• USD : Higher, focus turns to deepening recession in Europe, G-20 do not plan to discuss USD reserve status
  • JPY :, Lower , supported by repatriation flows into Japan's fiscal year and gains in cross trade the Europe
  • EUR : Lower, German Finance Minister warns on EU fiscal stability, EU industrial orders fall
  • GBP : Lower, UK GDP falls at record pace, downside limited by gains in cross to the EUR
  • CAD and AUD : AUD & CAD lower, equity market slide, New Zealand GDP contracts

Overview

USD traded sharply higher supported by comments from the German Finance Minister Steinbrueck and weak economic data in from Europe. German Finance Minister Steinbrueck said that the EUR would be threatened if the EU stability and growth pact is not taken seriously. The UK Daily Telegraph reports that the ECB is considering joining other G-7 central banks and will print money to prevent economic disaster in the EU. EUR was also pressured by report of a sharp drop in EU industrial orders. GBP traded lower pressured by a downward revision in UK Q4 GDP. UK Q4 GDP contracted the most in 29 years. EU and UK economic data point to risk of deteriorating economic outlook in the EU and UK. CHF was pressured by report that the Swiss KOF leading indicator fell to a record low. The commodity currencies were pressured by the broad gains of the USD against Europe and report of weaker than expected Q4 GDP from New Zealand. New Zealand Q4 GDP posted its largest quarterly contraction in 16 years. The USD rally is impressive in light of this week's debate over whether the USD should be replaced as the global reserve currency with a sovereign currency tied to the SDR of the IMF. It's our opinion that replacing the USD as dominant reserve currency will not happen quickly or in the near future because it would be impractical (the majority of global transactions take place in USD) and could further destabilize the current global financial crisis. USD was also supported by a statement from senior Japanese and Russian officials that the USD reserve status will not be discussed at next week's G -20 summit In London. JPY traded higher supported by repatriation flows and gains across trade to Europe.

US personal income falls 0.2% and consumption rose 0.2%. February PCE index rose 0.2%, a 0.1% rise was expected. University of Michigan sentiment rises to 57.3, a reading of 56.6 was expected. These reports had limited impact on USD trade as focus has turned to economic outlook in Europe and ECB policy.

Next week's main events will be: Thursday's ECB meeting, the G-20 meeting in London, and US non farm payroll due for release Friday. The EUR is vulnerable to speculation the ECB will adopt quantitative ease. The trade will be looking to see if the G-20 can agree to coordinated plans to try and boost global growth. US nfp is expected to post another rise above 600K.

Next 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 year end repatriation flows and gains in cross to Europe. Japan's fiscal year end is March 31st. Japanese life insurers and exporters were featured buyers of the JPY Friday repatriating overseas earnings before fiscal year end. Repatriation flows into Japan's fiscal year end may limit JPY downside. EUR/JPY traded lower pressured by comments from German Finance Minister Steinbrueck that the EUR could be threatened if the stability pact was not taken seriously. GBP/JPY was pressured by report of weaker than expected UK Q4 GDP and concern about deepening recession in the UK. JPY gain against the commodity currencies was partly attributed to report of weaker than expected New Zealand Q4 GDP and weaker equity market trade. Japan's February core CPI was unchanged and February retail sales fell 0.3%

Next week's Japanese economic calendar is active. 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. On April 1st, March Tankan survey will be released expected -39 compared to -24 last month. Capex spending is expected at –8%. These reports are likely to further erode JPY safe haven flows.

Key technical levels to watch in USD/JPY include support at 96.92 the March 25th low and 95.40 with resistance at 98.95 the March 17th high. Today's USD/ JPY high was 98.77.

EUR

EUR traded sharply lower pressured by comments from the German Finance Minister Steinbrueck warning that the EUR could be threatened if the EU abandons the stability and growth pact .EUR was also pressured by report of a plunge in EU industrial orders. Steinbrueck said the EUR could be hurt if the EU strays from the budget rules of the stability pact to combat the economic crisis. The ECB is under increased pressure to join other G-7 central banks and move towards quantitative ease to boost growth. A UK Daily Telegraph report Friday said that the ECB was prepared to begin printing money. The German finance minister's warning that the EUR could be threatened by abandoning of the stability pact and growth pact appears to be in reaction to the growing pressure on the ECB and the EU to try to join other industrial nations to try and spend their way to economic recovery. EU January industrial orders declined 3.4%. Although the report was better than the market expectation of a 6% fall, December was revised down 8% and new orders are down 34.1% for the year. The EU industrial orders report points to deepening EU recession and reflects the impact of the global recession. All eyes turn to next week's ECB policy meeting on Thursday. The ECB is clearly under pressure to lower interest rates and the trade will be looking to see just how far the ECB is willing to go to try and boost growth. Because of coordinated rate cuts and policy moves by the Fed, BOE, SNB and BOJ there is increased pressure on the ECB to lower interest rates and join the coordinated central bank efforts to boost global growth. Fear the ECB will adopt quantitative ease is the biggest negative for the EUR. Bloomberg reports that Citigroup is exiting its long EUR positions because of concern the ECB will announce purchase of bonds and adopt quantitative ease.

Next week's EU economic calendar includes the March 30th release of EU March economic sentiment expected at 65.2 compared to 65.4 last month. 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 the 31st expected to rise to 8% compared to 7.9% last month. EU March HICP inflation report is due on March 31st and is 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 1.3400 and trading at a new low for the week. Expect key EUR support at 1.3230 with resistance at today's high of 1.3590. A break of 1.3230 could set up for a test of March 18th low of 1.2985.

GBP

GBP traded lower pressured by report of a downward revision of UK Q4 GDP. UK GDP contracted at its fastest pace in 29 years falling 1.6% in Q4. The decline in UK GDP generates concern of deepening UK recession. GBP held up remarkably well at the early part of the week for shaking off reports of a sharp fall in UK retail sales and the failure of Wednesday's Gilt auction. There is growing opposition to UK efforts to increase spending to boost the economy. BOE Chief King warned that the UK government cannot continue to spend unlimited amount of funds. UK Q4 2008 current account deficit widened to GBP 7.6 Billion, a GBP 5.8 Billion deficit was forecasted. The widening of UK current account deficit reflects deteriorating fiscal outlook in the UK. GBP downside was partly limited by gains in cross to the EUR with the EUR pressured by a warning from the German finance minister that the credibility of the EUR could be threatened if the EU does not take the stability and growth pact seriously.

Next week's UK economic calendar includes the March 30th release of February consumer credit and February mortgage applications and lending. Consumer credit is expected at 0.410 Billion and mortgage applications are expected at 32K with mortgage lending expected at 0.61 Billion. 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 mixed as GBP failed to hold gains this week above 1.4600. Look for key GBP support at 1.4165 the March 19th low with resistance at 1.4530.

CAD

CAD drifted lower pressured by spillover from broad USD gains against Europe weaker CRB and declining equity markets. Weaker equity market trade, lower price of crude and uptick in risk aversion sparked by fears of deepening recession in Europe pressured the CAD. CAD was not the main focus of today's trade but concern about slowing growth in Europe and in New Zealand sparked weaker equity market trade and selling of the CRB. Short-term price moves for the CAD have been closely correlated to the direction of equities, commodities and risk sentiment. The only feature to note about the CAD trade over the last few days is that the CAD has lagged the performance of the other commodity currencies in particular the AUD and the NDZ. One explanation for the under performance of the CAD is that the Canadian economy has deteriorated much more than the domestic economies in Australia and New Zealand. In addition, Bank of Canada yields are well below the overnight rates in Australia and New Zealand. The current overnight rate in Australia is 3.25%, the current overnight rate in New Zealand is 3% and in Canada the overnight rate is 0.50%. Canada's Finance Minister Flaherty said the candidate would do whatever is necessary to help Canadians get through the global recession.

Next 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 and is expected at - 1.4% compared to -1% last month.

The technical outlook for CAD is mixed with USD/CAD holding above the February lows at 1.2130. Look for nearterm resistance at 1.2505 the March 19th high and 1.2640 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

AUD traded sharply lower pressured by liquidation sparked by weaker equities, concern about deepening recession in Europe and in reaction to report of bigger than expected contraction in New Zealand's Q4 GDP. AUD has been one of the top performing currencies supported by improving risk sentiment and the rebound in global equities and commodity prices. Friday, optimism about global growth was dented by reports of weaker than expected GDP in the UK and New Zealand and a sharp drop in EU industrial orders. New Zealand's Q4 GDP falls 0.9%. This marked the largest quarterly contraction in 17 years. The GDP decline will increase pressure on the RBNZ lower interest rates. AUD has been one of the primary beneficiaries of the recent improvement in risk sentiment and recovery in the global equity markets and CRB. 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 mixed with Friday's failure to hold above 7045. Look for key AUD support at 6845 the March 20th low with resistance at 7035 March 27th high. If AUD sustains trade above 7045 look for a move to 7300.