 28.5 compared to 25 last month. On April 1st, February Pending Home sales will be released expected at 78.1 compared to 79.5 last month. March domestic auto sales will also be released on April 1st expected at - 6.5%. On April 2nd, initial jobless claims for week ending 3/28 are due for release expected at 650K. Factory orders for February will also be released on April 2nd expected at -1.1% compared to -1.9% last month. On April 3rd, March nfp will be released expected at -605K compared to -651K last month. March unemployment is expected to rise to 8.4% from 8.1% last month.

JPY

JPY traded higher supported by safe haven demand sparked by falling global equity markets. Equity markets weakened in reaction to news that the US automakers will not be receiving additional bailout money and Spain's government took action to support troubled Spanish banks. The Nikkei closed 390 points lower. JPY was also pressured by report that Japan's February industrial production fell 9.4% and comments from the PBOC's Zhou that he's uncertain if economic slowdown in China is over. This week's Japanese economic calendar is active but risk appetite has re-emerged as the key market driver for the JPY. The key indicator to watch is Tuesday's release of the tankan manufacturing index. The tankan manufacturing index is expected to fall to -52 from -36 last month. The Tankan index may return focus to the negative economic fundamentals for the JPY and limit safe haven demand for the JPY.

February retail sales, household spending, unemployment, industrial output and housing starts will be released on March 31st. Retail sales are expected to fall 1% compared to a 0.6% rise last month. Household spending is expected at -1% compared to -0.8% in January. The unemployment rate is expected to rise 0.2% to 4.3%. Industrial output is expected down 6% compared to -10.2% last month. Housing starts are expected to fall 4% compared to 4.4% last month.

Key technical levels to watch in USD/JPY include support at 95.45 the March 23rd low with resistance at 98.30 the March 30th high.

EUR

EUR traded sharply lower pressured by rising risk aversion, report that EU business confidence dropped to a fresh record low and speculation that the ECB will lower interest rates at Thursday's ECB policy meeting. EUR price direction has re-linked to the direction of equity markets and risk sentiment. Risk appetite has been dampened by renewed selling of global equity markets and diminished optimism about global economic recovery. EU March business sentiment dropped to a fresh record low of -3.58. The drop in the EU business confidence generates concern about deepening EU recession. EUR was also pressured by report of Spain's decision to nationalize some of Spain's banks. European bank troubles weigh on investor sentiment and hurt risk appetite. This week's main focus will be Thursdays ECB policy meeting. The ECB is expected to lower interest rates 50 bps to 1%. The trade will look closely at the press conference following ECB meeting to see if ECB will announce other measures to boost growth including possible quantitative ease. The trade will also be monitoring Thursday's G-20 meeting. EU officials have rejected pressure to commit to greater fiscal stimulus. It's not clear whether the G-20 will convince European officials to join in the coordinated effort to inject more fiscal stimulus into the global economy. If the EU continues to reject calls for additional fiscal stimulus EUR may benefit when the global economy recovers because the EU will be in better fiscal shape than many of the industrialized nations trying to spend their way out of recession. EUR however may be vulnerable to fears of deteriorating growth outlook if the global economy continues to slide in the EU fails to take actions to boost growth. EUR outlook has turned negative and the downtrend appears to have resumed with potential near term target of 1.2985.

On March 31st, German February retail sales are due for release expected at -0.8% compared to 0.6% last month. German March unemployment will also be released on March 31st expected to rise 8% compared to 7.9% last month. EU March HICP inflation report is due on March 31st expected at 1% compared to 1.2% last month. On April 1st, EU February unemployment is due for release expected to rise 0.2% to 8.3%. The ECB meet on April 2nd and are expected to cut interest rates 50 basis points to 1%. The trade will be watching the press conference following the ECB meeting for details of whether ECB plans unconventional measures to boost EU economic growth including ECB discussions of possible quantitative ease.

The technical outlook for the EUR is turning negative with EUR breaking support at 1.3200. Expect key EUR support at 1.3090 with resistance at today's high of 1.3286. A break of 1.3090 could set up for a test of March 18th low of 1.2985.

CHF

CHF traded lower with downside limited by safe haven flows and gains in cross to the EUR. CHF was supported in cross trade by news of the Spanish bank bailout. EUR/CHF traded below 1.5130 and there are reports of SNB bids in the cross at 1.51. The CHF remains vulnerable to deteriorating Swiss economic outlook, lower Swiss inflation and SNB pledge to intervene to prevent the CHF from strengthening. Last week, Switzerland reported that the Swiss KOF leading economic indicator fell to a record low. SNB chief Roth forecasts that Swiss annual growth will fall between 2.5 to 3% in 2009. Roth went on to say that the SNB will take action to try and prevent downside risks to growth and prevent deflation. According to Roth, the best way for the SNB to prevent deflation is to keep the CHF from firming. This week's Swiss economic calendar includes Tuesday's release of the UBS consumption index. On Wednesday, March Purchasing Managers Survey is due for release expected at 33.6 compared to 32.6 last month. On Friday, March Consumer Price Index will be released expected flat compared to 0.2% last month. These reports are expected to confirm weak Swiss economic outlook and continued low inflation. Expect USD/CHF to range 1.1340-1.1685 with key resistance at 1.1825 March 18th high. Note in the graph below that 1.1825 is a trendline resistance.

GBP

GBP traded lower pressured by rising risk aversion and concern about deteriorating UK economic outlook. Falling global stock markets increased risk aversion. Equity markets were hit by the Obama administration's rejection of additional bailout money for US automakers Chrysler or GM and report that Spain intervened to support the banking system for the first time since 1993. CBI reports that they expect the UK financial services companies to shed up to 25% of the workforce in Q2 09. Threat of more job losses in the UK on the heels of last week's report of a downward revision in UK GDP generates concern about deepening UK recession. UK Q4 GDP contracted at the fastest pace in 29 years. The trade showed little response to report a slight improvement in UK mortgage approvals. UK January mortgage approvals rise to 38K from 32K in January. This week's main focus will be the release of UK manufacturing PMI on Wednesday and services PMI on Friday. These reports are expected to show a slight improvement but the data series will remain near record low. GBP price direction will continue to be closely correlated to the direction of equity markets and investor reaction to the BOE's effort to try to stimulate growth through quantitative ease. So far the impact of the Bank of England's effort to boost money supply through the purchase of guilt has been mixed. Last Wednesday's Gilt auction failed to attract demand. Friday's Gilt auction was better received. GBP price direction will also key on G-20 efforts to coordinate fiscal spending to boost global growth.

On March 31st, March GFK survey will be released expected at -33 compared to -35 last month. On April 1st, March manufacturing PMI Index will be released expected at 34 compared to 34.7 last month. On April 3rd, March services PMI will be released expected at 43.3 compared to 43.2 last month.

The technical outlook for GBP is turning negative as GBP rallies were rejected above 1.4600 last week and GBP breaks support at 1.4200. Look for key GBP support at 1.3845 the March 12th low with resistance at 1.4360 March 27th high.

CAD

CAD traded lower pressured by weaker equity markets and rising risk aversion. CAD was also pressured by weaker commodity prices. The weakness in global equity markets coupled with comments from the PBOC's Zhou, that he is not certain whether economic slowdown in China is over set the tone for the sliding commodity prices. Short-term price moves for the CAD remain closely correlated to the direction of equities, commodities and risk sentiment. CAD has been firming during March supported by optimism about global economic rebound, and rising crude prices. This optimism has given way to fresh concerns about global growth outlook as the IMF says the global economy will contract at its fastest pace since 1945 and China's Zhou was less confident about China's economic recovery than the statements he made last week. Crude prices traded sharply lower pressured by concerns about global demand. Crude prices fell 5% Friday. CAD price direction remains closely correlated to the direction of price of crude. The main focus for CAD trade will be Tuesday's release of GDP. The GDP is expected to post a sharp contraction. CAD may see increased selling pressure in reaction to the GDP report. The weaker than expected Canadian GDP could force the Bank of Canada to take additional easing measures.

This week's Canadian economic calendar includes the March 31st release of February IPPI and RMPI expected at -0.2% and 1.1% respectively. Canada's January GDP will also be released on March 31st expected at -1.4% compared to -1% last month.

The technical outlook for CAD is mixed to negative with USD/CAD holding above the February lows at 1.2130. Look for near-term resistance at 1.2630 and 1.2790 the March 16th high with support at 1.2384 the March 31st low.

AUD

AUD traded sharply lower pressured by weaker equities, concern about deepening global recession and weaker commodity prices. The trade is beginning to question whether the recent recovery in global equity markets and CRB is anything more than a bear market rally as bank troubles grow in Europe and the PBOC's Zhou is less certain that the Chinese economy has bottomed. AUD price direction has been closely tied to risk appetite and today's news that the Obama administration has rejected additional bailout funds for GM and Chrysler sent global equity markets sharply lower. US automaker troubles dampened risk appetite. This week's main focus will be on Tuesday's release of retail sales and building approvals and Wednesday's trade balance. The retail sales report will be looked at to see if the Australian economy is contracting. February retail sales are expected to fall 0.5%. February building approvals are expected to rise 1.5% compared to -3.7% last month. The trade balance will be looked at to gauge whether the global slowdown continues to hurt demand for Australian exports. February trade surplus is expected to narrow to 700 Million from 970 Million last month.

AUD has been one of the primary beneficiaries of the recent improvement in risk sentiment and recovery in the global equity markets and CRB. AUD weakness is directly correlated to the change in risk appetite and weaker commodity prices. Further AUD gains may be limited by uncertainty about the global economy. AUD is expected to continue to track risk appetite and global equity markets.

The technical outlook for the AUD is turning negative with today's break of 6800. Look for AUD support at 6725 the March 19th low with resistance at 6934 March 31st high. If AUD breaks 6725 look for a possible test of 6550.