FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
WORLD
Currency markets were mostly indecisive during the Asia session despite the brief episode of dollar buying when Richmond Fed President Lacker explained why he dissented again at Tuesday’s FOMC. Even before this, Lacker had revealed his preference for a rate hike in 2013, but this time the FX reaction was more apparent. We see this as a sign that Fed policymaking has overtaken Greece-related issues, and now occupies centre stage in the minds of investors. As a result, the behaviour of US yields seems likely to become an increasingly important driver of FX markets.
Oil continues to exert a secondary influence. Newswires reported that discussions are underway to release crude from the strategic oil reserves of developed economies, but that no final decision has yet been taken. We note that the reserves were tapped last year in the wake of geopolitical tensions in Libya, to release 60 million barrels over a 30-day period. The price of crude fell sharply at the time, and we would not be surprised to see a similar reaction if the reserve is tapped again. Falling oil prices would likely push EURUSD slightly lower by reducing inflationary pressures in the Eurozone.
Meanwhile, US data continues to improve. The downtrend in US jobless claims remains intact, with the latest reading for the week of March 10 dipping further to 351k vs 357k consensus, marking a four-year low. Our US economists expect the unemployment rate to drop to 7 ?% at the end of this year, and 7 ?% at end-2013. Elsewhere, EURCHF finds itself back below 1.21 in the wake of SNB’s Monetary Policy Assessment, which affirmed the need to keep the minimum exchange rate target at 1.20. Price action in EURCHF post-decision suggested there were opportunistic EURCHF longs positioned for a stronger rhetoric on the FX floor, only to be disappointed in the end. US CPI, industrial production and Michigan confidence data will be in focus today.
EUR
Our analysts have become less pessimistic on the Eurozone growth outlook for 2012. They still expect a contraction, but now only -0.4% y/y compared with their previous forecast of -0.7% y/y.
The euro got a boost when ECB Governing Council member Nowotny said the ECB is working on the design of its exit strategy so that it is ready for use when the time comes. We would not interpret these remarks as being hawkish. Instead, the comments were likely intended to be reassuring in the wake of concern over the possible dangers of ample liquidity provision. Nowotny went on to emphasise that the ECB is currently in wait-and-see mode and does see any evidence of inflationary pressures.
Referring to the bond buying facility Nowotny revealed there is a general reluctance to use it on the ECB’s governing council: “I think we are all very cautious about it. It still exists, but my personal view is that it should be used with great care and with great restriction”.
IMF Managing Director Lagarde said late on Thursday that there is no room for slippages in the Greek financing programme and risks are still “exceptionally high”. However, she said that Greece had made “tremendous efforts” and the deficit is now reduced “markedly”. This comes in the wake of official approval of a EUR 28 bn loan for Greece, in line with expectations.
In an article in the FT, former ECB Executive Board member Lorenzo Bini-Smaghi warned that Portugal and Ireland could require further funding of EUR 100 bn and EUR 80 bn, respectively. However, he also affirmed that the Greek PSI is still a special case for the Eurozone.
EU Economics Commissioner Rehn said that the Portuguese situation is very different from Greece and he “trusted the Portugal programme will remain on track”.
The Eurogroup formally announced that the second bailout for Greece had been finalised, and the EFSF would now disburse EUR 39.4 bn to Greece in tranches. The Eurogroup said that this would return the Greek economy to growth and a sustainable path would be “good for everyone”.
Greek Finance Minister Venizelos said he will resign after the March 18 elections for the PASOK leadership. Reuters recently reported that Greece will hold new elections by the end of April at the earliest, though this could extend into May. Greece‘s unemployment rate rose to 20.7% in Q4 from 17.7% in Q3 2011.
CHF
The SNB kept its policy unchanged, leaving the FX floor at 1.20. It revised its 2012 growth outlook higher to 1% from 0.5%, though the inflation path has been lowered further to -0.6% for this year, double the previous figure. The SNB warned that it was still ready to buy “unlimited quantities” of foreign currencies and the ceiling would be enforced with “utmost determination”. In addition, the SNB said that it would continue to maintain liquidity in money markets and be ready to take “further measures” at any time given the high uncertainty.
Domestically, the SNB warned that there were growing signs of imbalances in the real estate market and this could spark “considerable risks”. We believe the Swiss franc will continue to be driven by external rather than domestic factors. Again, the SNB will staunchly defend the floor should this become necessary, but beyond that, we do not expect any additional measures unless conditions were to take a dramatic turn for the worse. On the other hand, we continue to expect USDCHF to move higher as the Fed may have to further tone down its dovish language in view of solid economic data.
JPY
The BoJ released the minutes from its Feb. 14 policy meeting – a meeting where further easing took place and an inflation ‘goal’ of 1% was adopted. Despite this, “most” board members acknowledged that the bank’s “basic thinking was unchanged on price stability” and that this was simply an effort to communicate more effectively.
However “a few” members felt a target of 1-2% might eventually be appropriate. One member even went so far as to suggest that the bank should aim eventually to adopt a target of 2% – specifically to bring it into line with international practice, and “so that the foreign exchange rate would not move to a long-term trend of being one-sided”. We see the minutes as endorsing our view that the BoJ is likely to keep its easing bias long after other banks have begun to tighten. This backs up our call for USDJPY to push higher towards 85 in 3m.
MoF’s International Transactions in Securities report showed that Japanese investors were net buyers of foreign bonds (JPY 367 bn) and money market instruments (JPY 32 bn), yet net sellers of foreign equities (JPY 49 bn) last week. In the current quarter to date, the Japanese have sold a net JPY 678 bn of foreign equities, while purchasing JPY 163 bn of foreign money market instruments – and most significantly, JPY 5.9 trn of foreign bonds, refuting any lingering fears of repatriation ahead of the fiscal year-end.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BEARISH Outlook is bearish with focus on the Feb 16 key low of 1.2974; clearance of the level would open 1.2828. Resistance is at 1.3191.
USDJPY BULLISH USDJPY pulled back to unwind upside extremes; initial support at 82.87 ahead of 81.97. Underlying trend is bullish with initial resistance at 84.18.
GBPUSD BEARISH A move below 1.5603 would pave the way for 1.5525. Resistance is at 1.5748.
USDCHF BULLISH A rally through 0.9342 would open up the door to 0.9596, the year-to-date high. Interim resistance is at 0.9413. Support lies at 0.9140
AUDUSD BEARISH The focus is on key support at 1.0401, where a break would signal extension of losses to 1.0260. Resistance is at 1.0588.
USDCAD BEARISH As long as key resistance at 1.0050 holds, we expect downside pressure to persist. Initial support lies at 0.9873 ahead of 0.9842, the year-to-date low.
EURCHF NEUTRAL Clearance of 1.2147 would expose 1.2189. Support is at 1.2040.
EURGBP NEUTRAL Support lies at 0.8295 whereas resistance is at 0.8360.
EURJPY BULLISH The cross targets 109.93, the year-to-date high; a break here would open 110.18 and then 111.60. Support is at 107.65.
SCHEDULE
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