FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
Risk sentiment has improved early Monday, mainly on signs of further progress at a crippled Japanese nuclear plant, with US Energy Secretary Steven Chu saying that the Obama administration believes the worst of Japan’s nuclear crisis is over. As a result US stock futures are trading 0.7% higher. EURUSD traded in a 1.4160-1.4181 range overnight and USDJPY traded 80.73-81.04. Japanese markets are closed for a holiday.
Military action was launched against Libya on Saturday, with US and French defense authorities saying a de-facto no-fly-zone is now in place through the country though newswires continued to report exchange of fire in different parts of the country, even though Libyan authorities once again announced a ceasefire as of 1900 GMT. Commodities are likely to remain well support amid ongoing instability in the Middle East. This week eyes will be on Europe as leaders meet to finalize arrangements for EFSF reform. The agreements from earlier in the month were welcomed by markets, but details need to be agreed and in place by Thursday if they are to be signed off at the summit and therefore put forward for ratification.
EUR
The announcement of a major M&A telecom sector deal involving a European and a US company has attracted some attention with respect to its impact on FX.. The deal, which totals USD39 bn, is planned to be settled in cash and stock. However, no details are yet available on the timing and actual settlement of the deal. The US Federal Communications Commission must approve the deal first.
As ECB expectations have been a major source of support for the euro in recent weeks, markets remain focused on central bank comments given the global economic environment has changed radically since the March ECB meeting. Nevertheless, on Friday ECB President Trichet said he had “no new message” on interest rates. He is due to speak again today at 1400 GMT. As long as risk sentiment remains stable we expect the EUR to remain driven by rate expectations. As inflation expectations are well supported on the back of firm commodity prices and with Trichet keeping his stance unchanged, the euro is likely to remain in demand.
On Friday the German Parliament voted to ban EFSF funds being utilized to buy government bonds. Our analysts note that this legislation has been in the works for a few weeks but is not legally binding. Even though steps in the right direction have been taken with regard to the Eurozone’s rescue fund, implementation risk remains.
GBP
The Rightmove House Price Index showed house prices in March increased for the third consecutive month. Average house prices rose by 0.8% m/m (prev. 3.1%) and 0.9% y/y (prev. 0.3%). The state of the housing market will feature in the BoE’s policy decisions but inflation worries seem to carry greater weight at this stage.
The BoE’s policy decision minutes will be released this week, and our economists are looking for a 6-3 vote. Crucial CPI figures will be out on Tuesday.
The 2011-12 budget will be presented by Chancellor Osborne on Wednesday along with the Office for Budget responsibility’s latest macro forecasts. Our economists note that the budget is likely to be more of an event for equity markets than gilts or FX markets.
JPY
The yen has remained capped in Asian hours. More stable risk sentiment and the high probability of coordinated G7 intervention are both limiting demand for the currency. Moody’s said the downside risks from Japan’s disasters have increased.
We expect yen downside to be limited from current levels and target USDJPY at 85.00 over one and three months.
SCHEDULE
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