FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
The dollar held firm overnight on a combination of elevated yields and caution in equity markets. EURUSD traded in a range of 1.3552-1.3621 and USDJPY 83.21-83.52. A Japanese holiday limited volumes somewhat, though given yesterday’s jitters in Eurozone sovereign bond markets and ongoing geopolitical tension in the Middle East, we would expect the dollar to continue enjoying underlying support, especially with data surprises to the upside in the US. Yesterday’s initial jobless claims plunged to 383k, the lowest since July 2008. A combination of unusually bad winter weather and normal volatility around the holidays has added extra volatility to the claims readings recently, although the trend is downward is consistent with an improving labor market, which could bolster the case for some payback in the next Bureau of Labor Statistics release. Better claims data pushed yields higher while the new 30y auction went roughly as expected.
Fed Chairman Bernanke and other officials are not worried about higher yields because they say they reflect expectations for growth and reactions to future data prints should help confirm whether market participants are fully onboard with the US recovery. Meanwhile, Fed Governor Warsh, one of the more outspoken governors against the Fed’s asset purchase program announced his resignation, effective March 31. We are against consensus for the February preliminary University of Michigan confidence index forecast as we are looking for a decrease to 71.5. But a print in line with our estimate would still be the fourth consecutive month of an above-70 figure, so we would not expect a low figure to necessarily weigh too much on the dollar. There are no major releases out of Europe but investors will continue to monitor volatility in Eurozone periphery spreads.
EUR
Eurozone peripheral bond yields marched higher, prompting reports of central bank bond purchasing to stem the rise. Portuguese yields seemed to be the larger movers, which prompted Portuguese officials to say the higher yields represent a speculative attack on the euro and that Europe is preparing a response to the situation. Officials also said current yields do not correspond to the fundamentals and that the country will be able to finance itself in the debt markets. Regardless, the latest move in yields show that recent talk on Eurozone sovereign solutions are still not viewed as a comprehensive solution, which puts more focus on the upcoming March 11 EU summit. Spanish Prime Minister Zapatero even went so far as to say the summit would be “transcendentalâ€.
That said, we still remain negative on the euro as potential solutions could disappoint expectations and as borrowing costs represent a significant obstacle. German CPI came in at 2.0%, slightly above market expectations.
GBP
PPI figures are due in the UK today and the market is looking for softer growth in input costs while output price levels are expected to register 0.3%m/m gains. Core output PPI is also expected to hit 3.0%y/y and the BoE will be watching nervously for signs of second-round effects in general price levels.
The BoE left policy unchanged as expected, though there was a small risk of a change given the timing of next week’s inflation report. As such no explanatory statement was issued and the focus shifts to the Feb 23 minutes.
The National Institute of Economic and Social Research said the UK economy grew +0.6% in January, largely due to the recovery of output from the impact of adverse weather at the end of last year.
AUD
RBA Governor Stevens was on the wires overnight and sounded more cautious in testimony to parliament. He noted that although China’s economy is stronger than expected, inflation is now a little lower than thought and price effects are not a serious threat to inflation. Crucially, he said that market pricing of no hikes until later in the year is “reasonable”, noting that the RBA is “ahead of the game” with policy and comfortable on the level of interest rates. AUDUSD responded negatively, trading from 1.0045 at the open to below parity.
CAD
Canadian officials are concerned that currency strength could hamper growth but a recent publication by Export Development Canada, an export credit agency, essentially says Canadian exporters have adapted their methods to a stronger Canadian dollar. So while our forecasts call for Canadian dollar weakness relative to the US dollar on the basis of an improving US backdrop, another expected trade deficit print may not be as much of a damper on growth or the loonie, should exporters have quickly adapted to sustained currency strength.
TECHNICAL OUTLOOK
USDJPY 83.68 resistance.
EURUSD NEUTRAL Break of 1.3572 has turned the model to neutral; Support zone is at 1.3509/1.3482 while resistance is at 1.3744.
USDJPY BULLISH Violation of 82.93 pressurises initial resistance 83.68, break of which would expose 83.91, support lies at 81.20.
GBPUSD BULLISH As long as support at 1.5922 holds, expect recovery towards 1.6186 ahead of 1.6279/99 zone. Near-term support is defined at 1.6010.
USDCHF BULLISH Breach of 0.9687 has exposed 0.9764 next; support at 0.9575/24 zone.
AUDUSD NEUTRAL Pressure on initial support 0.9964 builds, break of this would expose 0.9897. Initial resistance is at 1.0152.
USDCAD NEUTRAL 1.0011 and 0.9915 mark the near term directional triggers.
EURCHF BULLISH Momentum is positive; focus is on 1.3206/87 resistance zone. Support at 1.2973.
EURGBP BEARISH Focus is on initial support at 0.8420 ahead of 0.8377. Near-term resistance is at 0.8530.
EURJPY BULLISH Resistance zone is at 114.01/94. Initial support lies at 112.06.
SCHEDULE
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