FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
Commodity currencies made fresh gains against the US dollar during the Asia session despite the general lack of news flow. AUDUSD broke 1.0400, and USDCAD also traded heavily on the back of M&A reports. EURUSD traded 1.4217-1.4268, and USDJPY 84.05-84.38. Events on Friday have potentially created the conditions for further commodity currency gains: a stronger-than-expected payrolls report confirmed that the US recovery seems to be accelerating, while dovish remarks by New York Fed President Dudley suggest the Fed’s liquidity taps will stay open for some time to come. Dudley’s comments specifically suggested the balance of opinion on the FOMC has not shifted decisively in favour of early tightening and, predictably, the dollar fell sharply on his remarks. Clearly, investors should be wary about over-interpreting last week’s hawkish rhetoric from several regional Fed presidents. Dudley said he sees no reason for an early pullback in monetary stimulus and warned not to ‘overstate’ how far the recovery had come. Nevertheless, the payrolls report did show signs of improvement, rising by +216k (cons. +190k) in March. Also, there were modest upward revisions to January’s and February’s numbers. The unemployment rate unexpectedly dipped to 8.8% (cons. 8.9%). But Dudley was not overly impressed by any of this – he said the creation of 200k jobs per month is “less than I would like”, and noted the unemployment rate is still “much too high”. He warned that the current strength of the recovery “looks to be better” than six months ago, but is “not as good” as it was last month.
EUR
A German newspaper claimed senior IMF officials are now privately recommending to European governments that Greek debt should be restructured. An IMF spokesperson denied the reports, and instead restated the IMF’s support for the Greek government’s “determination to fully service its debt obligations”. Greek Finance Minister Papaconstantinou said there is “absolutely no chance” that Greek debt will be restructured, pointing out that “the costs could much outweigh the benefits”.
With investors fixated on the upcoming ECB policy meeting, the euro was largely indifferent to Friday’s batch of sovereign rating actions. Fitch downgraded Portugal by three notches to BBB-, and kept the country on watch negative. This brings Fitch into line with S&P after the latter downgraded Portugal by a total of five notches in the past 2 weeks. Moody’s continues to rate the sovereign at A3. Elsewhere, S&P cut Ireland’s rating by a single notch to BBB+, outlook stable, while Fitch put Ireland’s rating on watch negative.
Portugal sold €1.645 bn worth of June 2012 bonds. Although this was more than the €1.5 bn indicative offer, average yields were much higher than those seen previously, and the bid-to-cover ratio dropped sharply to 1.4 (prev. 2.3). The auction should help ease any lingering market concern over a €4.3 bn bond, which matures on April 15.
JPY
The question of how Japan will fund the post-earthquake reconstruction effort remains unresolved. Local press previously suggested the BoJ could be asked to underwrite any additional bond issuance. Were this to happen, we would see it as highly yen-negative. Newspapers have since backed away from such claims, after government officials such as Finance Minister Noda and Economy Minister Yosano both denied there are any plans to go down that road. Our JGB strategist also sees such a move as highly unlikely. On Friday, BoJ Board member Shirai warned of the dangers of using the BoJ to underwrite JGB issuance, predicting it would damage confidence in the yen, and would ultimately raise government borrowing costs.
CHF
The desire to prevent further CHF strength continues to influence monetary policy at the SNB. Governing Board member Danthine conceded that although rates are “clearly too low” for the real-estate sector, the strong CHF justifies a continuation of a very cautious policy setting. He added that whether the SNB will hike depends on the actions of other central banks, clearly implying that the SNB is very unlikely to tighten unless the ECB leads the way.
Swiss retail sales were firm at +1.5% y/y, but the PMI fell to 59.3 − a sharp decline from February’s print and well below market expectations of 62.5.
TECHNICAL OUTLOOK
EURUSD clears 1.4249.
EURUSD BULLISH Break of 1.4249 has exposed 1.4282 ahead of 1.4373. Support lies at 1.4062.
USDJPY BULLISH Focus is on 85.00/40 resistance area. Initial support is at 83.13.
GBPUSD BEARISH Initial support is at 1.5972; break here would expose 1.5937. Resistance lies at 1.6224.
USDCHF NEUTRAL Move above 0.9369 would open the way to 0.9423. Near-term support is at 0.9127.
AUDUSD BULLISH Uptrend is intact; focus is on 1.0425 resistance ahead of 1.0500. Support lies at 1.0310.
USDCAD BEARISH Outlook remains bearish; focus is on initial support at 0.9584. Initial resistance is at 0.9707.
EURCHF BULLISH Pressure on key level 1.3205, break here would expose 1.3287. Support is at 1.3011.
EURGBP BULLISH Focus on initial resistance 0.8885; move above this would expose 0.8942. Initial support is at 0.8776.
EURJPY BULLISH While support at 117.68 holds, look for gains towards 122.08/61 area.
SCHEDULE
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