- USD: Higher, plan to buy toxic bank assets may help the US economy lead the global recovery
- JPY: Lower, improving risk sentiment reduces safe haven demand, trade data due Wednesday
- EUR: Lower, Trichet says ECB rates could diminish further , manufacturing and services PMI’s improve
- GBP: Higher, CPI surprises to the upside, rallies in cross trade, gains limited by weaker equities
- CAD and AUD: AUD & CAD lower, pressured by profit-taking /weaker equities
USD and GBP traded higher as the global equity market rally slows and UK inflation rises more than expected.
Monday’s announcement of US plan to buy toxic bank assets sparked a significant rally in global equity markets and improvement in risk sentiment. Investors are taking a step back to digest what the potential impact of the plan to buy toxic assets may be for the global economic outlook and for risk appetite. So far the overall consensus about the plan to buy toxic bank assets has been met with approval. However, there are questions about how the assets will be priced, how much private participation will actually emerge and will be government have to seek further funds to expand the purchase of the toxic assets? In light of the fervor over the AIG bonuses it may not be a good time for the government to seek additional funds from the U.S. Congress to buy bank assets. GDP surged versus the USD and in cross trade supported by an unexpected sharp rise in UK February CPI. Despite the CPI surge the Bank of England's King said that he expects UK inflation to moderate significantly in the months ahead.
King's comments suggest that the Bank of England is still planning to fight deflation. The trade showed limited reaction to report that Chinese officials are recommending that the IMF SDR be used as a new global reserve currency and as an alternative to the USD. A statement by Harvard economist Martin Feldstein that the recession will last into 2010 and another stimulus plan is needed also had limited impact on today’s FX trade. The USD is supported versus JPY by improving risk sentiment and trading mixed against Europe with some support attributed to speculation that the US is getting further ahead on the growth curve. The Feds Evans says that US growth may improve by year end in response to the Fed's effort to restore normal functioning to the financial markets. The comments from Feldstein and Evans set the parameters of the debate about whether the US government and Fed‘s efforts to deal with the financial crisis will ultimately boost growth and when the improvement in growth can be expected.
On March 25th, US February durable goods will be released expected at -2% compared to -1.9% last month, along with the release of February new home sales expected at 300K compared to 309K in January. On March 26th, initial jobless claims for the week ending 03/21 will be released expected at 640K. On March 27th, final Q4 GDP will be released expected at -6.3% along with February personal income expected at -0.1% compared to 1% last month and final March University of Michigan sentiment expected at 56.6.
JPY traded lower pressured by improving risk sentiment and selling in cross trade to GBP. The US plan to buy toxic bank assets helped spark a major rebound in global equity markets and improvement in risk appetite. The Nikkei extended its current rally closing another 273 points higher. Japan's Yasano said that the government will not yet abandon steps to support Japanese equity prices because the market has not recovered enough. GBP/JPY traded over 2% higher with the GBP supported by report of a surprise rise in UK February CPI. JPY also weakened in cross trade to the EUR and the AUD with cross flows mainly influenced by improving risk appetite. EUR/JPY traded at a five-month high. JPY remains vulnerable to improving risk sentiment and BOJ decision to purchase more JGB's. The rally in global equity markets and speculation that the US plan to buy toxic assets will help get credit flowing reduces safe haven demand for the JPY. The BOJ will increase its purchase of JGB's to ¥21.6 Trillion. The BOJ is flooding the market with JPY at the same time the Fed is flooding the market with USD. The BOJ purchase of JGB's is effectively an implementation of quantitative ease and JPY gains should be limited. USD/JPY is trading back to the same level above 98.00 that was traded before the Fed announced its plan to buy US long bonds.
This week's Japanese economic calendar includes the March 25th release of the February trade balance and the March 27th release of February CPI. Japan's February trade balance is expected to post a modest improvement from a record ¥-953 Billion last month. The Japanese trade deficit may confirm continued reduced demand for Japan's exports. February retail sales, household spending, unemployment, industrial output and housing starts will also be released on March 31st. Japan's February trade balance is expected at ¥.90 compared to ¥-953 last month.
Key technical levels to watch in USD/JPY include support at 96.95 the March 24th low with resistance at 98.95 the March 17th high. Note in the graph below that USD/JPY tested the recent breakout near 94.00. If the 94.00 level continues to hold it will likely confirm that last week's JPY rally was a correction and not a change in trend.
EUR traded lower despite report of slight improvement in EU manufacturing and services PMI. EUR was pressured by selling in cross trade to the GBP after the release of a surprise rise in UK February CPI and in reaction to report a sharp widening of the EU January current account deficit. EU March services PMI rises to 40.1 from 39.2 last month and March manufacturing PMI rises to 34 from 33.5 last month. EU January current account deficit widens to -18.2 Billion from 0.7 Billion surplus in December.
EUR/GBP traded 1.5% lower breaking below 9200 pressured by a statement from the Bank of England’s King that indicates that the Bank of England will continue to fight deflation. The trade showed little reaction to report that Deutsche Bank and Credit Suisse will post a Q109 profit. As the EUR struggles to hold above 1.3600 despite improving risk sentiment, the trade is debating whether this lack of rally from current levels is a signal that the EUR is vulnerable. Despite today's slight improvement in EU PMI's, the PMI data series remains near record low. The PMI data suggests that EU domestic demand remains weak. Some argue that the US plan to buy toxic bank loans has improved sentiment and will encourage demand for US assets. How the ECB responds to the continued deterioration in EU growth outlook will be a key factor in EUR price direction. If the ECB continues to resist calls for rate cuts and need for aggressive monetary policy action the EUR may be vulnerable to speculation that the ECB is getting farther behind the growth curve. The ECB's Liikanen says that the ECB has not used all of its room on interest rate policy. Trichet says interest rates have room to go lower. EUR/USD appears to be establishing a near-term trading range from 1.3500 to 1.3800.
On March 25th, March German CPI is due for release along with March German IFO. German March CPI is expected at 0.3% compared to 0.7% last month. March IFO is expected at 82.4 compared to 82.6 last month. On March 26th, German April GFK index is due for release along with French March consumer confidence.
The technical outlook for the EUR is mixed with the EUR struggling to hold gains above 1.3600 and 1.3700. Expect key EUR support at 1.3420 the March 19th low with resistance at 1.3750 the January 9th high and 1.3900.Note the trendline resistance near 1.3800 in the graph below. If the EUR rally continues to stall in front of 1.3800 trendline look for fresh technical selling to emerge.
GBP traded higher sharply supported by improving risk sentiment and report of an unexpected rise in UK CPI. UK February CPI posted an unexpected rise of 0.9% and 3.2%y/y. The trade expected UK year on year inflation to fall to 2.6%. BOE Chief King said that the inflation rise reflects GBP decline and he expects UK inflation to moderate significantly in the months ahead. According to King, weak GBP is helping rebalance the UK economy.
King went on to say that the money supply is not growing quickly enough to help the UK reach sustainable growth and that interest rates are no longer a key tool to ease monetary policy. King’s comments suggest that the Bank of England will continue to fight deflation and may increase its quantitative ease measures. The unexpected sharp rise in UK CPI has some analysts warning that the next risk for the UK is inflation not deflation. GBP was also supported by sharp gains in cross trade to the EUR and JPY. GBP may extend today’s rally supported by speculation the UK is getting ahead of the growth curve, by improving technicals and rising risk appetite. GBP maintains a close correlation to the direction of equity markets. GBP pared early gains pressured by weaker US equity markets.
On March 25th, March CBI distributive trade will be released. March CBI distributive trade is expected at -20 compared to -25 last month. On March 26th February retail sales are due for release. The final Q4 GDP and UK Q4 current account will be released on March 27th.
GBP traded above the February high of 1.4660. GBP break above this level sparked technical buying of the GBP.
The technical outlook for GBP has improved with the GBP trading above key resistance at 1.4660. If GBP fails to hold above 1.4660 look for fresh selling of the GBP. Look for key GBP support at 1.4450 the March 23rd low with resistance at 1.4775 the March 24th high and 1.4915 the February 10th high.
CAD traded mixed to lower tracking weaker equity markets and a decline in the CRB. CAD traded at six week high versus the USD in Monday's trade. No major US or Canadian economic data was released in today's trade and CAD traded in a choppy range with price action dictated by technicals and light corporate USD/CAD buying at 1.2200. CAD rallied to start the week supported by improving risk sentiment as global equity markets firm on news of the US plan to buy toxic bank assets. Monday, Canada released the February leading economic indicators report, Canada’s February leading indicators fell 1.1%, the trade was looking for a 0.9% decline. The drop in Canada's LEI points to continued deterioration of Canada's economic outlook. CAD has underperformed because of continued deterioration in the Canadian economic outlook. Further CAD price gains will hinge on the direction of commodity prices and risk sentiment. There are no major Canadian economic reports scheduled for the remainder of the week.
The technical outlook for CAD is mixed with USD/CAD approaching the February lows at 1.2130. USD/CAD is well below the four year high of 1.3065 made in early March. Look for near-term resistance at 1.2505 the March 19th high with support at 1.2192 the March 19th low. Key support for CAD is expected at 1.2090 the January 29th
low and uptrend line support noted in the graph below.
AUD traded lower after 11 days of higher prices pressured by profit-taking and a modest setback in equity markets. AUD has been one of the primary beneficiaries of the recent improvement in risk sentiment and recovery in the global equity markets and CRB. Although the Australian economy has been weakening, Australian economic data suggests that the economy will avoid deep recession and the reserve Bank of Australia elected to hold rate policy steady in March. In light of aggressive ease by the central banks in the industrialized nations AUD is supported by widening of yield differential and investor appetite for riskier assets.
Mondays’ news that the US plans to dispose of US toxic assets sparked a sharp rally in equities and encourages demand for high-yield assets like AUD. AUD was also supported by sharp gain in cross to the JPY as investors look to take on more risk as the rise of global equity markets confirms improving risk appetite. Last week AUD was one of the best performing currencies gaining 4.4% along with the New Zealand dollar which rose 6.5% .The high-yield commodity-based currencies are supported by last week's sharp rise in the CRB and improving risk sentiment. AUD is considered a more risky asset and flows to the AUD have been dependent on risk sentiment.
The Fed’s plan to buy bonds is expected to help improve risk sentiment and fight deflationary pressures. Because Australia is a commodity exporting nation rising commodity prices will encourage additional flows to the AUD. The Treasury plans to buy toxic bank assets and hope to get credit flowing and boost the outlook for global growth.
Further AUD gains will hinge on whether commodity prices can extend this past week’s rally. The only economic reports scheduled this week in Australian is Wednesday's release of conference Board leading economic index expected at -0.8% compared to -0.9% last month. The fundamental outlook for the AUD continues to improve as commodity currencies try to carve out a bottom supported by speculation that the global economy will begin to recover the midyear. The Fed’s plan to buy bonds and Treasury’s plan to buy toxic bank assets may intensify speculation that the global economy will soon bottom. A statement from Harvard economist Feldstein that the
recession will last into 2010 and another stimulus plan may have been enough of an excuse to take profits and AUD.
The technical outlook for the AUD has improved as well with today’s break above 7045. Look for key AUD support at 6845 the March 20th low with resistance at 7125 the January 9th high. If AUD sustains trade above 7045 look for a move to 7300.