FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
FX price action showed little conviction during the Asia session, an understandable reaction to the general lack of news flow. EURUSD traded 1.3712-1.3767 and USDJPY traded 81.62-81.76. Our team of analysts now expects the RBNZ to cut the OCR by 50bp at the upcoming policy meeting, in response to last week’s tragic earthquake. Brent crude pushed even higher on supply concerns, and is trading at $113.88/bbl at the time of writing; gold is hovering at $1413.95/oz.
Fed Governor Yellen did not sound excessively concerned about higher oil prices, noting that oil price shocks have historically generated few second-round inflation effects in the US. Richmond Fed President Lacker, a non-voter in 2011, said that oil price gains so far do not pose a risk to the economic recovery. Our US economists agree and, on Friday re-affirmed their US growth forecasts for 2011. Reinforcing their view, they note that the University of Michigan consumer sentiment reading for late February rose to 77.5 from 75.1 (cons. 75.4) despite higher oil prices. US Q4 GDP growth was revised down to +2.8% from +3.2% annualised rate. Attention now turns to Fed Chairman Bernanke’s congressional testimony on Tuesday and Wednesday for any guidance on the future of the Fed’s bond-buying program.
EUR
ECB Vice President Constancio said central bankers must be willing to be pre-emptive, and that the ECB remains extremely vigilant on inflation expectations. Nevertheless, he downplayed speculation that the ECB might be forced to react to the recent increase in oil prices saying that “monetary policy does not respond immediately to such a supply shock, nor should it”..
ECB Governing Council member Draghi said central banks are currently trying to assess whether the spike in oil prices will have a permanent effect on inflation or whether it is a one-off shock. He noted that mid-term inflation expectations remain well anchored, but that the appearance of “inflationary tensions” requires careful assessment of “the timing and methods for restoring normal monetary conditions and interest rates”. He stressed that the ECB must prevent “the stimulus of international prices from passing through to domestic prices and wages in the longer term”.
Ireland’s general election took place on Friday, and counting of votes continues. At the time of writing 150/166 seats have already been filled and, in line with opinion polls, opposition parties have made large gains. Fine Gael leader Kenny said he would begin provisional talks this week with European officials on possible adjustments to the terms of the EU/IMF financial support Packaged.
GBP
BoE Deputy Governor Bean showed no sign that he might vote for a rate hike in the near future. Rather, he fully aligned himself with Governor King’s view that higher commodity prices, a VAT hike, and sterling weakness are largely to blame for high UK inflation.
CHF
We believe Thursday’s ECB press conference in particular poses upside risks to EURCHF, given that President Trichet may sound even more hawkish. Second, the SNB has continued to lower short-term money market rates, which will likely support EURCHF by widening the rate differential with the Eurozone. Finally, the Swiss franc has been boosted by risk aversion over the past few days. However, unless tensions spread to some of the larger countries in the Middle East, market jitters may ease, leading to the reversal of some safe-haven inflows to the Swiss franc.
The KOF leading indicator came in stronger than consensus at +2.18 (cons. 2.06) and January’s print was revised up to 2.16 from 2.10
NZD
Our team of analysts changed their RBNZ forecast in the wake of last week’s tragic earthquake. He now expects a 50bp cut to the OCR on March 10, and notes that it could take 6 months or more for this emergency cut to be withdrawn. Previously, he had been looking for the next 25bp hike to come in September.
Finance Minister English said the government would largely bear the cost of the rebuilding effort and would issue more short-term debt to pay for it. Earlier Prime Minister Key distanced himself from the idea of imposing a levy, saying that doing so would slow the economy. Key estimated the total cost of earthquakes since September at N$20 bn, equivalent to about 10% of GDP.
CAD
Finance Minister Flaherty said he sees no reason at this stage to be especially concerned about long-term inflationary effects as a result of higher global oil prices.
TECHNICAL OUTLOOK
USDCAD eyes 0.9745/12.
EURUSD BULLISH Rise through 1.3838/62 would expose 1.3948. Near term support is at 1.3649.
USDJPY BEARISH Push below 81.13 would expose 80.93. Initial resistance defined at 82.52.
GBPUSD BULLISH Initial resistance is at 1.6255 ahead of 1.6279/99 zone. Support is defined at 1.6031.
USDCHF BEARISH Downtrend continues with focus on 0.9200 and potential for 0.8951 next. Near-term resistance at 0.9392.
AUDUSD BULLISH Pressure on 1.0200 initial resistance; next resistance at 1.0256. Support lies at 1.0002.
USDCAD BEARISH Outlook is bearish; the pair eyes 0.9745/12 zone. Near-term resistance at 0.9816, previous low.
EURCHF BEARISH While resistance at 1.2958 holds, expect losses towards 1.2706. Move below this level would open up 1.2686/1.2592.
EURGBP BULLISH Break of 0.8593 would expose 0.8619. Near-term support lies at 0.8470.
EURJPY NEUTRAL Model has turned neutral; 113.46 and 111.38 mark the near-term directional triggers.
SCHEDULE
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