FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
WORLD
Risk appetite suffered overnight after the Wall Street Journal reminded investors that Moody’s has the ratings of 114 European banks on review for a possible downgrade. We note that this review was announced in mid-February and that the article contained little new information. Elsewhere, China‘s weekend decision to widen the USDCNY trading band from ?0.5% to ?1%, effective today, had very little effect on G10 currencies.
Rather, the key message is that greater CNY volatility will be tolerated – one of the many anticipated steps towards the PBoC’s long-term goal of full regime liberalisation. The move could benefit G10 commodity bloc currencies at the margin to the extent it signals confidence in China‘s economy, but China‘s broader macro performance will still be the greater driver. While Friday’s 8.1% y/y Q1 GDP print undercut market expectations, our Chinese economics team has flagged signs of stabilisation and improvement ahead, noting that policy easing is already underway as is reflected in the monthly new lending data.
The wider trading band could also imply reduced intervention, reserve accumulation and hence currency diversification – a risk that could have the biggest negative effect on the euro. USDJPY should continue to find support from the dovish signals emanating from the monetary policy debate in Japan, where the constant political jawboning about the need for further easing has not prompted much overt resistance from the BoJ. All signs still point to further action on April 27, though recent press speculation about a JPY5-10 trn boost to the APP may have effectively raised the bar for the BoJ to surprise.
This should not detract from the prospect of gradual Fed-BoJ policy divergence that we maintain will keep risks tilted towards an upside USDJPY test of 85.00 on a three-month horizon. Today both US retail sales and the EmpireState manufacturing survey are due, but neither are likely to significantly alter the Fed debate ahead of the pivotal FOMC meeting on April 24-25.
EUR
The ECB’s Asmussen claimed Europe “has done its part” and said “now you would expect other IMF shareholders to come forward and make their contributions to increasing IMF resources”. Press reports indicate that Japan may contribute roughly $60 bn to the IMF, while the UK is reportedly ready to offer GBP10 bn. We expect further details to emerge at the IMF/World-Bank Spring meetings on April 20-22.
Data released on Friday showed that Spanish banks borrowed EUR316.3 bn from the ECB in March – a sizeable leap from the EUR169.8 bn taken in February. Spanish 5-year CDS continued to widen, rising to a new record high of 492 bps.
ECB member Asmussen said that the Spanish government is “on track” to regain investor confidence adding that “what we’re observing is a stabilisation in financial markets.” Spanish 10-year yields closed at 5.94% on Friday, and the upcoming auction of 2014 and 2022 bonds on Thursday is likely to be a significant focus for investors.
ECB’s Nowotny said that he sees risk for the European debt crisis in the Greek elections and is not sure that a majority will emerge in favour of continuing with the current economic programme.
French President Sarkozy said that “Europe must cut its debts, it has no choice, but between deflation and growth, it has no choice either. If it chooses deflation, it will disappear”. Sarkozy argued that there “must be no taboos” in the policy debate, warning that France would “open the debate” on the question of “the ECB’s role in boosting growth”.
JPY
The minutes of the BoJ’s Policy Board meeting on March 12-13 confirmed Ryuzo Miyao’s view that “it was appropriate to increase the total size of the Program and earmark this increase for the purchase of JGBs, as was done at the previous meeting”. Miyao’s proposal for a JPY5 trn boost to the APP was defeated by an 8-1 vote and did not re-appear at the most recent Board gathering on 9-10 April. We would not read too much into this, however, especially given the mounting political pressure for further BoJ easing on April 27. One need only check the comments in the minutes from the MoF representative, who noted that the government “expected that the Bank – in order to overcome deflation – would continue to conduct monetary policy vigorously and decisively, in accordance with the policy stance clarified at the previous meeting, and make efforts such as appropriately communicating to the public while sufficiently exchanging views and keeping close contact with the government”. The Cabinet Office representative voiced similar sentiments.
GBP
The minutes of the BoJ’s Policy Board meeting on March 12-13 confirmed Ryuzo Miyao’s view that “it was appropriate to increase the total size of the Program and earmark this increase for the purchase of JGBs, as was done at the previous meeting”. Miyao’s proposal for a JPY5 trn boost to the APP was defeated by an 8-1 vote and did not re-appear at the most recent Board gathering on 9-10 April. We would not read too much into this, however, especially given the mounting political pressure for further BoJ easing on April 27. One need only check the comments in the minutes from the MoF representative, who noted that the government “expected that the Bank – in order to overcome deflation – would continue to conduct monetary policy vigorously and decisively, in accordance with the policy stance clarified at the previous meeting, and make efforts such as appropriately communicating to the public while sufficiently exchanging views and keeping close contact with the government”. The Cabinet Office representative voiced similar sentiments.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BEARISH The pair tests 1.3004, a clear break here would open the way to significant support area at 1.2974/54. Resistance is at 1.3213.
USDJPY NEUTRAL Key support lies at 80.57, a break below would open 80.10. Initial resistance is at 81.20 ahead of 81.87.
GBPUSD NEUTRAL Support lies at 1.5801 ahead of 1.5779. Resistance is at 1.5986.
USDCHF NEUTRAL The recovery targets 0.9335, a break here would be an important bullish signal. Support lies at 0.9092 ahead of 0.9002.
AUDUSD BEARISH The pair resumes weakness, our support focus is on 1.0226. A breach here would open 1.0119. Resistance is at 1.0381 ahead of 1.0471.
USDCAD NEUTRAL The range extending from 1.0052 to 0.9834 is intact. Initial support lies at 0.9888.
EURCHF NEUTRAL Resistance is at 1.2049 ahead of 1.2070, while support lies at 1.2000.
EURGBP BEARISH The cross remains under pressure, testing the initial support at 0.8222; a clear break below would open 0.8201. Resistance is at 0.8279.
EURJPY BEARISH The break below 105.45 extends weakness towards 105.05 and then 104.24. Resistance is at 107.47.
SCHEDULE
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