Daily Forex Report-USD lower, jobless claims drop more than expected

Here are the latest Financial News:

• USD: Lower, stocks rally, Dubai World debt bailout, jobless claims drop more than expected
• JPY: Lower, rising US bond yields, BOJ’s Kamezaki says it will be difficult to turn CPI trend positive
• EUR: Higher, hope that the EU will agree on Greek aid, ECB to extend collateral, Greek deal tonight?
• GBP: Mixed, UK retail sales surge in February, January retail sales revised sharply lower, deficit worries
• CAD and AUD: AUD & CAD higher, hawkish RBA and BOC comments

Overview
The USD traded lower Thursday with the EUR supported by short covering ahead of the start of a two-day EU summit. EUR was supported by hope that the EU summit will produce an agreement on aid for Greece and a statement from ECB President Trichet that ECB plans to expand emergency collateral beyond 2010. The ECB’s extension of collateral will make it easier for Greece to finance its debt. GBP traded higher supported by report of a surge in UK retail sales. Commodity currencies traded higher supported by hawkish comments from RBA and BOC officials. RBA assistant Governor Lowe says rates will continue to rise toward normal. In a speech, late Wednesday BOC Governor Carney said  that maintaining low BOC yields was conditional on inflation outlook and that he was open to raising interest rates as soon as June 1st because of higher inflation and faster than expected  growth in Canada. JPY traded lower in reaction to report of soft corporate service price index and a statement from a BOJ official that it will be difficult for Japan to exit from deflation. USD was also pressured by a slight uptick in risk appetite fueled by firmer equity market trade and in reaction to report of a $9.5bln restructuring of Dubai World debt. The cost of insuring the Dubai debt dropped in reaction to the restructuring announcement. US economic data was positive with jobless claims reported to have declined by more than expected last week. USD drifted higher after the release of the jobless claims report as US bond yields rise in reaction to the jobs data.

Today’s US data:
Initial jobless claims for week ending 3/20 dropped by 14k to 442k, reading of 453K was expected.

Upcoming US data:
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 lower pressured by a statement from the BOJ’s Kamezaki that it will be difficult to turn CPI to a positive trend. Japan’s February corporate service price index rose by 0.1%m/m and declined by 1.3%y/y. JPY traded almost 2% lower versus the USD in Wednesday’s trade pressured by a spike in US bond yields and in reaction to the announcement of a record Japanese budget announcement. US 10 year bond yield rose to its highest level since last July. US bond yields are rising in response to weak demand and increasing supply pressures. In light of the recent easing of monetary policy by the BOJ and spike in US bond yields, yield differential is moving in favor of the USD. The widening of the US and Japanese yield gap makes the USD less attractive as a funding currency. Japan announced a record $1trln budget for next fiscal year. 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. 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. JPY traded to new lows for the day after the release of better than expected US jobless claims. The improvement in US jobless claims boosted US bond yields. Yield differential is emerging as a key driver for JPY trade.

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 91.40 with resistance at 92.68 the January 11th high.

EUR
EUR traded higher rebounding from a 10 month low versus the USD supported by short covering ahead of today’s start of a two-day EU summit. The EUR rebound is attributed to hope that the EU summit will produce an aid package for Greece. German Chancellor Merkel says that she sees potential for bilateral aid plan for Greece and if not Greece may need to seek aid from the IMF. The EUR was also supported by a statement from ECB President Trichet that the ECB will expand its emergency collateral beyond 2010. The ECB will accept securities with credit ratings as low as BBB- into 2011. This could help Greece finance its debt because the ECB will accept lower quality Greek bonds as collateral for loans to banks. German consumer confidence was unchanged in April at 3.2%. The trade had expected a decline to 3.1%. EU February M3 growth declined by 0.4%. The EUR traded at a 10 month low versus the USD Wednesday 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. 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 for clues to EU plans for Greece. There’s an interesting article on the Wall Street Journal website which suggests that although the EUR has been pressured by the Greece crisis the USD may find additional support from recovery in the US economy. EUR turned mixed midsession in reaction to Bernanke’s testimony on the Fed exit strategy. Bernanke said that monetary conditions will have to be tightened as the recovery matures. Bernanke’s comments coupled with concern that the Greek debt crisis will hurt the EU recovery generate speculation that the Fed will hike rates ahead of the ECB.EUR re-rallied in reaction to report that the EU’s Juncker is more confident that there will be a deal for Greece tonight.

The technical outlook for the EUR is negative as EUR trades below 1.3400. Expect EUR support at 1.3284 the March 25th low with resistance at 1.3485 the March 24th high.

GBP
GBP traded higher supported by an unexpected surge in UK retail sales. UK February retail sales rose by 2.1%, the trade had expected just a 0.2% rise. GBP gains were limited by a sharp downward revision in the January retail sales report. January retail sales were revised to  -3% from -1.8% in the original report.Net/net January and February UK retail sales data will contribute little to UK Q1 GDP.GBP remains vulnerable to UK government debt and election uncertainty. Wednesday the UK announced its pre-election budget forecast.UK Chancellor Darling said 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. The budget announcement did little to dampen concern about risk of a downgrade of UK AAA debt rating. The Fitch rating agency said that the UK budget did not change their view on the UK debt. Ratings agencies have indicated that if the UK does not take credible action to reduce the deficit the UK could see a downgrade in its sovereign debt rating. The upcoming UK general election on May 6th will be key to the outlook for the UK budget deficit. The conservative party has pledged to take quick action to reduce the UK deficit if they gain a majority control of parliament after the election. UK election polls have been extremely volatile with the latest poll indicating that the Conservatives lead over Labor party is just 2%. The narrowing of the conservative party’s lead may mean that neither party will gain a significant enough majority in parliament and that the UK may be facing a hung parliament. A hung parliament is unlikely to take quick action to reduce the deficit.

The technical outlook for GBP is mixed as GBP trades below 1.5000. Expect near-term support at 1.4781 the March 1st low with resistance at 1.5200.

CAD
CAD traded higher supported by a rebound in equity and commodity markets and in reaction to hawkish comments from BOC Governor Carney. The rebound in equity and commodity markets partly reflect hope that the EU is moving closer to an agreement on a package for Greece and news the Dubai World debt has been restructured. In a speech late Wednesday 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.  Carney suggested that the higher than expected inflation was result of transitory factors and underlying economic strength. He went on to state that BOC plans to hold interest rates low was conditional. 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. CAD should remain well supported on breaks by speculation that the BOC will hike rates before the Fed.

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 higher supported by hawkish RBA comments, gains in cross trade to the JPY and improving risk sentiment as equity markets trade higher. RBA assistant governor Lowe said that interest rates will continue to rise towards normal and that waiting for improving global outlook to raise rates would be too late. He went on to say that Australian house prices were rising fast and he expressed concern about the risk of a housing bubble. AUD rally has been partly stalled by RBA policy uncertainty. The trade is debating whether the RBA will pause in its rate hike cycle next month. Arguments in favor of an RBA pause include tightening of credit conditions in China and uncertainty about the threat of a US China trade war. Rumors have been circulating that China may raise its reserve ratio this weekend. Some members of U.S. Congress have called for quick action on China’s currency policy and could be moving closer to naming China as a currency manipulator. Another reserve rate hike from China and US China trade fiction could be a threat to the global recovery. Arguments in favor of an RBA rate hike include recent Australian data that confirm to the domestic economy is strengthening and the risk that if the RBA delays normalization of monetary policy it could risk the creation of speculative bubbles in real estate and other markets. The RBA is expected to hike rates from the current 4% level to 5% by year-end. If the RBA elects to pause in April, the pause should have limited negative impact on the AUD as more rate hikes are coming in the months ahead. 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.

The technical outlook for the AUD is mixed as the AUD holds above 9000. Expect AUD support at 8985 the March 5th low with resistance at 9225 the March 19th high.

Source: Easy Forex

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Posted on Thursday, March 25, 2010 by admin in Financial News | Leave a Comment  
Tags: Jobs