FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
WORLD
The RBA held the cash rate at 4.25%, in line with expectations. The rates market had 8bp of easing priced in, and AUDUSD jumped 20 pips immediately. The more dovish policy statement quickly put an end to the rally and the pair soon dropped 40 pips below its pre-announcement level. Growth was deemed to be “somewhat below trend” and “somewhat lower than earlier estimated”. This represents a significant shift from the “close to trend” language used previously.
The rhetorical shift means the RBA may consider a rate cut in May if the Q1 inflation reading (due on April 24) is low enough. If a cut eventually materializes this would not do AUD any favours in our view. However, even with a policy rate at 4% AUD would still offer by far the most attractive carry in G10, and still be the first port of call for yield-hungry investors.
The events calendar is relatively quiet today. FOMC minutes from the March 14 meeting are due, and this will provide the latest opportunity to assess policy opinion across the committee. However, thirteen of the seventeen FOMC officials have already aired their views in public since the meeting – including Fed Chair Bernanke himself – and so the scope for a market-moving surprise is limited. The April 25 meeting is now just over 3 weeks away and promises to be a far more interesting affair. At this meeting the Fed Funds target forecasts are due to be updated for the first time since they were first presented in January. This will provide an instant quantitative measure of how opinion is distributed across the committee – and just as importantly how this opinion has changed over the past three months in response to the improving economic data flow.
Overnight EURUSD traded 1.3314-1.3356 and USDJPY 81.56-82.23. Asian equities were mixed, despite the S&P500 climbing a further 0.75% to set another 4-year high.
EUR
Spain‘s Prime Minister Rajoy defended his decision to press ahead with an austerity program, and warned members of his party that ‘the alternative is infinitely worse’. He stressed that losing market access is not ‘theoretical’, citing precedents within the Eurozone. More details on Spain‘s budget are due today after an outline was released last week.
Germany‘s CDU Parliamentary Leader Kauder said that Spain is currently doing all it can to meet goals, and there is ‘no need’ to discuss the possibility of Spain needing a bailout.
EU Economics Commissioner Rehn said that he saw a gradual recovery in confidence and growth later this year, but he again warned that the Eurozone economy is being hampered by debt and structural problems. Monday’s Eurozone-wide data appeared to confirm Rehn’s bleak near-term prognosis. Eurozone Manufacturing PMI was confirmed at 47.7, a fall from February’s print of 49. The French number was revised down to 46.7 and the German number up to 48.4. The Eurozone February jobless rate rose to 10.8%, in line with consensus. The Italian February jobless rate rose to 9.3%, the highest increase since January 2004.
GBP
The UK‘s construction PMI is due, and the consensus expects a modest drop to 53.4 (from 54.3). On Monday the manufacturing PMI came in at 52.1, well above expectations of 50.7, and set a 10-month high. The more important services PMI is not due until Wednesday.
AUD
Apart from the unchanged policy rate, retail sales data were also released. They grew in line with consensus at +0.2% m/m. More evidence of the two-speed economy is evident in the data as our Australia economics team observes: resource-rich Western Australia showed a +1.0% m/m increase while NSW and Victoria showed monthly declines.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BULLISH Focus is on 1.3386; a clearance of this level would trigger extension of gains to the key high of 1.3486. Support holds at 1.3252 for now.
USDJPY BEARISH A close below 81.96 is required to confirm the break of the level and open next support at 81.47. Resistance is at 83.30.
GBPUSD BULLISH Next target resistance is at 1.6096, where a break would open the key high of 1.6167. Support lies at 1.5947.
USDCHF BEARISH Pressure is on 0.9002; a break here would favour extension of weakness to 0.8961. Resistance is at 0.9094.
AUDUSD NEUTRAL Resistance is at 1.0515, the 38% retracement of the March sell-off. Initial support lies at 1.0305 ahead of 1.0260.
USDCAD NEUTRAL Violation of 0.9901 has exposed the March 19 low of 0.9861. Resistance holds at 0.9991.
EURCHF NEUTRAL Support is at 1.2000. Resistance is at 1.2070.
EURGBP NEUTRAL Trend conditions are unclear at the moment. Initial support lies at 0.8283 ahead of 0.8264. Resistance is at 0.8355.
EURJPY BULLISH The cross remains constructive above 108.49. We expect the cross to trade back to the recent high of 111.26 where a break would expose 111.60.
SCHEDULE
Please visit GCI’s Economic Calendar for a schedule of market news and events.
