FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
The price action during the Asia session was subdued relative to the frenetic activity seen after Friday’s payrolls report, with USDJPY locked in a particularly tight range. However, the dollar did surrender some of Friday’s gains overnight. EURUSD traded 1.3547-1.3624, USDJPY 82.16-82.29. On Friday, the headline payrolls number only gained +36k in January, falling well short of consensus expectations for a +146k increase. But the market seemed content to attribute the weaker print to inclement weather, and focused instead on the lower unemployment rate which unexpectedly fell sharply to 9.0% (cons. 9.5%). In response, the US 10-year Treasury yield climbed significantly higher, and peaked just above 3.66%, reaching levels not seen since May 2010. The S&P 500 finished 0.29% ahead. Given the scale of the surprise, our US economists have lowered their end-2011 unemployment rate forecast, and now expect it to fall to 8.8%, instead of 9.0% previously. They also now see upside risks to their 4.2% forecast for Q1 GDP growth. These latest developments bode well for our view that the dollar is poised to become a growth currency. The long-awaited semi-annual Treasury report on International Economic and Exchange Rate Policies was finally published, having been delayed since October. No major trading partners of the US were deemed to have manipulated their currencies to gain “unfair competitive advantage in international trade”.
EUR
As expected at Friday’s EU Summit, no concrete decisions were taken regarding the future of Europe’s financial rescue mechanisms. EU Council President Von Rompuy pledged that a comprehensive package of anti-crisis measures would instead be adopted in March.
Germany’s Chancellor Merkel said a special summit of Eurozone-only states would be held at an unspecified date after March 9.
ECB Executive Board member Gonzalez-Paramo said that the ECB would have to hike rates if CPI inflation did not begin to drop again by year-end.
France’s Finance Minister Lagarde said Eurozone leaders are “politically determined to defend the zone and the currency”.
JPY
BoJ Governor Shirakawa said further asset buying could be conceivable if the performance of the domestic economy fails to match the BoJ’s forecasts. He also sounded cautious on Japan’s deteriorating fiscal position, noting that the lesson of history is that no country can continue to run a deficit forever. However he noted that JGB yields have been relatively stable, partly on the belief that Japan is determined to carry out the necessary fiscal consolidation.
AUD
December retail sales grew by only +0.2% m/m, falling well short of the consensus expectations of +0.5% m/m growth. The AUD was briefly hit on the numbers but soon steadied and spent the rest of the Asia session creeping higher. Our Australian economics team expects a soft print in January too, as sales are likely to be significantly hurt by the Queensland floods. Our economists continue to see the next lift in the cash rate in H2, probably in either August or September.
CAD
USDCAD fell sharply to a low of 0.9832 on Friday, reaching levels not seen since May 2008. A particularly strong employment report was the trigger for the move. In January, 69.2k new jobs were created, well above expectations of only a 15.0k gain. The unemployment rate unexpectedly rose to 7.8%, but a corresponding increase in the participation rate was largely to blame.
TECHNICAL OUTLOOK
USDJPY clears 81.31
EURUSD BULLISH Move above 1.3741 is required to refocus towards 1.3862 recent high while support lies at 1.3482.
USDJPY BEARISH Violation of 81.31 has exposed 80.93 ahead of 80.54. Resistance at 82.93.
GBPUSD BULLISH Push above 1.6279/99 resistance zone would expose 1.6379. Initial support is defined at 1.6037.
USDCHF NEUTRAL Rise above 0.9526 has exposed 0.9623, support is at 0.9451/0.9396 zone.
AUDUSD BULLISH Focus is towards 1.0256 key resistance. Support lies at 1.0083.
USDCAD BEARISH The pair targets 0.9832/20. Near term resistance at 0.9932.
EURCHF BULLISH Rise above 1.3069 would open up the way towards 1.3118. Support at 1.2781.
EURGBP NEUTRAL 0.8533 and 0.8377 mark the near term directional triggers.
EURJPY NEUTRAL Remains neutral; 112.92 and 110.32 mark the near term resistance and support level respectively.
SCHEDULE
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