Overview
USD traded mixed Thursday gaining versus the JPY and EUR and weakening versus the GBP, CHF and commodity currencies. Improving manufacturing PMI in Europe, China and the US and firmer equity market trade sparked modest selling of the USD Thursday. EUR continues to underperform pressured by selling in cross trade with the EUR/CHF cross trading at a record low and GBP/EUR cross trading at a five week low. Weaker EUR is attributed to ongoing worries about the Greek fiscal outlook as the cost of financing the Greek debt continues to rise. CHF traded higher in reaction to report that Swiss manufacturing PMI rose to a four year high. GBP traded higher supported by report that UK manufacturing PMI improved to its highest level since 1994 and in reaction to UK election polls which suggest the Conservatives could gain a majority in parliament. Commodity currencies traded higher tracking firm equities, a rally in crude above $84 a barrel and in reaction to report of stronger manufacturing PMI in China. China's March PMI improved to 55.1 from 52 in February. Commodity currency gains were limited by fear that the improvement in China's manufacturing PMI may encourage China to step up its withdrawal of stimulus. AUD underperforms in reaction in the reaction to report of weaker Australian PMI and a widening of Australia's trade deficit. JPY traded lower in reaction to improving risk sentiment as the Nikkei traded sharply higher. Japanese business sentiment improved in March but capital spending remains weak. US economic data was mixed with jobless claims declining to the lowest level since December 2008. ISM rose to its highest level since July 2004 and construction spending declined by more than expected. Focus turns to Friday's release of US March unemployment and nonfarm payrolls. March unemployment is expected unchanged at 9.7%. March nonfarm payrolls are expected to rise by 190k. Treasury Secretary Geithner said that US unemployment is going to stay unacceptably high for a long period of time. According to Geithner the US economy will start creating jobs again but it will take a long time to make up ground lost in the recession.
Today’s US data:
Initial jobless claims for week ending 03/27 drop by 6K to 439K, a reading of 438k was expected. March ISM surged to 59.6, a reading of 56.5 was expected. February construction spending declined by 1.4%, a reading of -1.1% was expected.
Upcoming US data:
On April 2nd the March unemployment rate and nonfarm payrolls will be released. Nonfarm payrolls are expected to rise by 190k compared to -36k last month and the unemployment rate is expected unchanged at 9.7%.
JPY
JPY traded at a seven month low versus the USD pressured by firmer equity market trade and improving risk sentiment sparked by report of strong manufacturing PMI data from Europe and China. Asian equity markets surged with the Nikkei closing 154 points higher. Asian equities were supported by report that China's manufacturing PMI improved in March. The Nikkei was supported by report of improving Japanese business sentiment. Japan's March Tankan business sentiment index improved to -14. This was the highest level for the Japanese Tankan index since September 2008. CAPEX spending however remains weak reported at -0.4%. The strong manufacturing PMI reports contribute to rising bond yields. In light of the BOJ's decision to ease monetary policy mid March JPY price direction has become more sensitive to rising bond yields and the widening yield gap with the US. Today's Japanese Tankan report is unlikely to reduce pressure on the BOJ to maintain accommodative policy because Japan's business sentiment remains in negative territory and capital spending remains weak. Focus turns to Friday's release of US March unemployment and nonfarm payrolls. A sharp rise in nonfarm payrolls is expected. If the nfp report is strong it will likely boost US bond yields and spark additional selling pressure of the JPY.
Key technical levels to watch in USD/JPY include support at 93.28 the April 1st low with resistance at 94.30 the August 27th high.
EUR
EUR traded mixed to lower pressured by ongoing worries about the Greek debt outlook and selling in cross trade to the CHF and GBP. Despite last week's announcement of an IMF/EU plan to aid Greece the cost of financing the Greek debt continues to rise. Investors are selling the EUR because of disappointment that the IMF/EU aid plan for Greece did not have a better impact on the Greek bond market. EUR/CHF traded at a record low 1.4150 with the CHF supported by safe haven demand related to Greek worries and in reaction to report the Swiss manufacturing PMI rose to four year high. GBP traded at a five week high versus the EUR supported by report that UK manufacturing PMI rose to its highest level since 1994 and in reaction to UK election polls which suggest the conservative party could gain a majority in parliament. A Conservative majority in parliament may reduce the risk of a downgrade of the UK debt rating. There was limited reaction to report that EU final March manufacturing PMI came in at 56.6 compared to 54.2 in February. The improvement in the EU manufacturing PMI was offset by report of weaker retail spending in Germany. German February retail spending declined by 0.4%, a flat reading was expected. Focus turns to Friday's release of US March unemployment and nonfarm payrolls. A strong US nonfarm payroll rise is expected. A strong US nonfarm rise would boost US bond yields and encourage additional selling pressure for the EUR as yield differential moves in favor of the USD. EUR turned higher for the day midsession as stocks extend early gains.
The technical outlook for the EUR is negative as EUR trades below 1.3400. Expect EUR support at 1.3384 the March 31st low with resistance at 1.3560 the April 1st high and 13627 the March 19th high.
GBP
GBP traded higher supported by report of strong UK manufacturing PMI and in reaction to the latest UK election polls. UK March manufacturing PMI improved to its highest level since 1994 reported at 57.2 from 56.5 in February. UK election polls show that the Conservative party has a 6 to 9 point lead. UK general election is expected to be called on May 6th. Investors have been concerned that the election could result in a hung parliament if neither the Conservative or Tory party gains parliamentary majority. A hung parliament would reduce the chance of quick government action to reduce the UK budget deficit. Failure by the UK government to reduce the budget deficit could lead to a downgrade the UK AAA sovereign debt rating. The conservative party pledged to take quick action to reduce the deficit and a conservative victory may reduce the risk of UK downgrade. Despite today's optimism about the UK election PIMCO said that they expect the UK debt rating to be downgraded within a year. PIMCO is a major bond investing fund and the company said that it would be underweighting UK bonds because of the heavy UK debt burden. GBP direction will be linked to UK debt and election outlook. GBP price action may be less sensitive to Friday's US employment report because of the focus on UK debt and election outlook. GBP may benefit from improving risk sentiment if a strong US nfp report boosts demand for global equities.
The technical outlook for GBP is mixed as GBP traded above 1.5000. Expect near-term support at 1.5043 to March 31st low with resistance at 1.5475 the February 23rd high.
CAD
CAD traded higher supported by a surge in the price of crude, firmer global equity markets and in reaction to strong manufacturing PMI data from Europe and China. Crude prices traded above $84 a barrel. The rally in crude partly reflects increased demand from Asia. The improvement in manufacturing PMI in Europe and China helped boost risk sentiment and demand for growth led currencies like the CAD. CAD gains were partly limited by concern that the acceleration of China's manufacturing activity may force China to move forward its timeframe for withdrawal of stimulus. China's withdrawal of stimulus could become a threat to the global recovery and reduce demand for commodities. CAD continues to outperform supported by improving Canadian domestic economic outlook. Wednesday Canada reported that January GDP rose more than expected. A stronger Canadian GDP confirms that the Canadian domestic recovery is gaining momentum. The improvement in Canada's GDP will encourage speculation that the BOC may move the timetable for a rate hike forward, possibly as early as June.
CAD traded higher last week supported by hawkish comments from BOC Governor Carney. Carney said that the Canadian recovery was faster than expected and he suggested that he was open to consideration of possible rate hike as early as June 1st. The BOC has pledged to maintain low yields through June of 2010 conditional on inflation remaining in check. 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. CAD should remain well supported on breaks by speculation that the BOC will hike rates before the Fed. Focus turns to tomorrow's release of US March unemployment and nonfarm payrolls. A strong nfp rise could neutralize the impact of BOC rate hike speculation as the nfp report encourages speculation that the Fed may move its time frame forward for a tightening of monetary policy.
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 1.0273 the March 29th high.
AUD
AUD traded higher supported by firmer global equity markets, rising commodity prices and in reaction to report of strong manufacturing PMI from Europe and above expectations manufacturing PMI from China. AUD rally was limited by report of widening Australian trade deficit, a drop in Australia's manufacturing PMI and by speculation that the strong manufacturing PMI and China could force China to bring forward the timeframe for withdrawal of stimulus. Australia's February trade deficit widened to 1.924bln, a 1.3bln deficit was expected. Exports declined by 1% and imports rose by 2%. March PMI dropped by 3.6 points to 50.2. Today's report of weaker Australian exports and slowing manufacturing growth was partly offset by report to the March TD/MI inflation index rose by 2.5%. Focus turns to next week's RBA policy meeting. Wednesday Australia reported an unexpected 1.4% decline in retail sales. The drop in Australian retail sales generates uncertainty about the outlook for RBA monetary policy. Majority consensus is that the RBA will raise interest rates 25 bps to 4.25% next week. Recent statements from RBA officials suggest that the RBA is leaning towards a rate hike. Australian economic data clouds the outlook for the RBA policy decision. In contrast to the retail sales decline February home prices rose by 1.4%. Tuesday the RBA's Debelle said that rate policy will be tied to mortgage rates and home prices. Australia’s February home prices rose to a record level. RBA officials may become more concerned about the risk of the formation of a housing price bubble in Australia. RBA watcher McCrann said that it would be extraordinary if the RBA did not hike rates next week. McCrann's comments follow yesterday's statement by the RBA Governor Stevens that interest rates are too low and cannot remain at prior levels. His comments fuel speculation that the RBA will hike rates at the April RBA policy meeting. It's a close call but the RBA is likely to hike rates 25 basis points next week to continue the normalization of monetary policy. Normal range for RBA policy is thought to be 4.25% to 5%. A rate hike by the RBA next week may not boost demand for the AUD because it would bring the RBA closer to normalization and a pause in its tightening cycle. AUD may be vulnerable to speculation that the RBA is nearing the end it's tightening cycle as the Fed is about to begin its tightening cycle.
The technical outlook for the AUD is positive as the AUD rallies above 9100. Expect AUD support at 9035 the March 29th low with resistance at 9253 the March 17th high.
