FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
The price action during the Asia session was choppy and stop-loss driven. The RBA’s policy statement was slightly more hawkish than the previous one, but there was not enough of a rhetorical shift to materially affect AUDUSD. EURUSD traded 1.4772-1.4882, USDJPY 80.98-81.29. Risk appetite was more or less unchanged. The Nikkei-225 was closed for the Golden Week holiday, but US stocks closed fractionally lower. Manufacturing ISM edged down slightly to a still better-than-expected 60.4. The survey components that most directly indicate output trends remained strong, on balance, although were down slightly from March. Our analysts think the strong reading reinforces their view that the economy is not losing momentum, despite the slower Q1 GDP report. As a result of recent dollar underperformance and the Fed continuing with QE2 through June, we lower our short-term dollar forecasts. We now see EURUSD at 1.48 in 1m and at 1.40 in 3m, up from 1.40 and 1.30, respectively. Our 1m USDCHF target drops to 0.89 and the 3m falls to 0.96. We mark to market our 1m commodity currency forecasts, putting USDCAD at 0.95, AUDUSD at 1.10 and NZDUSD at 0.81. We keep our USDJPY and EURCHF forecasts unchanged. Our UK economist recently revised his forecast for the first BoE rate hike, postponing it until August at the earliest. In line with his view, we now raise our 1m and 3m EURGBP targets to 0.90 from 0.85.
EUR
Eurogroup President Juncker said they would give a full response to Portugal by mid-May and reiterated that Greek debt restructuring is not an option at this stage. Juncker also said he thought Bank of Italy Governor Draghi appears to have strong support to be the next ECB president, once Trichet’s term ends in October.
Greek Finance Minister Papaconstantinou repeated that Greece does not need to restructure its debt, but that an extension to the repayment schedule on the EU/IMF loans could be beneficial. EU’s Rehn says the EU strategy to rescue Greece isn’t ‘failing’; and that the EU has ‘largely contained’ bond market distress.
The ECB’s Constancio reiterated that risks to the inflation outlook have moved to the upside and said officials have not decided to rush into a series of rate hikes. Constancio also said that non-standard measures are temporary by nature.
There was a series of upward revisions to European PMIs. German manufacturing PMI was revised up to 62.0, while the Eurozone-wide number was revised up to 58.0.
AUD
The RBA kept policy unchanged for the fifth consecutive meeting, but allowed slightly more hawkish language to creep into the policy statement. Our Australian economics team sees this as an attempt to reintroduce a near-term tightening bias, which was virtually absent in the previous statement. Specifically, the RBA noted the terms of trade were reaching higher levels than assumed a few months ago, and that the ‘marked decline’ in core inflation had now ‘run its course’. It was again noted that the strong AUD was useful in the fight against inflation, but the board questioned the currency’s ability to control inflation single-handedly. Our economists stick to their view that the next hike will likely come in August.
TECHNICAL OUTLOOK
USDJPY 80.89/69 support.
EURUSD BULLISH Rise through 1.4905 would open up the way for further gains towards 1.5000. Support is at 1.4633.
USDJPY BEARISH Pressure on 80.89/69 support area, break through this would expose 80.00. Initial resistance lies at 82.28.
GBPUSD BULLISH A break above initial resistance at 1.6747 would expose 1.6878. Support lies at 1.6500.
USDCHF BEARISH Support is at 0.8600, move below this would expose 0.8569. Near-term resistance is at 0.8761.
AUDUSD BULLISH The pair targets initial resistance 1.1023, break here would open way to 1.1130. Support lies at 1.0852.
USDCAD BEARISH Break below 0.9446 would pave the way for weakness towards 0.9400. Resistance is at 0.9550/76 area.
EURCHF BEARISH As long as resistance at 1.2974 holds, look for a break of 1.2751/30 support zone which would expose 1.2624.
EURGBP BULLISH Focus is on key resistance at 0.8942, break of this would expose 0.9000. Support lies at 0.8847.
EURJPY BULLISH Pullback through 120.00 has exposed 118.50. While this level holds, expect recovery towards 121.00 and 121.84.
SCHEDULE
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