FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
USDJPY fell sharply to a low of 80.60 during the Asia session but soon reversed course after the BoJ announced Y12 trn worth of same-day liquidity operations. There was no FX reaction to the BoJ’s later decision to raise the ceiling on its asset purchase facility to Y10 trn from Y5 trn previously. EURUSD traded 1.3917-1.3985, USDJPY 80.60-82.45. The Nikkei-225 came under immediate selling pressure from the open, and is down -6.18% at the time of writing. Despite events in Japan, the S&P500 still managed to rise +0.71% on Friday, and the VIX closed lower on the day, finishing just above 20.
US data was mixed. February retail sales expanded by +1.0%, in line with consensus estimates. The University of Michigan consumer sentiment index unexpectedly fell 9.3 points to 68.2 in early March. Interestingly, our US economics team observe that a sharp rise in inflation expectations drove much of the decline: long-term inflation expectations jumped to 3.2% from 2.9%, and short-term inflation expectations rose substantially to 4.6% from 3.4%. Although this is only a single month’s data, the uptick in expectations may embolden some of the more hawkish FOMC members to speak against another round of asset purchases.
EUR
Eurozone leaders made a number of euro-positive announcements over the weekend. Leaders pledged to increase the effective lending capacity of the European Financial Stability Facility (EFSF) to ?440 bn, and agreed to lower the interest rate charged on Greece’s financial rescue package by 1%. The maturity of loans to Greece was also extended to 7.5 years. These outcomes had been expected to emerge from the upcoming EU Leaders summit on March 24-25, but have now come sooner than many investors anticipated.
Most significantly, in a surprising turn of events, EU leaders agreed to authorise the EFSF to buy sovereign bonds in the primary market. This in particular is likely to prove to be a significant euro positive on Monday. Germany’s Chancellor Merkel said “I hope that this will also be a good message to the world in terms of the euro as a major currency.”
JPY
News headlines continue to describe the aftermath of Japan’s tragic earthquake and tsunami. Amid the rescue operation, efforts are also continuing to deal with malfunctioning nuclear power plants. Prime Minister Kan declared that this is the greatest national crisis since 1945.
The BoJ made no change to the policy rate which remains in a range between 0 and 0.1%. The maximum size of the asset purchase facility was doubled to JPY10 trn.
S&P said the earthquake has no immediate impact on Japan’s sovereign rating. Moody’s said it is “very unlikely” that the earthquake would affect Japan’s rating.
Both Kan and Economy Minister Yosano said the government would fight decisively against speculative moves. Yosano, quoting Finance Minister Noda, said that FX and interest rate movements would be closely watched. Yosano added that the economic impact of the disaster is likely to come to more than JPY20 trn. On Friday, Finance Minister Noda said the government’s fiscal position should not be an obstacle to responding to the crisis, and both he and Kan have called for a supplementary budget. Yosano said the government would cooperate more than usual with the BoJ and he predicted that the BoJ would take both traditional and non-traditional monetary policy steps as needed.
CAD
USDCAD climbed about 15 pips after the February employment count rose by fewer than expected. Only +15.1K new jobs were added against consensus expectations of +25.0K. The unemployment rate also steadied at 7.8% despite market expectations that it would fall to 7.7%.
TECHNICAL OUTLOOK
USDJPY 80.62 support.
EURUSD BULLISH Opens gap up; the pair targets 1.4000/36 resistance area ahead of 1.4086. Near-term support lies at 1.3752.
USDJPY BEARISH Sell-off during the day found support at 80.62 ahead of 80.22 key low. Resistance lies at 83.30.
GBPUSD NEUTRAL Violation of 1.5977/64 would trigger a negative tone and expose 1.5892 Fibonacci level next. Initial resistance is defined at 1.6213.
USDCHF BEARISH Focus is maintained on 0.9236/00 support zone, move below this would expose 0.8951. Initial resistance is at 0.9369 ahead of 0.9421.
AUDUSD NEUTRAL 1.0202 and 0.9944 mark the near-term directional triggers with key resistance defined at 1.0256.
USDCAD BEARISH Move below 0.9668 would expose 0.9600. Near-term resistance lies at 0.9803.
EURCHF BULLISH A push above 1.3040 would expose 1.3086, while initial support is at 1.2827.
EURGBP BULLISH Following the recovery through 0.8654/72 resistance area, the pair pressures 0.8691 ahead of 0.8777. Near-term support is at 0.8534.
EURJPY BULLISH As long as support at 111.96 holds, focus is on upside with initial resistance at 115.29 ahead of 116.00.
SCHEDULE
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