FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
Markets turned severely risk-averse during the Asia session amid reports that another explosion at a malfunctioning nuclear power facility may have ruptured the reactor’s outer protective casing, allowing much larger quantities of radioactive material to escape. Prime Minister Kan declared that “substantial amounts of radiation are leaking in the area” and that “we are making utmost efforts to prevent further explosions or the release of radioactive materials”. The Nikkei-225 went into freefall and dropped 14% at one point. EURUSD traded 1.3893-1.4003, USDJPY 81.23-82.01. Although USDJPY was relatively stable, AUDJPY and NZDJPY fell sharply. Stock indices and equity futures also weakened worldwide and UST yields were 14bp lower at one point. Overnight developments also affected central bank tightening expectations: at one point the OIS market was pricing in a 50% chance of a cut at the RBA’s upcoming April meeting. This had nothing to do with the content of the RBA’s March minutes which were also released overnight and were largely unremarkable. From here, we expect the performance of global stock markets today will play a key role in dictating short term FX direction.
EUR
ECB Governing Council member Bini-Smaghi continued to signal an imminent hike in interest rates. He said the ECB “needs to be ready to react immediately to prevent any increase in inflation expectations”. He also reminded his audience that the ECB has “indicated to markets that they should prepare for a re-normalisation of interest rates.”
The latest meeting of Eurozone finance ministers provided no further detail on proposed changes to Europe’s financial rescue facilities. However, Eurogroup Chairman Juncker said he expects more detail will emerge next Monday on the design of the ESM (the proposed successor to the current ?440 bn EFSF).
Portugal’s Prime Minister Socrates repeated his opposition to Portugal accepting external financial assistance. He said the government would meet its fiscal targets whatever the economic conditions.
Fitch said that decisions announced at the weekend materially enhance Europe’s policy response to the sovereign debt crisis, yet do not resolve concerns over the solvency of some highly indebted Eurozone countries.
Ireland’s new Finance Minister Noonan said there is no way Ireland will agree to raise its corporate tax rate in exchange for a lower interest rate on rescue loans advanced through the EFSF.
JPY
Moody’s said it is “very unlikely” that the earthquake would affect Japan’s rating. However, while noting that Japan can still fund fiscal deficits at exceptionally low cost, Moody’s said the quake may have hastened the point at which investors lose confidence in the public finances.
Finance Minister Noda pledged to keep monitoring markets and to take appropriate steps at the appropriate time.
Noda also announced plans for a supplementary budget to help deal with the aftermath of the earthquake. He said the size of the budget would likely exceed that announced at the time of the 1995 Kobe earthquake, but that his first approach would be to deploy funds held in reserve as part of the budget for the current fiscal year.
GBP
Sterling was boosted when Fitch affirmed the UK’s AAA rating, outlook stable, noting that the risks to the rating are reduced by a strong and credible fiscal consolidation program. Fitch also expressed concern that higher oil prices may result in faster interest rate hikes than are currently being assumed.
TECHNICAL OUTLOOK
EURJPY 111.96 key support.
EURUSD BULLISH Upside potential stalled in front of 1.4000/36 resistance area; a break here would expose 1.4086. Near-term support lies at 1.3752.
USDJPY BEARISH Initial resistance defined at 83.30; while support at 80.62 holds, move below this level would open way towards key low at 80.22.
GBPUSD NEUTRAL Resistance is at 1.6200, while support lies at 1.5977/64 area.
USDCHF BEARISH Bearish pressure holds above 0.9236/00 support zone, move below this would expose 0.8951. Initial resistance is at 0.9369 ahead of 0.9421.
AUDUSD BEARISH Break below 0.9944 triggers the bear trend, next support lies at 0.9867. Initial resistance at 1.0107 intraday high.
USDCAD NEUTRAL Recovery through 0.9803 renders the model neutral with next resistance at 0.9902. Support defined at 0.9735 intraday low.
EURCHF NEUTRAL 1.3040 and 1.2827 mark the near-term directional triggers.
EURGBP BULLISH Outlook remains bullish; focus is on through 0.8692 ahead of 0.8777. Near-term support is at 0.8590.
EURJPY NEUTRAL While 111.96 marks the key support, resistance lies at 116.00.
SCHEDULE
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