FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
WORLD
The Australian dollar suffered after Australia‘s Q1 CPI inflation report came in much weaker than expected. Headline inflation fell sharply to +1.6% y/y (cons. 2.2%, prev. 3.1%). Market expectations had already been lowered by yesterday’s PPI report, but the scale of the miss was still surprising, and AUD promptly dropped 70pips. The rates market had previously priced in a full 25 bp cut from the RBA on May 1, but is now looking for 32bp of easing at the time of writing. Our Australia economists doubt it will come to that – instead they stick to their view that a full 50 bp of easing is indeed on the way, but will be spread evenly between the May and June RBA meetings.
ECB policymakers continued to make their voices heard overnight with Governing Council member Nowotny sounding a little more dovish than usual, noting that an exit strategy is of no immediate concern, and that there is no point in lowering policy rates further “at least for the time being”. Growth remains a worry in the wake of disappointing flash PMIs across the Eurozone and we note that – as ECB officials have often stressed in the past – further cuts to the refi or deposit rates are not beyond the bounds of possibility.
Bundesbank President Weidmann stuck to his hawkish instincts however and said monetary policy must do what is necessary when upside risks to Eurozone inflation increase. Today, Swiss trade data will provide the latest read on how CHF strength is affecting the domestic economy. Bank of Canada Governor Carney also appears before a parliamentary committee – monetary policy is the key topic for discussion and the governor is likely to sound as concerned as ever about household debt after the bank re-instated an explicit tightening bias at last week’s policy meeting.
EUR
ECB Governing Council member Nowotny said that, if necessary, the ECB can act in a very forceful way, but that there is no point in lowering policy rates further “at least for the time being” until the full impact of the 3y LTROs is felt. The comments are consistent with the ECB’s long-standing position that 1.00% is not necessarily a policy floor on the refi rate, and we note that 25bp is not necessarily a floor on the deposit rate either. Continuing his dovish remarks he added that exit strategies are not an immediate concern.
Tuesday brought a long list of weak Eurozone data points: Italy’s consumer confidence fell to 89.0 from 96.2, setting a record low in a series that dates back to 1996; Spain’s Q1 GDP contracted by -0.5% y/y according to the Spanish central bank; the flash Eurozone PMIs were generally soft with the composite indicator falling to 46.0 (cons. 48.0) – the weakest reading since June 2009; Ireland’s 2011 deficit was reported at 13.1% of GDP, with the debt-to-GDP ratio having reached 108.2%.
The Dutch coalition government appears to have collapsed after disagreements over budget cuts. Dutch Prime Minister Rutte tendered his government’s resignation to Queen Beatrix. Moody’s have described this as ‘credit negative’, and warned that if the Dutch institutional framework weakens due to a lack of fiscal discipline, the AAA rating on the sovereign could face ‘downward pressure’.
The ECB announced that no bond purchases settled under the Securities Markets Program last week. We would not expect to see the facility reactivated unless sovereign yields in Spain or Italy approach 7% again.
German Government spokesman Georg Streiter noted that Chancellor Merkel ‘continues to support Sarkozy’ in the French election, but at this stage there were no plans for Merkel to go to France and campaign on behalf of Sarkozy.
GBP
We raised our sterling forecasts overnight, given the likelihood that the Bank of England will not vote in favour of additional asset purchases at the May policy meeting. Stronger UK data of late – especially on the employment front – has also influenced our thinking, We see scope for greater sterling gains against the euro than against the dollar, given our expectation that the dollar will see a broad-based advance over the period ahead.
AUD
The Australian dollar fell sharply after the Q1 inflation report came in far weaker than expected. The headline rate only rose +0.1% q/q (cons. 0.6%) and +1.6% y/y (cons. 2.2%). The core readings were also very subdued. Combined with yesterday’s soft PPI report, and ongoing signs that the economy has lost momentum, our Australian economics team sticks to its view that the RBA will cut the cash rate by 25 bp when the Board next meets on May 1. A follow-up cut in June is now even more likely.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD NEUTRAL A clear break of 1.3237 is required to trigger gains towards 1.3386. Failure to do so would shift our focus to the key support at 1.2976/54.
USDJPY NEUTRAL The pair remains under pressure intraday; important support is at 80.30/10. Tough resistance is at 81.78.
GBPUSD BULLISH A recovery through 1.6167 would trigger extension of the uptrend towards 1.6261. Support lies at 1.6023.
USDCHF NEUTRAL Initial resistance is at 0.9252, a move above would open 0.9335. Key support lies at 0.9002.
AUDUSD BEARISH The focus is back on important support at 1.0260/26. A move below the level would expose 1.0119. Resistance is at 1.0453.
USDCAD NEUTRAL The range extending from 1.0052-0.9842 remains intact. A breakout through the range is required to trigger the next directional move.
EURCHF NEUTRAL Resistance is at 1.2049 ahead of 1.2070, while support lies at 1.2000.
EURGBP BEARISH The cross is testing 0.8142; a break here would signal extension of weakness towards 0.8068. Resistance is at 0.8210.
EURJPY BEARISH A clearance of 106.32 would expose the key support at 104.61/24. Resistance is at 108.03.
SCHEDULE
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