FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
In the absence of any negative news, risk sentiment has been broadly stable in Asian hours. Better-than-expected New Zealand growth data, Japanese manufacturers starting to produce again, and constructive earnings releases in China have all contributed to the steadier tone. As a result most Asian stock market indices are trading in the black. US stock futures, however, are broadly flat. In FX, the euro has been capped after the Portuguese parliament rejected the minority coalition’s austerity plan and after the press cited a draft document that said no decisions would be made at this week’s EU leaders summit. EURUSD traded 1.4070-1.4090 and USDJPY traded 80.83-81.06. Fed Chairman Bernanke offered no new insights during his speech yesterday.
EUR
Sovereign worries and political uncertainty returned to the forefront as the Portuguese opposition rejected the minority coalition’s austerity plan. This raises questions about future leadership though the government remains for now despite the resignation of Prime Minister Socrates. The lack of an austerity plan increases the chances that Portugal could seek external assistance. The vote came after Reuters cited a draft document for this week’s EU leaders summit that said no final decisions would emerge and that implementation of changes to the EFSF would more likely come at the end of June. Peripheral yields have been rising in recent days and the prospect of no decision from the summit has some market participants shifting focus to euro downside.
Given Portugal’s low systemic risk for the Eurozone as a whole and as the latest developments are unlikely to have any material impact on the ECB’s monetary policy stance, further EURUSD downside is likely be limited. We believe that inflation and rate expectations will continue to drive the euro for now.
Ahead today, manufacturing and services PMI for March will be released. Any confirmation of further improving growth conditions would also keep inflation risk on the upside.
JPY
The Japanese authorities noted the stock loss of the March 11 earthquake would range between JPY15-25 trn. The upper bound is probably to the higher side of general estimates but markets have factored this in. Authorities continue to deny the existence of any repatriation effects.
GBP
The MPC voted 6-3 to keep rates on hold, and 8-1 on the QE program. Weale, Dale and Sentance remained in favour of a hike. Our economists note the headlines suggest the tone is broadly unchanged from February. However, the March meeting occurred before events in Japan and the Middle East, so the MPC will likely be much more cautious at the April meeting, undermining prospects of a near-term rate hike. Sterling suffered as a result and gave back its gains following a higher CPI print the day before. We remain short GBPCAD as a trade recommendation.
The UK budget proved to be a non-event as it showed a broadly unchanged fiscal consolidation profile. The Office for Budget Responsibility revised down its growth forecasts as expected and the inflation forecast was revised higher. Most of the details concerned specific tax and spending measures.
NZD
New Zealand GDP in Q4 2010 was better than expected mainly on the back of a stronger export sector. Q4 GDP turned out above forecasts at 0.8% y/y (prev. 1.5%, cons. 0.7%) and 0.2% q/q (prev. -0.2%, cons. 0.1%). There had been worries that the economy may slip back into recession after growth contracted in Q3 2010.
Given the RBNZ’s decision to cut rates as a precaution after the February Christchurch earthquake and rising expectations that reconstruction will support economic activity ahead, growth expectations’ may improve again from current levels. Under such conditions, and as long as risk sentiment remains stable, NZD downside is likely to be constrained.
TECHNICAL OUTLOOK
EURUSD 1.3981 support.
EURUSD BULLISH As long as support at 1.3981 holds, look for resistance area 1.4249/82. Break above this would open up 1.4373 next.
USDJPY BEARISH Focus is on 80.00; a break here would expose 78.83. Near-term resistance lies at 82.01.
GBPUSD BULLISH Move above 1.6401 would pave the way for a climb to 1.6458 and 1.6500. Support is at 1.6204 ahead of 1.6143.
USDCHF BEARISH The pair eyes 0.9198 resistance. Overall focus is on the downside with initial support at 0.8964 ahead of 0.8852 key low.
AUDUSD BULLISH Break of 1.0162 would trigger a bull trend and open way to 1.0202. Initial support lies at 1.0038.
USDCAD BULLISH Near-term resistance is at 0.9867, while support lies at 0.9735. Only a break above 0.9974 would confirm the bull trend.
EURCHF BEARISH Move below 1.2660 would expose 1.2571. Resistance is at 1.2887.
EURGBP BULLISH While support at 0.8626 holds, expect the cross to target 0.8761/87 resistance area.
EURJPY BULLISH Break of 115.57 would signal scope for further gains towards 116.00/68 area; Support lies at 113.06.
SCHEDULE
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