FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
WORLD
The Asian session was relatively quiet as markets consolidated further. BoJ Governor Shirakawa said that the latest easing measures were supposed to boost sentiment temporarily and a rise in prices won’t change policy. He also suggested that the BoJ will leave policy easy until the 1% inflation target is reached and that this view is backed by the 9-member board. Prime Minister Noda said that he wants more frequent talks with the BoJ governor to boost cooperation. More generally, with the news flow from the Eurozone largely exhausted for now the market reverted to data in search of risk drivers. On Wednesday the results were somewhat more disappointing as US housing numbers suffered revisions to the weaker side, especially the deep revision to the December numbers, and there is some sign of strain in the mortgage market as the mortgage purchase index fell another 2.9%w/w.
This is exactly the area of the US economy where the Fed has expressed significant concern, though even if further dips arise conventional QE may not be the right answer. Ahead on Thursday Germany IFO numbers will be a test of the Eurozone’s economic resilience, especially now that the LTRO has had close to two months to make its impact felt on the economy – if any at all. At this stage we still dispute the notion that the ECB’s liquidity steps can be a catalyst for renewed credit creation for the Eurozone household and corporate sectors, as banks are largely using the funds for their own refinancing needs and the marginal impact on the real economy is expected to be limited. In the same vein, the next 3-year LTRO may also be used for ‘ring-fencing’ purposes ahead of a potential credit event regarding Greece, and actually putting the funds to work remains several layers down the order of priority. In the US, initial claims are due and the market is looking for a slight rebound to 355k from last week’s 348k. Our economists note that the upcoming reading could be affected by seasonal adjustment problems relating to the Presidents’ Day holiday. Overnight EURUSD traded in a range 1.32312 1.326, USDJPY 80-07-80.35.
EUR
The euro came under slight pressure after some weaker Eurozone PMIs. The advance February numbers for the Eurozone composite indicator came in at 49 for manufacturing and 49.4 for services. Our European economist notes that German PMI components suggest the index should stabilize around 50-51. This is the message from the orders – purchases gap. Puzzlingly, all components were flat or up. The services PMI components suggest stabilization: new and outstanding business were both solidly up while business expectations slipped slightly
The Dutch Finance Minister said he is in favour of merging the firepower of the ESM and EFSF, broadly in line with German comments in the past.
EU Commissioner Rehn said the current Firewall for the Eurozone has been inadequate during the debt crisis and again stressed the ESM and EFSF should be ‘used together’. Again he toed the Eurozone line by saying a Greek default would have ‘dramatic’ consequences.
German Chancellor Merkel said that she will maintain the pressure on Greece and the rest of the periphery. She noted that ‘everyone must do their homework because otherwise this Europe can’t hold together’.
US Treasury’s Brainard said the economic recovery remains fragile, and the G20 countries must remain active. On Greece he said that the ‘critical issue’ is that the Eurozone establish a ‘credible firewall’, but warned that the US does not intend to seek more funding for the IMF this year, which would be a blow to the Eurozone’s hopes for a smaller internal burden in the upcoming bailout.
According to Dow Jones, an IMF official said that the fund would avoid excessive ‘risk-taking’ in funding the Greek programme, supporting German Finance Minister Schaeuble’s recent commentary that the Fund’s contribution to the new package is likely to be limited to around EUR13bn (net new monies).
JPY
Overnight BoJ Governor Shirakawa said that the latest easing measures were supposed to boost sentiment temporarily and a rise in prices won’t change policy. He also suggested that they will leave policy easy for longer until the 1% target is reached, a policy that is backed by the 9-member board. Prime Minister Noda said that he wants more frequent talks with the Governor in order to boost cooperation.
The Japanese Ministry of Finance continued its rhetoric, despite the strong rally in USDJPY. A senior official said there is nothing strange about USDJPY at 80, and the JPY weakening is due to the BoJ’s timely easing and a better risk environment. They continued to state that a strong JPY has a strong negative impact on the Japanese economy.
GBP
BoE dove David Miles (who voted for 75bn of QE) said the UK economic situation is still precarious and monetary policy therefore needs to be expansive.
The BoE minutes for the February meeting revealed that the MPC voted 7-2 to increase the QE program by GBP50 bn. The dovish members Miles and Posen called for GBP75 bn however, which led to a slight sell-off in GBP. The MPC committee acknowledged that the macro environment had improved but argued that underlying problems in the Eurozone remain. Our analysts note that although the minutes are dovish, a group within the committee still believes that inflation will end up higher than the inflation report projections. As a consequence, ‘a case can be made for maintaining the stance of policy at this meeting’. This group clearly did not have enough conviction in their view to vote against the majority however..
AUD
Australian Foreign Minister Kevin Rudd resigned, saying that he could not work with Prime Minister Gillard. The immediate impact on AUD is likely to be minimal but further strains on the incumbent government could have a longer term impact.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD NEUTRAL Key bull trigger is at 1.3322 and next resistance is at 1.3435. Support lies at 1.3187 ahead of 1.3115
USDJPY BULLISH Next resistances are at 80.83 and 81.48. Support lies at 79.68.
GBPUSD NEUTRAL Resistances are at 1.5815 and 1.5881. Key downside trigger is at 1.5645 and next support is at 1.5582.
USDCHF BULLISH Resistance is at 0.9207 ahead of 0.9300. Key downside trigger is at 0.9066.
AUDUSD NEUTRAL Support lies at 1.0570 and 1.0527. Resistance is at 1.0686 ahead of 1.0756.
USDCAD BEARISH Initial support lies at 0.9955, a move below which would open 0.9924. Resistance is at 1.0052.
EURCHF NEUTRAL Resistance is at 1.2084 ahead of 1.2116. Key supports to watch are at 1.2032 and 1.2000.
EURGBP BULLISH Clearance of 0.8486 would open 0.8562 next. Support lies at 0.8379.
EURJPY BULLISH Break of 106.04 has opened resistances at 106.74 and 107.65. Support is at 105.05.
SCHEDULE
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