FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
WORLD
China‘s official manufacturing PMI released over the weekend came in at 53.1 (cons. 50.8), substantially beating consensus opinion. The Australian dollar was the main beneficiary and climbed over 100 pips at the Asia open, although the rally eventually lost some steam after a very weak Australian building approvals report. The weekend PMI was all the more surprising given investors had been mentally prepared for a soft print after the weak private sector flash estimate released over a week ago. The weekend PMI is likely to continue to set a positive tone throughout the week, although US data releases such as ISM and non-farm payrolls will also be key. In particular, the data comes at a crucial moment for AUD given the RBA is scheduled to meet on Tuesday. Our Australia economics team expect no change to the cash rate and the latest Chinese numbers support this view – despite a loss of momentum in recent Australian economic data.
USDJPY has also started the week on a firmer note as Japan‘s new fiscal year gets underway. The prospect of yield-seeking yen-outflows over the weeks ahead should keep the pair on a trajectory towards our 3m target of 85.00. Japan‘s Tankan survey was slightly weaker than expected which gave USDJPY a nudge higher by slightly raising the risk of another round of BoJ easing. US data on Friday showed core PCE in line at +1.9% y/y while University of Chicago consumer confidence survey hit a 13-month high. BoE and ECB policy decisions are due this week and our economists expect no material change in policy settings.
EUR
Eurozone finance ministers agreed to raise the ceiling on the combined EFSF/ESM bailout facility to EUR 700 bn from EUR 500 bn previously. Although this option was the least ambitious of those on the table, it is still very much in line with consensus opinion, and so is unlikely to be market moving. Reuters reported that Germany, Finland, the Netherlands, Estonia and Slovenia opposed a larger increase in the fund.
Additionally, it was decided to accelerate the payment of government capital into the ESM. The crucial point here is that unlike the EFSF (which has to fund itself exclusively in the market), when the ESM becomes fully operational it is due to hold a stock of EUR 80 bn in readily-available capital which it can use to fund its aid programs directly. That EUR 80 bn was due to be paid in by Eurozone governments in instalments over the course of five years. On Friday however, finance ministers agreed to accelerate the pay-in schedule so that it is completed in less than two years. This will put additional short-term funding pressure on sovereigns who will now need to find the money more quickly, and it should soon become apparent if any ratings actions flow from this.
Newswire reports suggest that Greece may now be preparing to default on Greek sovereign bonds which are governed by foreign law. Recall that holders of debt governed by Greek law have already been dealt with, whereas holders of foreign-law governed Greek debt have been given until April 4 to volunteer for a restructuring deal. The Greek parliament does not have jurisdiction over these bonds and so CACs cannot be used to enforce participation. However, Reuters reports that Eurozone finance ministers have granted Greece approval to simply refuse to pay holders of this debt if they do not come forward voluntarily.
Spain announced a budget outline on Friday, with more details due on Tuesday. The government has re-committed to the upwardly-revised 2012 deficit target of 5.3%, down from 8.5% in 2011.
Italy‘s Prime Minister Monti qualified some of his previously upbeat remarks, and now contends that “no one can say the euro zone crisis is totally over”, but he declared the crisis “virtually over”. He spoke after meetings in China with Chinese President Hu and the head of CIC where, according to Monti, the question of Chinese investment in Italy was a key talking point.
JPY
Japan‘s Finance Minister Azumi described Europe‘s decision to raise the EFSF/ESM funding ceiling as “a big step forward”. Attention now shifts to the upcoming meetings of the IMF and World Bank on April 22, when IMF members debate whether to make more money available for crisis fighting, both in Europe and beyond.
The large manufacturer’s Tankan index for Q1 came in unchanged at -4, despite consensus expectations that it would rise to -1.
Data released on Friday show that Japan did not carry out any FX intervention between Feb. 28 and Mar 28.
AUD
Building approvals in February fell -7.8% m/m in Feb, well below market expectations of a +0.5% m/m increase. Our Australian economics team notes that the decline was concentrated in NSW, where changes to the stamp duty system encouraged approvals to be fast-tracked in previous months, leaving a vacuum of approvals in the current month.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BULLISH If resistance at 1.3386 gives way, risk would be for extension of gains to the key high of 1.3486. Support holds at 1.3252 for now.
USDJPY BULLISH Failure to follow through on the break of 81.96 has shifted our focus back to upside. A recovery through 83.39 would expose 84.18. Support is at 81.83.
GBPUSD BULLISH Next target resistance is at 1.6096, where a break would open the key high of 1.6167. Support lies at 1.5947.
USDCHF BEARISH A closing break below 0.9016 would favour extension of weakness to 0.8961. Resistance is at 0.9094.
AUDUSD NEUTRAL Resistance is at 1.0515, the 38% retracement of the March sell-off. Initial support lies at 1.0305 ahead of 1.0260.
USDCAD NEUTRAL The pair is under pressure again signaling downside risk. Initial support lies at 0.9901, while resistance is at 1.0019.
EURCHF NEUTRAL Opened gap down, support is at 1.2000. Resistance is at 1.2070.
EURGBP NEUTRAL Initial resistance is at 0.8395 ahead of the key bull trigger at 0.8424. Support lies at 0.8300.
EURJPY BULLISH The cross is back up targeting the key high of 111.26; a break here would open 111.60. Support is at 108.77.
SCHEDULE
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