FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
The Australian dollar struggled through the overnight session, weighed down by lingering concern over how severe the slowdown in China could become. A McCrann article in the Australian press added to the selling pressure, claiming that a cut to the RBA’s cash rate at next Tuesday’s meeting is actually more likely than not. This is not the view of our Australia economists who instead expect the RBA to remain on hold at 4.25% for the rest of this year. The rates market too is skeptical of the claim, but has seen fit to price in 10bp of easing just in case. The official China PMI for March due out on Sunday is also looming large, especially given the weakness of the private-sector flash PMI released last week. We are certainly alert to the near-term risks for AUDUSD, and reiterate our 3m forecast of 1.00. We are however comforted by the fact that Chinese demand for Australia‘s main export (iron ore) has not declined and, unlike many other commodities, its spot price is still rising.
Our team is also constructive on iron ore’s price outlook as their new quarterly forecasts published overnight indicate. Equity markets still look fragile though – something AUD cannot ignore. The Nikkei-225 is down -0.7% at the time of writing, and the Shanghai Composite has sustained similar losses. A further decline in US initial jobless claims today could help turn sentiment around though, especially if our analysts also get the upward revision they expect to US Q4 GDP. Ordinarily the third estimate of a previous quarter’s GDP is not a market-moving affair, but the sterling selloff in the wake of yesterday’s downward revision to UK Q4 GDP (-0.3% q/q) is a reminder that investors remain firmly in data-watch mode, and can punish or reward currencies on the narrowest surprise. Fed Chairman Bernanke will continue his college lecture series today, and speeches are due from Fed Presidents Lacker, Lockhart and Plosser.
The IMF’s mission chief in Greece, Thomsen, warned that there is no more scope for tax increases, and further across-the-board cuts in wages or pensions are not feasible either. He implied that the only way forward now is to enforce mandatory public sector redundancies – something the government has been reluctant to do in the past. We note that the Greek unemployment rate had already reached 20.7% by the end of Q4 2011.
Newswire sources from the Eurozone dismissed speculation that Spain might need a financial rescue and said the private sector will meet most of the funding needs for Spanish banks.
Discussion is still ongoing about how to boost the firepower of the combined EFSF/ESM. There is still a difference of opinion on how to utilise the remaining capacity of the EFSF. The possibility of governments making accelerated cash payments into the ESM is also being looked at.
Greek opinion polls suggest that no single party will obtain a clear majority at the upcoming elections – a date for which has still not been set.
MoF weekly data showed that Japanese investors were actually net buyers of foreign bonds in the week ended March 24. It appears that any fiscal year-end repatriation effects have almost entirely run their course.
The final Q4 UK GDP release came in below expectations, revised lower to -0.3% q/q from -0.2% q/q. Our economists note that at the margin this will encourage some MPC members to argue for more QE in May, but that decision will depend on the preliminary Q1 GDP print that will be released towards the end of April . As of now, it looks as if the economy will expand by around 0.2-0.3% q/q in Q1. If correct, the UK economy has stagnated in the last 6 months.
BoE MPC Member Posen said he was not as worried about downside risks as before, but if core CPI did not drop then “something is wrong”.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BULLISH Recovery stalled at 1.3386; a move above the level would shift our focus to the key high of 1.3486. Support lies at 1.3192.
USDJPY BULLISH Outlook is bullish; a move above 83.39 would pave the way for a climb to the key high of 84.18. Support lies at 82.33.
GBPUSD BULLISH Resistance is at this week’s high of 1.6001 ahead of 1.6096. Support lies at 1.5842 ahead of 1.5801.
USDCHF BEARISH Clearance of 0.8961, the 62% retracement of Oct/Jan rally, would open 0.8931. Resistance is at 0.9137.
AUDUSD BEARISH The pair is approaching the last week’s low of 1.0336; a break here would open 1.0260. Resistance is at 1.0462.
USDCAD NEUTRAL Initial resistance is at 1.0034 ahead of 1.0052, while support lies at 0.9901.
EURCHF NEUTRAL Resistance is at 1.2082 ahead of 1.2147. Support is at 1.2040.
EURGBP NEUTRAL Clearance of 0.8424 would trigger further gains towards 0.8470. Support lies at 0.8335.
EURJPY BULLISH A recovery through key resistance at 111.44 would expose 111.94. Support lies at 109.18
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