FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
An uneasy calm descended over FX markets during the Asia session, and risk currencies managed to hold their ground despite continuing concerns about Libya. The dollar fell further against the yen, but has steadied against the Swiss franc. EURUSD traded 1.3649-1.3712, USDJPY 82.53-82.89. AUDUSD crept back above parity although there seemed to be little conviction behind the move. NZDUSD continues to languish sub-0.75. The euro remains supported on expectations of a hawkish ECB press conference next week. The S&P 500 fell just over 2%, registering its worst one-day fall since August. WTI and Brent are $95.57 and $106.45, respectively, and gold is $1399.83 at the time of writing. On the US data front, both consumer confidence and the Richmond Fed manufacturing survey showed upside surprises. S&P/Case-Shiller data registered another decline in house prices. With few top-tier data releases in the US ahead, external events will remain the larger driver of risk sentiment and we should continue to see a bifurcation of dollar performance, as it benefits as a safe haven versus the higher-beta currencies but struggles against the Swiss franc and the yen as market participants remain undecided on US recovery prospects.
EUR
The euro was supported by hawkish comments from the ECB’s Mersch. While his tone was not particularly surprising, comments indicating the possibility of hiking rates with temporary liquidity measures still in place and the specific mention of the March 3 ECB meeting piqued interest. We believe the ECB will also have updated forecasts at that meeting and Mersch said the ECB may warn of “upside inflation risks” then. S&P later cautioned that Spain still has significant downside risks to its AA credit rating and could face further problems in obtaining financing in the markets. S&P also said Spain has not done enough to “radically overhaul [its] labour market.” S&P has the lowest rating on Spain among the three major ratings agencies but the euro nevertheless managed to hold on to some of its earlier gains.
German Chancellor Merkel said the EU may consider extending the period for the Greek bailout plan. She said any extension would have to be part of a larger, more comprehensive solution and that Germany would present initial proposals at the specially called March 11 EU summit.
GBP
The BoE’s Posen and Tucker were on the newswires yesterday. Posen again sounded dovish as he said it would be a mistake to raise the BoE policy rate just “for the sake” of it and he did not rule out the possibility of deflation should the BoE raise rates right now. Tucker said the recovery could take a while longer and the BoE faces a dilemma on interest rates. He said inflation is a worry and that the BoE would need to raise rates rapidly in order to get CPI down quickly.
Up next are the BoE MPC minutes from the Feb 10 meeting. The vote split will be the focus, as at least one other member is likely to have joined Andrew Sentance and Martin Weale in voting for a rate hike. But even if there is no shift in the voting stance, the commentary will likely suggest that many members were close to voting to raise interest rates. While a third hawkish voter would not tip the scales overwhelmingly in favour of an imminent policy rate hike, continued hawkish overtones should keep sterling supported in the near term, especially as BoE hiking expectations remain elevated.
AUD
RBA Governor Stevens repeated that AUD strength should help contain inflation. He added that, although he is uncertain how long the boom in the terms of trade will last, it does seem persistent.
NZD
Prime Minister Key has declared a national state of emergency following yesterday’s earthquake in Christchurch.
Finance Minister English said the RBNZ may consider the impact of yesterday’s earthquake in its rate decisions. RBNZ Governor Bollard issued a statement on the disaster but made no mention of monetary policy.
Moody’s said the quake would have no immediate impact on New Zealand’s Aaa rating, but warned that the country is at risk of moving back into recession.
TECHNICAL OUTLOOK
EURJPY 114.94 resistance.
EURUSD BULLISH The pair targets 1.3744, break here would expose 1.3826. On the downside, initial support is at 1.3525 intraday low ahead of 1.3463.
USDJPY BULLISH As long as 82.34 continue to cap the downside risks, expect recovery towards 83.98.
GBPUSD BULLISH Stalled in front of 1.6279/99 resistance zone. Support is defined at 1.6076.
USDCHF BEARISH Focus is on 0.9329/01 support area. Initial resistance at 0.9539.
AUDUSD BULLISH Initial resistance lies at 1.0158 ahead of 1.0200 while near-term support is defined at 0.9944.
USDCAD BEARISH Initial support is at 0.9816 ahead of 0.9745/12 area.
EURCHF NEUTRAL 1.3029 and 1.2774 mark the near term bull and bear triggers respectively.
EURGBP BEARISH Break of 0.8356 would open way towards 0.8332/13 support zone. Resistance is at 0.8514.
EURJPY BULLISH Support at 112.09 holds, while a break above 114.94 would expose 115.42/68 zone.
SCHEDULE
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