FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
WORLD
A much stronger than expected Australian employment report gave AUDUSD 70 pips of upside overnight. 44k new jobs were created against expectations of only 6.5k, and the unemployment rate held steady at 5.2% despite fears it would tick higher. Our analysts team sound a note of caution though – they point out that when averaged across several months jobs growth is still relatively soft and not strong enough to keep the unemployment rate as low as it currently is. The team sticks to its view that the RBA will cut 25 bp at each of its May and June meetings, thanks to what is expected to be a low enough CPI reading for Q1.
Fed Vice-Chair Yellen’s much anticipated speech provided a fairly balanced assessment of where Fed policy is headed. She noted that “further easing actions could be warranted if the recovery proceeds at a slower-than-expected pace, while a significant acceleration in the pace of recovery could call for an earlier beginning to the process of policy firming than the FOMC currently anticipates.” For a renowned FOMC dove, this shift to a more balanced stance is remarkable, although we note that the possibility of further easing has not been completely taken off the table.
USDJPY continues to look a little firmer, although the pair was largely indifferent to Yellen’s remarks. Growing confidence that the BoJ will indeed deliver further easing at its next Board meeting on April 27 is behind the better tone. Political pressure is more visible than ever (witness the DPJ’s request to meet four BoJ Board members for “an exchange of opinions”, just days after the PM called for an anti-deflation panel to be set up), press speculation is intensifying, and the Nikkei’s recent retreat will simply enhance the sense of urgency to act. We certainly see scope for BoJ action on April 27, but with various press reports already flagging a JPY5-10 trn boost for the APP, it may ultimately take JPY10 trn plus a removal of the maturity limit on JGB purchases and perhaps an extension of the APP to mid-2013 to really surprise markets. Our three-month target of 85 remains intact, with further BoJ easing superimposed upon what we expect to be a steady Fed policy stance. Today Fed officials Dudley, Lockhart, Plosser, Kocherlakota and Raskin are also due to make an appearance..
EUR
After the sell-off in Spanish bonds during the past week, the market consolidated on Wednesday. Spanish CDS traded to a record wide of 488/497 bp but spreads versus bunds tightened. The data flow remains weak, however, as February industrial output fell 5.1% y/y.
A German bund auction was technically uncovered, with just EUR4.109 bn of bids received versus the EUR 5 bn on offer. While the result was very poor, we view it as more a function of pricing, with bund yields close to record lows.
JPY
Political pressure on the BoJ for further easing remains highly visible, most recently in the form of the meeting requested by the ruling DPJ with four BoJ Board members (excluding the Governor and two Deputy Governors) for “an exchange of opinions” according to DPJ official Kouhei Ohtsuka, who asserted “in this economic climate, with continuing deflation, the responsibility that the BoJ Policy Board members have to shoulder is very heavy”.
Vice Finance Minister for International Affairs Takehiko Nakao cautioned that “we are not thinking of using our reserves like a sovereign wealth fund”, noting that there were limits on how Japan’s FX reserves could be used after taking into account the portions earmarked for supporting rescue efforts for Europe and the Chiang Mai Initiative, a pool of funds used to shield Asian economies from shocks. Nakao also warned that advanced economies like Japan “cannot postpone fiscal consolidation efforts forever”.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD NEUTRAL A break below 1.3004 would resume weakness towards important support area at 1.2976/54. Resistance is at 1.3210.
USDJPY NEUTRAL Initial support is at 80.57, a break here would open 80.10. Initial resistance is at 81.85.
GBPUSD BEARISH Support lies at 1.5805 ahead of 1.5779, the 62% retracement of the March rally. Resistance is at 1.5964 ahead of 1.6063.
USDCHF NEUTRAL The pair has found resistance at 0.9223, a clearance of this level would expose 0.9335, the March high. Support lies at 0.9094 ahead of 0.9002.
AUDUSD BEARISH Initial support is at 1.0226, a break here would open significant level at 1.0119, the 62% retracement of Nov/Feb rally. Initial resistance is at 1.0471.
USDCAD BULLISH The recovery continues to test the Feb high at 1.0052, watch for a clear break through this level to open the way to 1.0103. Support lies at 0.9945.
EURCHF NEUTRAL Resistance is at 1.2049 ahead of 1.2070, while support lies at 1.2000.
EURGBP BEARISH Trend conditions are bearish, focus is on support at 0.8222; a clearance of this level would open 0.8201. Near-term resistance is at 0.8279.
EURJPY BEARISH A correction has materialised following the test of 105.65 support. Support lies at 105.05. Resistance is at 107.47.
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