FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
Risk sentiment has been stable in Asian hours, mainly as a reaction to more stable conditions at Japan’s nuclear reactors and yesterday’s constructive performance in US stock markets. Prime Minister Kan said that the nuclear situation is getting better bit by bit and that a reconstruction plan must be prepared. Nevertheless more progress is needed before the situation can be evaluated as safe. Prospects of rising reconstruction activity in Japan have also increased demand for regional stocks. The Nikkei advanced by 3.70% at the time of writing. The euro has also been stable, mostly due to firm rate expectations backed by ECB members’ hawkish monetary policy stance. EURUSD traded 1.4208-1.4230 overnight and USDJPY traded 80.85-81.23. Today’s focus will be on UK CPI for February, Canadian retail sales and several speeches by Fed members and SNB Chairman Hildebrand.
EUR
Eurogroup President Juncker and the European Stability Mechanism (ESM) will have a capital base of EUR700 bn-EUR80 bn paid in, with the rest callable and that the ESM would have the ability to intervene in the primary debt market. German Finance Minister Schaeuble said the German share of ESM capital would be around 27%.
ECB President Trichet and ECB Executive Board Member Tumpel-Gugerell reinforced the message that ‘exceptionally strong vigilance’ is needed on inflation. Even though risk aversion and growth concerns have dampened expectations for an ECB move in April, we still expect them to remain on track for early tightening.
As long as risk sentiment remains stable, the euro is likely to be driven by relative rate expectations and capital flows. The ECB’s more hawkish monetary policy stance is set to keep rate expectations supported. Our equity flow monitor shows the Eurozone continues to attract equity-related capital inflows.
JPY
The yen continues to trade in a tight range versus the greenback. Given the high probability of coordinated G7 intervention we expect selling interest in USDJPY to remain relatively low. As it would take a material change in Fed rate expectations to drive the pair materially higher, it’s likely to trade in a narrow range for now..
GBP
CPI data is due in the UK. At 4.1% y/y, our economists expect a slightly lower reading than the consensus for 4.2% (previous 4.0%). Inflation and hence rate expectations will remain the pound’s main driver for now.
CHF
The Swiss franc has been capped versus the euro as risk sentiment stabilizes this week. Investors are also focused on comments by SNB members to evaluate the outlook for policy tightening. We believe the franc’s impact on monetary conditions and export competitiveness will keep the SNB cautious about changing its monetary policy stance. SNB Chairman Hildebrand recently said the economy will slow over the year given that CHF strength is a burden to exports.
Hildebrand is due to speak again today and we expect no change in tone. The franc should therefore continue to be driven more by external factors.
With the ECB expected to begin hiking rates in April and the SNB likely to lag for several months, we expect relative rate expectations to drive EURCHF higher in the short to medium term. As such we recommended re-entering a long EURCHF trade at 1.2825 for a move higher to 1.3500 with a stop below the all-time low at 1.2400.
SCHEDULE
Please visit GCI’s Economic Calendar for a schedule of market news and events.
