Daily Forex Report-USD mixed, sovereign debt risks may slow the recovery
Monday, March 22nd, 2010- USD: Higher, sovereign debt risks, spike in risk aversion, Greek bailout doubts
- JPY: Higher, Tokyo market closed for holiday, safe haven demand versus lower yields
- EUR: Lower, EU officials divided over need for aid for Greece, EU summit March 25th and 26th
- GBP: Higher, CBI warns that UK faces a slow and sluggish recovery, gain in cross trade to the EUR
- CHF: Higher, SNB will take decisive action to prevent excessive appreciation of the CHF vs. EUR
- CAD and AUD: AUD & CAD lower, US China trade tensions, India rate hike, weaker crude and CRB
Overview
The USD traded mixed to higher to start the week supported by a spike in risk aversion. There are numerous factors that contributed to today’s spike in risk aversion. These factors include ongoing worries about the Greek fiscal crisis. Reuter’s reports that EU nations are divided over whether to aid Greece. The trade awaits this week’s EU summit on Greece scheduled for March 25th and 26th. A report that Chinese officials are considering the start of withdrawal fiscal stimulus coupled with Chinese threat of retaliation if the US labels China currency manipulator adds to today’s decline in risk appetite. Friday, India surprised the markets and hiked interest rates. The Indian rate hike generates concern about the outlook for the global recovery. Last night the U.S. House Representatives passed President Obama’s health care reform plan. The passage of major health reform in the US adds to stock jitters. GBP opened lower in reaction to CBI warning that the UK faces a slow and sluggish recovery. GBP downside was limited by gains in cross trade to EUR. Commodity currencies were pressured by weaker equities, a decline in crude prices and diminished risk appetite. Crude oil traded below $80 a barrel in Monday’s trade. JPY traded higher supported by safe haven demand and by gains in cross trade. Markets were closed for holiday in Tokyo. No major US economic data was released in today’s trade. USD gains were limited as US equity markets trade higher midsession.
Today’s US data:
No major US economic data was released today.
Upcoming US data:
This week’s US economic calendar includes the March 23rd release of February existing home sales expected at 500mln compared to 505mln last month. On March 24th February durable goods will be released expected flat compared to a 3% rise last month. February new home sales will also be released on March 24th expected at 320k compared to 309k last month. On March 25th initial jobless claims for the week ending 3/20 will be released expected at 453k compared to 457k last week. On March 26th final Q4 GDP was released expected 5.7% compared to 5.9% along with final March Michigan consumer sentiment expected unchanged at 72.5.
JPY
JPY traded higher supported by today’s spike in risk aversion. Markets were closed in Tokyo for holiday. Last week the BOJ elected to hold rate policy unchanged and raised its lending operations to Â¥20trln from Â¥10trln. The BOJ however stopped short of announcing a plan to buy Japanese bonds. The purchase of Japanese bonds would be seen as a more aggressive ease by the BOJ. The BOJ has been under significant pressure from the Japanese government to take more action to combat deflationary pressures. This week’s main focus for the JPY will be Thursday’s release of Japan’s CPI. If the CPI confirms deflationary pressures it will likely increase the risk of more government pressure on the BOJ to ease monetary policy. JPY price direction is caught between the outlook for lower Japanese yields and uncertain risk sentiment. JPY has benefited from gains in cross trade to Europe sparked by sovereign debt risks in peripheral European nations and the UK. JPY traded higher versus the AUD Monday with AUD pressured by a decline in risk appetite sparked by US China trade friction and concern about global growth outlook as China considers the withdrawal of fiscal stimulus and India hiked interest rates last Friday.
This week’s Japanese economic calendar includes March 24th release of February trade balance expected at Â¥0.79trln compared to Â¥0.06trln. On March 26th February CPI will be released expected flat compared to -0.2% last month.
Key technical levels to watch in USD/JPY include support at 89.63 the March 9th low with resistance at 91.30 the February 23rd high.
EUR
EUR drifted lower pressured by ongoing uncertainty about whether the EU will aid Greece. Reuters reports that EU nations are divided on whether to aid Greece. Greek officials say they may soon be unable to sell debt and may have to seek aid from the IMF. This week’s main focus will be the EU summit on Greece scheduled for March 25th and 26th. If EU officials fail to agree on a plan to support Greece the EUR is likely to continue to decline. Friday, European press reported that the rift between Germany and Greece about an aid package has deepened. One of the German central bank members Sarrazin said that Greece is not in need of aid and Greece should declare insolvency if it can’t finance its debt. His comments suggest that Germany remains reluctant to join in financial aid for Greece. Greek officials indicate that if EU aid is not coming within a month that they will seek help from the IMF. If Greece is forced to go to the IMF for aid it would generate concern that the EU does not have a plan to deal with sovereign debt risk in the other peripheral EU nations. This means that the Greek fiscal crisis may turn into a contagion and spread to other parts of Europe. The Greek fiscal crisis is seen as a challenge to the unity of European Monetary Union and a possible threat to the EU economic recovery. A Greek official warns that European Union is at stake if European leaders do not come up with a credible package to aid Greece. Uncertainty about the Greek debt crisis will encourage the ECB to maintain steady rate policy.
This week’s EU economic calendar includes the March 24th release of EU manufacturing and services PMI along with March German IFO index. Manufacturing PMI is expected at 54.6 compared to 54.2 last month. Services PMI is expected at 52 compared to 51.8 last month. The IFO is expected at 94.9 compared to 95.2 last month. On March 25th February M3 will be released expected at 0.1% compared to -0.1% last month. Also on March 25th German April GFK Index will be released expected at 3.3 compared to 3.2 last month.
The technical outlook for the EUR is negative as EUR trades below 1.3600. Expect EUR support at 1.3433 the March 2nd low with resistance at 1.3627 the March19th high.
CHF
CHF opened lower pressured by increasing risk of SNB intervention as the EUR/CHF cross trades near a 17 month low. CHF gains in cross trade are attributed to ongoing concern about the Greek debt crisis and improving economic outlook in Switzerland. Last week SNB board member Danthine said that Switzerland must be ready for higher interest rates and he warned that the SNB is prepared to intervene to prevent excessive rise of the CHF versus the EUR. Recent Swiss economic data shows that the Swiss recovery is outpacing the recovery in Europe. The combination of improving Swiss domestic growth outlook, Greek debt uncertainty and speculation that the SNB is preparing for a future rate hike will make it difficult for the SNB to limit CHF gains with intervention. Last week the SNB said that it would no longer be providing ample liquidity and raised its outlook for the Swiss economy. There is report on Bloomberg that states that Barclays sees the potential for a technical selloff of the EUR/CHF cross to 140. The outlook for the CHF remains positive versus the EUR and mixed to negative versus the USD. Expect USD/CHF support at 1.0507 the March 17th low with resistance at 1.0795 The March 10th high.
GBP
GBP traded mixed initially pressured by a CBI report which says that the UK recovery will be uneven and that the UK faces a slow and sluggish recovery. GBP downside was limited by gains in cross trade to the EUR sparked by uncertainty over whether the EU will agree to aid Greece. GBP downside was also limited by position squaring ahead of tomorrow’s release of UK CPI. There has been mixed speculation about the outlook for BOE policy in light of uncertain outlook for the UK recovery and rising inflation.  Friday the BOE’s Sentence said he sees the risk of a double dip recession in the UK. Sentence’s statement and the mixed outlook for the UK recovery encourages speculation that the BOE may be forced expand quantitative ease. The minutes for the March BOE policy meeting however suggest that BOE officials are becoming more concerned about rising inflation risk. A higher than expected CPI report Tuesday could be a mild positive for the GBP as the data could dampen BOE ease speculation. Focus turns to this week’s release of UK CPI and retail sales. The BOE minutes for the March policy meeting state that the BOE is becoming more concerned about rising inflation risk in the UK. The trade will be looking at a CPI report for indications of UK inflationary pressures and the retail sales report for clues to the strength of the UK recovery. The trade will also be focused on Wednesday’s announcement of the UK pre election budget. UK budget outlook is key to the UK sovereign debt rating.
This week’s UK economic calendar includes the March 23rd release of February CPI expected at 0.1% compared to -0.1% last month. On March 24th January CBI distributive trades will be released expected  at 24 compared to 23 last month. On March 25th February retail sales will be released expected at 0.2% compared to -1.8% last month.
The technical outlook for GBP is mixed as GBP trades below 1.5100. Expect near-term support at 1.4873 the March 10th low with resistance at 1.5200.
CAD
CAD traded lower pressured by weaker crude prices, a spike in risk aversion as equity markets decline and in reaction to concern about the global recovery outlook as China ponders the possible withdrawal of stimulus and India hiked rates Friday. CAD was also pressured by the threat of intervention as Canada’s PM Harper says that the BOC has expressed concern about the impact of rising CAD for the Canadian recovery. No major Canadian economic data was released in today’s trade. CAD has been outperforming supported by improving Canadian domestic economic outlook and speculation that rising Canadian inflation will encourage the BOC to make an earlier rate hike. Last week Canada reported strong retail sales and manufacturing shipments. Canada’s core inflation rate rose to its highest level in 16 months. Canada’s February CPI rose by 0.4%, a 0.3% rise was expected. The core inflation rate rose by 2.1%. The core inflation rate is above the BOC’s 2% inflation target. The above target CPI increases the risk of an earlier BOC rate hike. The BOC pledged to maintain low yields through June of 2010 provided inflation remains in check. The Canadian CPI report will increase pressure on the BOC to consider an earlier rate hike. Bloomberg news reports that yield differential on Canada and US inflation protected bonds widened the most in five months. This suggests that the BOC will hike rates before the Fed.
This week’s Canadian economic calendar includes the March 23rd release of February leading index expected at 1.1% compared to 0.9% last month.
The technical outlook for CAD is positive as USD/CAD trades below 1.0100. Look for near-term support at 1.0062 the March 19th low with resistance at 1.0323 the March 11th high.
AUD
AUD traded lower pressured by a spike in risk aversion sparked by weaker equity market trade. Friday’s surprise rate hike from India coupled with ongoing sovereign debt risks in Europe and concern about US and China trade tensions sparked selling of equity markets and the AUD. As noted above, there is a report in the Chinese press that Chinese officials may be considering withdrawing of fiscal stimulus. The threat of the withdrawal of fiscal stimulus in China coupled with Fridays rate hike in India generate concern about the outlook for the global recovery. In addition, Chinese officials have pledged to retaliate if the US takes action to label China currency manipulator. US China trade fictions are also seen as a risk to the global recovery. Uncertainty over whether the EU will aid Greece adds additional pressure to the AUD. The outlook for stocks, RBA policy uncertainty and Greek debt news are the key drivers for AUD price direction. There is speculation that the RBA will pause in its rate hike cycle at the April policy meeting if Greek debt crisis is unresolved and China takes additional measures to curb lending. The RBA March policy minutes noted concern about the impact of the Greek debt crisis. The RBA’s decision to pause in February was linked to tightening of lending conditions in China. Diminished RBA rate hike speculation is negative for AUD. Recent technical price action suggests that the AUD may be nearing a near-term top. February new car sales declined by 1.9%.
The technical outlook for the AUD is negative as the AUD fails to hold above 9200. Expect AUD support at 8985 the March 5th low with resistance at 9225 the March 19th high.
Written by Easy-Forex
