FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
WORLD
The lack of any economic data releases overnight allowed the US dollar to get back on its feet and reclaim some lost ground. Still tempering the US dollar’s upside is the cautious stance of Fed Chairman Bernanke, who said in a transcript of an impending television interview that “it’s far too early to declare victory” and while “the recent news has been good&I think we need to be cautious and make sure this is sustainable”. In response to a question about further easing, Bernanke noted “we don’t take any options off the table…we don’t know what’s going to happen in the future, and we have to be prepared to respond to however the economy evolves”. That said, there is nothing here that alters our view that the US recovery will be sufficiently durable to prevent the Fed from adopting QE3, offering broad support for the US dollar. Indeed, at 70.2 in March, the US Conference Board consumer confidence index held on to most of its hefty February increase (from 61.5 in January to a revised 71.6).
Moreover, the S&P Case Shiller home price index was unchanged m/m in January (consensus -0.3% m/m), and more timely indicators have given even stronger signals of stabilisation. Predictably dovish comments from Boston Fed President Rosengren (“if real GDP does not grow more rapidly and unemployment remains at its current unacceptably high level, monetary policy may need to be more accommodative”) were countered by predictably hawkish comments from Dallas Fed President Fisher (QE3 is a “fantasy of Wall Street”). Fisher added that “before you tighten you have to stop accommodating and I don’t believe we need further accommodation” – basically summing up the view of our own US economics team. Ahead today, we expect below-consensus prints for total US durables orders in February (UBSe 1.8%, cons. 3.0%) and orders ex-transport (UBSe 1.0%, cons. 1.7%), but the uptrend should remain intact.
EUR
Referring to his own country, Italy‘s Prime Minister Monti said that if the founding members of the EU do not follow the rules, later additions to the EU family cannot be expected to follow the rules either. He was making the case for why Italy needs to get its fiscal house in order and to lead by example.
Somewhat optimistically, Monti said the crisis in the Eurozone is almost over, and noted that “clever” ECB LTROs had helped Italian interest rates fall. ECB President Draghi said that Eurozone governments should continue to take “decisive measures” after the LTROs have stabilised sentiment, noting “the current stabilisation should not make us pause in our responses”.
Spanish PM Rajoy said the budget for 2012 is not completed yet, but there are currently no plans to increase taxes on consumption and the government will not cut civil servants’ pay. He again affirmed that the budget will be “very austere”.
Spanish Economy Minister Guindos said that the central government is now considering Treasury-backed joint bonds for the regions. This news highlights investor concerns that the Spanish sovereign could compromise its own credit-worthiness by supporting the finances of indebted Spanish regions.
The Irish government set May 31 for Ireland to vote on backing the new fiscal treaty agreed by the EU earlier this year. Under current rules, should voters reject the treaty, Ireland would not have access to Europe‘s ESM bailout fund when it becomes operational in July. The latest polls suggest that the treaty may receive the public’s backing.
JPY
BoJ Deputy Governor Nishimura said that, when it comes to assessing whether the BoJ’s inflation goal has been met, the bank would ignore any positive inflation impact arising from a possible increase in the sales tax. Although this is not a surprise, it does make hitting the inflation goal an even greater challenge, and this in turn gives the BoJ license to ease even more aggressively.
BoJ board member Miyao said the BoJ’s additional easing in February is one factor behind the yen’s retreat. He added that a weaker yen along with rising equities could create a virtuous cycle which further stimulates domestic demand.
In the Diet on Tuesday, Governor Shirakawa noted that the BoJ’s “liquidity provision alone can’t lift the economy”, stressing that measures to nurture new industries and raise Japan‘s growth potential were also necessary. Moreover, Shirakawa warned that excessive bond purchases could trigger a rise in long-term yields to the detriment of the economy if such actions were interpreted by markets as debt monetisation. There was nothing really new here, but we would note that such concerns did not prevent the BoJ from boosting its APP by JPY10 trn last month.
AUD
The RBA’s semi-annual financial stability review noted that global market sentiment has “improved noticeably” largely due to the ECB’s use of 3y LTROs. Closer to home, the report observed that the Australian banking system “remains in a relatively strong condition”, in part due to households showing “more caution” with their personal finances which should improve the banking system’s resilience to possible future shocks.
GBP
BoE Governor King kept the door open to a further round of QE. He does not know yet whether more QE will be needed, and said that if more asset purchases are ultimately required the bank will limit itself to buying only conventional Gilts.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BULLISH A move above 1.3386 would expose the key high of 1.3486. Support lies at 1.3192.
USDJPY BULLISH Trend is bullish; a move above 83.39 would pave the way for a climb to the key high of 84.18. Support lies at 82.64.
GBPUSD BULLISH A close above 1.5993 would be an important bullish development to confirm the bull trend and open 1.6096. Support lies at 1.5886.
USDCHF BEARISH The pair remains under pressure; support lies at 0.8961, the 62% retracement of Oct/Jan rally, ahead of the 0.8931. Resistance is at 0.9137.
AUDUSD BEARISH The pair is back under pressure with focus on 1.0336; a break here would open 1.0260. Resistance is at 1.0558.
USDCAD NEUTRAL The pair is trading within a range extending from 1.0052 to 0.9842.
EURCHF NEUTRAL Resistance is at 1.2082 ahead of 1.2147. Support is at 1.2040.
EURGBP NEUTRAL Trend is sideways with resistance at 0.8372 and support at 0.8283.
EURJPY BULLISH Outlook is bullish; a recovery through key resistance 111.44 would expose 111.94. Support lies at 109.18.
SCHEDULE
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