FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
WORLD
Price action in Asia was dominated by month-end and quarter-end flows into the Tokyo fix, on this the last day of Japan‘s fiscal year. The euro, and Australian and New Zealand dollars received a boost, but USDJPY remains heavy as UST yields continue to drift lower. We are wary of joining the rally in commodity currencies given the likelihood of a weak official Chinese March PMI over the weekend, and we would expect risk appetite to begin next week on a softer tone. The latest US economic data was uninspiring with jobless claims falling to 359k from (a revised up) 364k. Q4 GDP growth was unchanged at a 3.0% annual rate though. Fed Chairman Bernanke completed his four-part economics lecture series noting the pace of recovery has been “extremely sluggish” and that the unemployment rate remains “painfully high”. He did acknowledge though that the economy’s need for Fed support will diminish “at some point”.
Fed President Plosser said he has not participated in any discussion about so-called sterilized QE – an idea first floated in a Wall Street journal article a month ago. The remarks suggest any discussion about this as a possible policy tool is still at a very preliminary stage. Asian equities were mixed after the S&P500 recovered most of its losses into the New York close. Ahead today, we have the Eurozone finance ministers meeting, plus US personal income/spending and consumer sentiment data. Tonight, the IMF may release a quarterly report on the currency composition of FX reserves. Given the BoE’s revelations of overseas buying interest in Gilts in Q4, the sterling composition of reserves will be of particular interest this time around. The SNB has already published its reserve composition for Q4, showing an uptick in sterling holdings to 5% (prev. 4%) of total reserve assets.
EUR
A meeting of Eurozone finance minister is due to start at 0800 GMT today. The key objective is to agree a final design for the combined EFSF/ESM lending facility that is due to become operational in July. Wire reports are likely to focus on the headline figures, and Germany‘s Finance Minister Schaeuble has already floated a figure of EUR800 bn, which he said should be enough to convince markets. We expect to hear a final announcement on this later today or over the weekend, but it has been well telegraphed, so the FX reaction should be relatively modest.
Our fixed income strategists note that the Dutch government is facing difficulties passing additional austerity measures to meet the Maastricht deficit criteria by 2013. Meanwhile Spanish and Italian 10y sovereign yields are rising again amid newswire reports of a clearing house raising margins.
JPY
Inflation in Japan picked up in February, but there are still plenty of reasons to expect further rounds of BoJ easing ahead. The BoJ’s preferred measure (nationwide CPI excluding fresh food) strayed into positive territory for the first time in five months rising to +0.1% y/y (cons. -0.1%). We do not see this as early evidence of the success of the BoJ’s latest round of easing. Rather, higher electricity charges and gas prices were to blame. Also, Tokyo CPI, which is seen as a leading indicator for the nationwide figure, continues to languish in negative territory and fell -0.3% y/y in March.
Tokyo University Professor and former BoJ official Tsutomu Watanabe warned “there’s a possibility prices may still be falling” even if consumer prices move towards 1%, the BoJ’s recently-adopted inflation goal. He claimed the official statistics understate the degree of deflation in Japan.
Japan‘s manufacturing PMI rose to 51.1 in March, setting a 7-month high. In particular, the new export orders sub-index rose sharply to 50.2 (prev. 47.1). A weaker yen since the Feb. 14 BoJ policy meeting surely helped here, but we would not be surprised if the prospect of stronger exports to the US also had a positive influence – after all, February’s trade data released last week revealed a sharp rise in exports to the US. This also suggests the US economy is picking up steam and supports our stronger dollar view.
It is still unclear who will succeed the two BoJ board members whose terms expire next week. A majority of DPJ members attending a financial affairs committee meeting on Thursday voiced their opposition to Ryutaro Kono’s nomination to the BoJ’s Policy Board. Party official Shinsuke Amiya asserted “with the main policy goal being measures to get out of deflation, there was doubt expressed on whether the nominee has been making proposals in the same direction”. This serves reminder of the considerable political pressure on the BoJ for further easing, reinforcing our view that more concessions are in the pipeline. It also raises the risk that two of the nine policy board seats will be empty when the BoJ holds its next policy meeting on April 10.
A Japan MoF official said that Japan remains on guard in case the yen rises rapidly.
GBP
The BoE announced that mortgage approvals fell to 49k in February, below a revised 57.9k in the previous month. Our economists note the result was disappointing; in fact, the outturn was the lowest since June last year and well below the 53-58k range observed recently. There is no credit story behind the data. The latest BoE credit conditions survey shows that credit availability was broadly unchanged in the three months to March, and the survey also shows that demand for property held up during this period. The BoE also noted that foreign investors were net buyers of GBP9.4 bn in gilts in February.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BULLISH A rise through 1.3386 would signal extension of gains to the key high of 1.3486. Support lies at 1.3252.
USDJPY BEARISH The pair is testing the key support at 81.96; a close below the level would be an important bearish development to open 81.47 next. Resistance is at 82.50.
GBPUSD BULLISH Resistance targets this week’s high of 1.6001; a clear break of the level would open 1.6096. Support lies at 1.5861.
USDCHF BEARISH A move below the recent low of 0.9016 would open up the way towards 0.8961, the 62% retracement of Oct/Jan rally. Resistance is at 0.9137.
AUDUSD BEARISH Trend is bearish; a move below yesterday’s low of 1.0305 would open 1.0260. Resistance is at 1.0463.
USDCAD NEUTRAL Trend conditions are unclear; initial resistance is at 1.0034 ahead of 1.0052, while support lies at 0.9947.
EURCHF NEUTRAL Resistance is at 1.2082 ahead of 1.2147. Support is at 1.2040.
EURGBP NEUTRAL Initial resistance is at 0.8395 ahead of the key bull trigger at 0.8424. Support lies at 0.8300.
EURJPY NEUTRAL Support at 108.49 is still intact; a rise above the mid-point of recent sell-off at 110.01 would signal resumption of gains and open 111.26.
SCHEDULE
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