FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
WORLD
The RBNZ kept its policy rate unchanged at 2.5%, but implicitly raised the prospect of a future interest rate cut. The short overnight policy statement warned that continued strength of theNew Zealanddollar may force the bank “to reassess the outlook for monetary policy”. Previously, only a deferral of interest rate hikes was being considered in the case of persistent currency strength, but now two-way risk has been injected into the policy language. Surprisingly, theNew Zealanddollar did not weaken in response, and soon gained 30 pips in line with a more supportive backdrop for risk appetite.
Meanwhile, FX investors continue to digest the FOMC’s latest policy announcement and forecast revisions. Near-term GDP growth and inflation forecasts were revised higher, and several FOMC members brought forward their personal views on the date and pace of future tightening. But it was Fed Chair Bernanke’s dovish interpretation of FOMC opinion that left a lasting impression. Denied a boost from the Fed, it is difficult to see the dollar rally in the near term without a significant uptick in risk aversion. While a better payrolls report next week might help, policy support is not likely to come through until the FOMC minutes are released in three weeks’ time, or until the FOMC meets on June 20.
USDJPY followed US 10y yields lower after the press conference. Yen bears can take some solace from the fact that the ball is now in the BoJ’s court, and if they deliver a bold round of additional easing on Friday, USDJPY could push towards 82.00. However, with US yields failing to sustain a rally, and risk largely driven by strongUS earnings estimates, a structural move higher seems unlikely in the near term, especially if the BoJ disappoints.
EUR
ECB President Mario Draghi called for a growth pact in the euro area alongside the current fiscal compact. Supporting the call, Executive Board member Asmussen said that such a package could involve redirecting structural and regional resources from the EU to bolster employment in indebted countries and implementing labor market reforms similar to those carried out inGermany. The announcements gather significance in light of the growing political unrest in the euro-zone on the effectiveness of austerity.
French Socialist Presedential candidate Francois Hollande saidFrance won’t ratify the European agreement in its current form and that “there will be a re-negotiation,” if he wins the presidential elections. While it is largely repeating his manifesto, the euro came under slight pressure from the headlines.
LCH Clearnet revised its margin parameters forFrance andSpain. The 10-15y bonds were increased from 6.10%-6.40%. Margins on Spanish bonds from 2-15y were also raised.
GBP
After initially coming under pressure, the pound pared its losses in theUSsession versus both the euro and dollar after the Q1 GDP print confirmed that theUKis back in recession. The headline number came in at -0.2% versus consensus estimates of +0.1%. The decline was driven by the construction sector (albeit a small contributor towards theUKeconomy) which declined the most since Q1 2009. The data is hard to reconcile with the leading indicator data and a recovery in PMI readings from the more important services sector. Our analysts believe that positive revisions in services and construction are very likely. This view is shared by the British Chamber of Commerce who stated that “Business surveys, including the BCC’s quarterly economic survey, have shown a more positive picture, and we believe these give a more accurate indication of the underlying trends in the economy,” following the release. We retain our moderately bullish forecast versus the euro however, and believe that there is greater underlying strength in theUKeconomy than the GDP data suggests. Indeed the forward looking CBI business optimism indicator rebounded to 22 in April.
NZD
The RBNZ kept the policy rate unchanged at 2.5%, but introduced two-way risk into the future setting of monetary policy. Governor Bollard noted that theNew Zealanddollar has remained elevated despite falls in commodity prices, and should this remain the case the bank may “need to reassess the outlook for monetary policy”. This means future rate hikes may need to be deferred but, taken literally, it also leaves the door open for a possible future cut. After all, the March statement merely noted that ‘sustained strength in theNew Zealanddollar would reduce the need for future increases in the OCR’.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD NEUTRAL A break above 1.3237 would expose 1.3386. Near-term support lies at 1.3105.
USDJPY NEUTRAL Resistance is at 81.78, while support lies at 80.86.
GBPUSD BULLISH The key high of 1.6167 is under test; a close above the level would be bullish opening next resistance at 1.6261. Support lies at 1.6078.
USDCHF NEUTRAL The risk is for a move to the April low of 0.9002. Near-term resistance is at 0.9172 ahead of 0.9210.
AUDUSD BEARISH Trend is bearish; we expect to see a re-test of the key support at 1.0260/26. Resistance is at 1.0384.
USDCAD BEARISH The pair moved below 0.9842 marking a range breakout. Next support is at 0.9800 ahead of 0.9766. Resistance is at 0.9881.
EURCHF NEUTRAL Resistance is at 1.2049 ahead of 1.2070, while support lies at 1.2000.
EURGBP BEARISH A clearance of 0.8142 would signal extension of weakness towards 0.8068. Resistance is at 0.8222, yesterday’s reaction high.
EURJPY BEARISH A clearance of 106.32 would expose the key support at 104.61/24. Resistance is at 108.03.
SCHEDULE
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