- Higher, Greek debt woes, downgrade of Portugal's debt, new home sales rate lowest since 1963
- Lower, Japan announces a record $1trln budget, Japan's debt rating may be at risk
- Lower, improving manufacturing and services PMI overshadowed by EU sovereign debt risk
- Lower, pressured by UK 2011 budget announcement which included a cut in 2011 GDP forecast
- AUD & CAD lower, China reserve hike rumors, stocks and commodities decline
Overview
The USD traded to a 10 month high versus the EUR in reaction to report that Fitch downgraded Portugal's credit rating to AA- from AA and ongoing uncertainty about the Greek fiscal outlook. French and German officials indicate that the EU may seek IMF help to handle the Greek bailout. The Fitch downgrade of Portugal's debt rating sparked selling of the EUR against the majors and EUR/CHF cross traded at a record low. The EUR weakened despite report of improvement in EU manufacturing and services PMI. GBP traded lower in reaction to today's UK budget announcement which included a cut in 2011 UK GDP forecast. Commodity currencies traded lower pressured by weaker equities and declining commodity prices with selling pressure attributed to concern about sovereign debt risks in Europe. The commodity currencies were also pressured by rumors that China may hike its reserve requirement over the weekend. Tightening of credit conditions in China is seen as a risk to the global recovery. In addition, US lawmakers said that China must change its currency policy. JPY traded sharply lower in reaction to announcement of a record $1trln Japanese budget for next fiscal year. Japan's rising budget deficit increases the risk of a downgrade of Japan's credit rating. Today's US economic data was mixed with durable goods rising slightly above expectation, and new home sales came in weaker than expected. The data had limited impact on today's Forex trade.
Today's US data:
February durable goods rose by 0.5%, a flat reading was expected. February new home sales came in at 308k, a reading of 320k was expected.
Upcoming US data:
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 sharply lower pressured by report that Japan has approved a record $1trln budget. The budget includes a record ¥44.3trln in new bond issues. The sharp increase in Japan's bond issuance and budget deficit increases the risk that Japan will face a downgrade of its debt rating. Ratings agencies have indicated that Japan must keep its bond issuance below ¥44trln. The Japanese government must seek to contain the size of its bond issuance or risk a downgrade of Japan's debt rating. Today's announcement of a record amount of new Japanese bond issuance may limit the Japanese government's ability to increase spending to boost growth. Japan's debt is twice the size of GDP. This may encourage the Japanese government to increase pressure on the BOJ to take more action to boost the Japanese economy. Japan's Finance Minister Kan however said that there is no need for the BOJ to underwrite JGB's. Last week the BOJ eased monetary policy and doubled size of its lending activity. The BOJ however stopped short of increasing purchase of JGB's. The BOJ ease is not expected to be enough to boost Japan's economy and combat deflation. This week's main focus for the JPY will be the March 26th 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. There was little reaction to today's report that Japan's February trade surplus widened to ¥651bln, reading a ¥550bln was expected. Exports rose by 45.3% and imports rose by 29.5%.
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 90.38 the March 24th low with resistance at 92.16 the February 19th high.
EUR
EUR traded at a 10 month low versus the USD pressured by report that Fitch downgraded Portugal's credit rating and in reaction to a statement from French and German officials that the EU may look to the IMF for a bailout of Greece. EUR decline accelerated after report that Greece is not on tomorrow's official EU summit agenda and that no decisions on Greece are expected this week. If the IMF becomes part of a rescue plan for Greece it could be seen as an additional blemish on the EUR. EUR weakened to a record low versus the CHF with the CHF supported by safe haven demand sparked by Greek debt worries and the Portugal downgrade. Despite increased threat of intervention from the SNB the SNB has yet to intervene to sell the CHF. Bloomberg news reports that one reason the SNB may be reluctant to intervene is because of the U.S. Congress intense focus on a possible label of China as a currency manipulator. SNB may not want to become a target of the U.S. Congress. EUR traded lower despite report of improving EU manufacturing and services PMI. EU March flash services PMI rose to 53.7 from 51.8 last month and the flash manufacturing PMI improved to 56.3 compared to 54.2 last month. The German March IFO business climate improved to 98.1 from 95.2 last month. Improving EU economic data was overshadowed by worries about EU sovereign debt risk. Absent a credible plan from the EU to deal with Greece and sovereign debt risk in peripheral EU nations the EUR is likely to continue to trade lower. Focus turns to the EU summit which begins on Thursday for clues to EU plans for Greece.
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 1.3400. Expect EUR support at 1.3285 the May 5th low with resistance at 1.3485 the March 24th high.
GBP
GBP traded lower pressured by uncertainty about today's UK budget announcement and rising risk aversion sparked by concern about sovereign debt risk in Europe and Japan. GBP traded lower despite a reduction in UK deficit forecast. UK's Darling says that UK borrowing for 2009-10 will be £167bln down from £178bln and for 2010-11 government borrowing will be £163bln down from £176bln. Darling also lowered the UK debt forecast for 2014 to £89bln from £96bln. The UK budget left 2010 GDP growth forecast unchanged at 1 to 1.5% and cut the 2011 GDP forecast to 3% to 3.5% from 3.25% to 3.75% in the pre-budget report. Today's UK budget announcement is unlikely to diminish concern about that UK AAA debt rating may be at risk of downgrade if the UK does not take credible action to reduce it deficit. The BOE's Blanchflower said that if the UK were to lose its AAA debt rating it may not have as big an impact as some analysts expect. GBP downside was limited by gain in cross trade to the EUR. Today's UK budget announcement should have limited impact on BOE policy outlook. Tuesday the UK reported weaker than expected retail sales and lower inflation. The combination of weaker than expected UK retail sales and lower CPI may revive BOE ease speculation. Although UK CPI remains at the high end of the BOE's inflation target range the fact that inflation is moderating may reduce some of the concern expressed by BOE board members at the March policy meeting that UK inflation expectations may rise. Focus turns to Thursday's release of UK retail sales.
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 1.5000. Expect near-term support at 1.4873 the March 10th low with resistance at 1.5200.
CAD
CAD traded lower pressured by declining commodity prices and weaker equity markets sparked by today's Fitch downgrade of Portugal's debt rating and ongoing uncertainty about a rescue plan for Greece. Crude prices traded sharply lower in reaction to report of a big build in crude inventories. Uncertainty about an EU aid plan for Greece and Fitch downgrade of Portugal's credit rating sparked selling of the EUR and the spike in risk aversion. 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.
The technical outlook for CAD is positive as USD/CAD trades below 1.0100. Look for near-term support at 1.0157 the March 24th low with resistance at 1.0323 the March 11th high.
AUD
AUD traded lower pressured by weaker equity markets and declining commodity prices. Investor concern about sovereign debt risk in Europe and Japan sparked selling of commodity and equity markets and safe haven demand for the USD. As noted above, Fitch downgraded Portugal's credit rating, the EU may seek IMF help to handle a Greek bailout and Japan announced a record $1trln budget deficit. AUD was also pressured by increased tensions between the US and China over the Yuan. A report released Tuesday says that China's unfair trade and currency policies cost the US 2.4 million jobs between 2001 and 2008. Two US senators are calling for quick action by Congress to vote on whether the US will label China a currency manipulator. If the US Congress labels China as a currency manipulator, China is expected to retaliate and this could generate fear of protectionism. US China trade friction threat and fear of protectionism would be a negative for the global economic outlook. US China trade friction and global sovereign debt risk may also impact the outlook for RBA monetary policy. The RBA may be less inclined to hike rates in April if US and Chinese tensions escalate and the EU fails to come up with a credible plan to deal with Greek fiscal crisis. 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. Rumors are circulating that China may hike its reserve requirement this weekend. Diminished RBA rate hike speculation is negative for AUD. Recent technical price action suggests that the AUD may be carving out a near-term top.
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.
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