FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
The absence of news flow and economic data releases made for a quiet Asia session. The dollar stabilized against the euro after yesterday’s heavy losses in the wake of ECB President Trichet’s hawkish commentary. EURUSD traded 1.3930-1.3972, USDJPY 81.73-82.52. The S&P 500 finished +1.7% higher, and the Nikkei is +1% stronger at the time of writing. The nonmanufacturing ISM index rose to 59.7. Jobless claims fell sharply to 368k and the downtrend continues after having been interrupted by January storms. Our analysts forecast a +235k rise in total nonfarm payrolls (cons. +195k) and a +250k rise in private payrolls (cons. +200k). They also expect the unemployment rate to stay unchanged at 9.0% (cons 9.1%). Before the payrolls report, attention will likely be on today’s speeches from several ECB policymakers, where corroboration of Trichet’s remarks could lead to further euro upside. We still think the dollar could strengthen in the medium term but the latest ECB comments put the dollar on rockier footing in the near term.
EUR
Market participants had been expecting a hawkish tone and ECB President Trichet definitely delivered, noting the need for “strong vigilance” as risks to the inflation outlook had moved to the upside. The phrase has been used previously to signal an imminent rate hike and Trichet later said that vigilance could mean a rate hike next month, though he stressed this is not certain. The ECB also increased its staff forecasts for inflation in both 2011 and 2012, with the upward revision for 2011 larger than our analysts had expected, to between 2.0% and 2.6% from 1.2% to 2.2% previously. Our European economists now look for a 25bp hike at the April meeting. The ECB kept the rules of the 3m repo operation unchanged at full allocation, a fact which was largely overshadowed by the discussion on rates.
The hawkish comments point to continued euro upside, at least in the near term. But EURUSD failed to go above 1.40 as market participants await the US labour data release. An above-consensus print in the US will likely be needed to help the dollar recover some of its losses versus the euro.
The series of services PMIs was released across the Eurozone, with the composite indicator slightly softer at 58.20. Eurozone Q4 GDP was not revised, as expected.
A Spanish auction was well received with a bid-to-cover ratio in the 5y at 2.17, up from 2.11 last time.
CHF
SNB’s Jordan said that the deflation risk in Switzerland has largely disappeared but the question of raising rates is not one for “today or tomorrow”.
TECHNICAL OUTLOOK
EURUSD 1.4000 resistance.
EURUSD BULLISH The pair targets 1.4000 with scope for 1.4086 next. Near-term support is defined at 1.3833.
USDJPY BEARISH Break of support 81.57 would open the way to 81.13/80.93 area. Resistance is at 82.89.
GBPUSD BULLISH The pair eyes resistance 1.6379, break of this would pave way to 1.6458 next, Support lies at 1.6216.
USDCHF BEARISH Bearish pressure holds above 0.9200, move below this level would expose 0.8951 next. Near-term resistance at 0.9392.
AUDUSD BULLISH Climb through 1.0202 would open up key resistance 1.0256. Near-term support at 1.0085.
USDCAD BEARISH Focus is on 0.9684; break below the level would expose 0.9600. Resistance at 0.9800.
EURCHF NEUTRAL Abrupt rise through 1.2893 has initial resistance at 1.3138 while support is at 1.2788.
EURGBP BULLISH Break of 0.8555 has exposed 0.8593 ahead of 0.8619. Support at 0.8461 holds.
EURJPY BULLISH Sharp recovery through 114.19/94 has exposed 115.42/68 resistance area. Support defined at 113.10.
SCHEDULE
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