FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
The Australian dollar managed to steady itself overnight after Tuesday’s scare about China’s appetite for iron ore, but the currency could not fully recover lost ground. Tuesday’s comments from an Australian miner appeared to provide anecdotal evidence of a Chinese slowdown and we can expect AUD to show extreme sensitivity to any further remarks of this nature. China is after all Australia’s largest export market, and iron ore Australia’s single-biggest export. Any doubts raised about both factors simultaneously risk triggering a double-dose of downside each time. Crucially though, we doubt any selloff will last long unless miners react by shelving mine development and expansion plans in anticipation of weaker commodity prices. This has not yet occurred although we are watching carefully. Elsewhere, the US Treasury market was largely unmoved, while Asian equities drifted lower. Oil inched higher again – slowly recovering after the Saudi Arabian oil minister’s assertion that output could be boosted immediately to address any shortages helped to bring crude prices down. Fed Chairman Bernanke spoke yesterday and is due to do so again today. He cautioned against moving too quickly to reverse the policies that are helping the economy, but mostly added nothing new to the equation. We certainly remain in the ‘no QE3′ camp in the US, reflecting in part our sense that housing activity is picking up. Those seeking further evidence will be looking ahead to the February existing home sales data later today. UBS forecasts a further 1.0% m/m rise, after the 2.3% m/m advance in the three months ended December and the 4.3% m/m gain in January. Another pair to watch is GBPUSD, which has eased off its overnight highs. The higher than expected 3.4% y/y February CPI print does not alter our call for further moderation ahead. The UK focus is now on the Bank of England’s MPC meeting minutes and the Budget Speech. We do not expect to see much in the way of GBP-positive developments, as the general tone of the minutes should remain dovish (with both the rate/QE policy decisions secured unanimously) and the Budget likely to be a macro non-even.
EUR
Greece received the first tranche of the long-awaited second rescue package on Tuesday. The EU contributed EUR5.9 bn of this and the IMF provided a further EUR1. 6 bn. A Greek finance ministry official said that EUR4 .7 bn of the cash would be paid to the Eurosystem of Central Banks to cover principal and coupon due on the 3y bond which has just matured. This suggests official holdings of this bond were larger than many investors assumed, although hedge fund clients were probably well represented too before their holdings were forcibly restructured. Now that the ECB has been repaid, the stock of bonds held under the SMP program should contract slightly – but there is a long way still to go given the stock of bonds was EUR218 bn as of the week ended March 16.
The ECB’s Nowotny stressed that the bank’s founding treaty prohibits monetary financing, lest some quarters once again start to question whether the SMP needs to be boosted or the ECB needs a mandate change. He also said that Portugal is in much better shape compared to Greece.
The Greek central bank released a report warning that the country needed to strictly implement the troika plan to restore confidence. In addition, it warned that Greek GDP would contract 4.5% this year, and unemployment would exceed 19%. The Greek current account gap was to shrink to 7% of GDP this year, while the economy may start recovering in 2013.
The Dutch budget deficit has been revised higher to 4.6%, and the country said its debt-to-GDP ratio would hit 76% in 2015. This underscores the challenges across the Eurozone to meet fiscal targets in an environment of contracting growth.
CHF
The IMF said that it was encouraging Switzerland to return to a freely floating currency once inflation is back to comfortable levels, and growth picks up. It also said mortgage affordability should be included in the regulatory toolkit to prevent housing bubbles. We note that the IMF’s commentary is consistent with our view that at some point the SNB will have to exit the floor. The question is when, of course, and the most recent inflation forecast – with CPI reaching 0.8% y/y by Q4 2014 – suggests not anytime soon. However, once inflation starts to rise, the pressure will increase.
GBP
UK CPI inflation came in at 0.6% m/m and 3.4% y/y, above the respective market expectations of 0.4% and 3.3%. RPI inflation also topped expectations at 0.8% m/m, with the annual rate at 3.7% instead of the 3.5% consensus estimate. According to the ONS, the main upside pressure came from a record rise in the price of alcoholic beverages.
Looking forward, we expect inflation to remain on a downward path, but the risk is that inflation exceeds the BoE’s forecast because of higher oil prices. Oil prices have risen around 10% since the Inflation Report, and that alone should add around 0.2pp to UK inflation. In principle, such a prospect should make the BoE a little more hawkish, but in the current environment, inflation appears set to fall from a peak of 5.2% y/y to somewhere below 2% y/y.
The UK budget is due today. Our economists note that the government is unlikely to alter its macro forecasts, limiting the potential GBP impact. The focus this time will be on details that help unblock the logjam in the credit markets and other initiatives to kick-start economic growth that were announced in the Autumn Statement in November.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BEARISH The underlying trend is bearish and we expect the recent bounce to be limited to 1.3302. Support lies at 1.3135 ahead of 1.3004.
USDJPY BULLISH Our focus is on resistance at 84.18 a break above which would open up the way towards 85.28. Key near-term support is at 83.02.
GBPUSD NEUTRAL Near-term resistance is at 1.5914 ahead of the key upside trigger at 1.5993. Support is at 1.5759.
USDCHF NEUTRAL The pair remains under pressure intraday. The key support is at 0.9085, where a break would suggest weakness to 0.8931. Resistance is at 0.9178.
AUDUSD BEARISH Trend is bearish; clearance of 1.0423 would expose 1.0401 and 1.0359 next. Resistance is at 1.0640.
USDCAD BEARISH As long as 1.0052, the February failure high is intact, we look for a break below 0.9842 to trigger extension of weakness.
EURCHF NEUTRAL Resistance is at 1.2147 ahead of 1.2189. Support is at 1.2040.
EURGBP NEUTRAL Support is at 0.8265 ahead of 0.8222. Resistance is at 0.8424.
EURJPY BULLISH Recovery targets 111.60; a push through the level would expose 113.29. Support is at 109.05.
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