FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
WORLD
Those hoping for less dovish commentary from Fed Chair Bernanke were mostly disappointed. Although he acknowledged the recent “genuine improvement” in the labour market, he again emphasised that the situation is still “far from normal”. What hurt the dollar most was Bernanke’s view that “continued accommodative policies” could help boost employment. This is a marvelously vague remark and open to interpretation. While it does not endorse the market’s recent decision to price in a rate hike as soon as in late 2013, it does not rule it out either. Furthermore, as our US economists point out, “continued” accommodation does not mean additional accommodation. As such, Bernanke was non-committal about the possible need for further asset purchases without ever mentioning the policy explicitly. The market chose to focus on the lower-for-longer interpretation however, and this provided a positive kick for risk appetite. Among the commodity currencies, we continue to favour the Canadian dollar on the premise that the Bank of Canada may become less dovish sooner than the Fed. We keep our bullish view on USDJPY too.
With the new fiscal year starting next week in Japan, risks should be skewed towards further yen weakness, as yield-hungry Japanese investors look for investment opportunities overseas and the BoJ tees up further easing; April 27 is one potential window for action, coinciding with the release of the Outlook Report. However USDJPY vols are already extremely well bid ahead of the BoJ’s April 10 meeting – by which time two new board members may have already been appointed provided parliament can decide who to pick. Despite the recent setback, we remain fundamentally bullish on the US dollar, taking comfort from the fact that Bernanke did not hint at further easing. Our take is that the US recovery will be sufficiently durable to prevent the Fed from adopting QE3, as small firms are feeling better, payrolls should continue to expand, credit activity is improving, core inflation is likely to tick higher, and house prices are stabilising. On the latter, we would not read too much into the soggy January S&P/Case Shiller (SP/CS) Index expected later today. Distressed sales are having an increasingly negative effect on broader measures of home prices such as the SP/CS reading; the rise in non-distressed housing prices provides a more reliable barometer of underlying trends.
EUR
Germany‘s Finance Minister Schaeuble, speaking hypothetically, said that Germany cannot prevent Greece leaving the euro if the Greeks choose to leave.
German business confidence readings unexpectedly rose to an 8-month high, suggesting Europe‘s largest economy will return to growth even as the Eurozone debt crisis curbs demand for its exports. The IFO business climate index increased to 109.8 (cons. 109.5). The current assessment index remained unchanged at 117.4 (cons. 117.0). The expectations index clocked 102.7 (cons. 102.6).
CHF
EURCHF got a boost after Switzerland‘s Economy Minister Schneider-Ammann said the floor should be raised to 1.35-1.40. We note that exchange rate policy in Switzerland is a matter for the SNB and we would not be surprised if the cross surrendered its overnight gains.
GBP
Bank of England MPC member Miles – who voted for an extension of the QE programme at the last meeting – noted that “there is a margin of spare capacity in the UK economy which has been, and will continue, depressing domestically generated inflation pressures”. He added that “those domestically generated pressures are a good indication of where the underlying inflationary forces are and it is because they look very muted that monetary policy has been loosened over the recent past”.
JPY
Japan‘s Senior Vice Finance Minister Igarashi said it would be acceptable for foreigners to hold more JGBs. We note this is a significant shift in rhetoric, given that JGB and T-bill buying by China met with a frosty response in 2010. Of course, the yen was on a strengthening trajectory back then, and foreign inflows from China or elsewhere risked aggravating the situation. Now, after six weeks of yen weakness, the MoF may be relaxing its guard on the consequences for the currency and may instead be focusing on the advantages of attracting additional investor interest – especially given the prospect of accelerated JGB issuance over the years ahead.
AUD
RBA Assistant Governor Debelle said AUD is now in the right “ball park”, having come a little off its post-flotation highs. Additionally, RBA Board member Corbett noted that the strong AUD is a significant constraint on some sectors such as retail and manufacturing. There is nothing particularly new in these remarks given that other board members such as Deputy Governor Lowe have recently made similar observations. We emphasise that FX intervention is not on the cards, and that the RBA has no ambition to weaken the currency. Instead, Lowe has recently urged industries adversely affected by the strong AUD to adapt to the new environment as this is in the best interests of the economy as a whole.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BULLISH A clearance of 1.3302 resistance signals scope for further advance towards the key high of 1.3486. Support lies at 1.3192.
USDJPY NEUTRAL Recovery pressures 83.04; a break here would signal a bullish resumption. Support lies at 82.33.
GBPUSD BULLISH The pair targets 1.5993 key resistance, where a break would confirm the bullish trend conditions. Support lies at 1.5801 ahead of 1.5771.
USDCHF BEARISH Fresh downside pressure has developed following the break of 0.9072. Next target support is at 0.8931. Resistance is at 0.9137.
AUDUSD BEARISH Underlying trend is bearish; initial support is at 1.0427 ahead of 1.0336. Resistance is at 1.0596.
USDCAD BEARISH The focus is on the break of 0.9861 to open 0.9842. Resistance is at 0.9999.
EURCHF NEUTRAL Resistance is at 1.2082 ahead of 1.2147. Support is at 1.2040.
EURGBP NEUTRAL Resistance is at 0.8424, while support lies at 0.8283.
EURJPY BULLISH A rally through 110.47 has exposed 111.44 key high. Support lies at 109.18
SCHEDULE
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