FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
WORLD
For the second day running, Australian dollar bulls were temporarily knocked back by weaker than expected domestic data, with a 15.4k decline in employment and an uptick in the unemployment rate to 5.2% in February, coming on the heels of weak Q4 GDP data yesterday. The Australian dollar recovered its poise as risk sentiment improved amid the rise in the major equity indices. USDJPY remained well supported in Asia, aided by confirmation of a current account deficit for January (non-seasonally adjusted), the first since January 2009 and the deepest on record. To be sure, this does not herald a shift to a sustained current account deficit position yet, as exports were distorted by the Chinese New Year and the large income surplus will continue to provide a buffer against the trade deficit.
However, today’s figures serve reminder of Japan‘s increased sensitivity to volume and price spikes for imported energy that could progressively eat into the current account balance and heighten ‘twin deficit’ fears – a worrisome prospect for the yen. MoF data released today showed that the Japanese remained net buyers of foreign bonds last week to the tune of Y276 bn, following the hefty Y1.4 trn tally recorded the previous week. Net foreign bond purchases have been chalked up in 8 of the past 9 weeks, underlining our view that repatriation will not be a major yen-supportive factor. The market spotlight now shifts to the upcoming policy decisions from the BoE, ECB and Bank of Canada. In line with the consensus, our economists expect ‘no change’ verdicts from all three central banks. Beyond the ECB decision, euro risks will hinge heavily on the headlines out of Greece, in the run-up to the 2000 GMT PSI deadline for bondholders to confirm their involvement. It still looks as if the CACs will be invoked and a credit event will be triggered by early next week, an outcome that markets should be well prepared for at this stage. Overnight ranges for EURUSD and USDJPY were 1.3135-1.3162 and 81.08-81.36, respectively.
EUR
Germany’s Finance Minister Schaeuble said he discussed very openly with Greece’s finance minister whether it would be better for Greece to leave the euro, but that Greek authorities were 100% committed to remaining within it.
Ahead of the deadline for bondholders to declare their involvement in Greece‘s debt restructuring, Greek media said participation levels are approaching 77%. We note that consent from only two-thirds of participants (who express a preference) would open the door for the Greek authorities to actually invoke the CAC clauses – likely triggering a credit event by early next week. A Greek government official said that six Greek pension funds with holdings of EUR3.4 bn of Greek sovereign debt continue to oppose the deal.
Schaeuble said a teleconference of Eurozone finance ministers has been scheduled for 1300 GMT on Friday.
JPY
Weekly MoF statistics revealed that cumulative net Japanese purchases of foreign bonds have amounted to Y5.5 trn in the current quarter to date, tempering any lingering fears of repatriation ahead of the book closing on March 31. Separate monthly data indicated that the net foreign bond investment tally for Japanese insurers in February was the highest since October 2010 – another sign of the greater overseas diversification we expect to see from yield-hungry Japanese institutions into the new fiscal year. Please refer to our March 1 FX Comment (“Repatriation Games”) for a more detailed analysis of the drivers underpinning our bullish USDJPY call.
The upward revision to Japan‘s Q4 2011 GDP was well telegraphed and had little FX impact. The headline print was ‘less negative’ at -0.2% q/q compared to the first preliminary estimate of -0.6% q/q, thanks in large part to the improvement in private capex flagged by the MoF’s Financial Statements Statistics of Corporations by Industry. Real GDP growth is expected to turn positive from Q1 2012, helped by reconstruction demand.
AUD
The unemployment rate ticked up in February to 5.2%, after unexpectedly falling in January to 5.1% – though it has been holding around 5.25% since Q3 2011. The participation rate ticked down to 65.2% from 65.3%, matching the lowest since mid-2007. Employment was weaker than expected, retracing by 15k m/m in February, albeit after a 46k m/m rebound in January. The trend of jobs growth remains weak, with the y/y pace moderating to 0.2% from 0.3%.
Together with the weaker than expected Q4 2011 GDP result (0.4% q/q), slack employment conditions should open the door for an RBA rate cut, if the rise in the jobless rate continues. While our Australian economics team (and the RBA) continue to expect a modest increase in the unemployment rate towards 5.5%, it has been broadly steady for a number of months around 5.25%. With leading indicators suggesting a better trend in jobs growth ahead, we continue to expect the RBA to hold rates.
NZD
The RBNZ left the policy rate unchanged at 2.5%, with Governor Bollard noting that a strong currency undermines GDP growth – and, if the kiwi’s recent gains are sustained, the need for rate hikes would be reduced.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BEARISH Decline through 1.3056 would expose 1.2974. Resistance is at 1.3241.
USDJPY BULLISH Clearance of 81.59 would open 81.87, the month-to-date high. Support lies at 80.59.
GBPUSD BULLISH Our focus remains on upside with resistances at 1.5790 and 1.5883. Support lies at 1.5697.
USDCHF NEUTRAL Resistance is now at 0.9213 ahead of 0.9300, the February rejection high. Support lies at 0.9106 ahead of 0.9022.
AUDUSD NEUTRAL Support is at 1.0509 ahead of 1.0476. Resistance is at 1.0691 ahead of 1.0744.
USDCAD BEARISH As long as the resistance at 1.0052 holds we expect the pair to move below 0.9937 to open 0.9886.
EURCHF NEUTRAL Resistance is at 1.2084 and support is at 1.2041.
EURGBP NEUTRAL Support lies at 0.8314, the trendline support drawn off the Jan. 9 low, ahead of 0.8265. Resistance is at 0.8383 ahead of 0.8410.
EURJPY BULLISH Break above 107.02 would open 108.04 ahead of 108.74. Support is at 105.65.
SCHEDULE
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