Weekly Review and Outlook
Dollar Broadly Lower as Weak Economic Data Revived QE3 Talk
Dollar was the weakest currency last week as poor job data and Q1 GDP revived talk of QE3 from Fed. Also, dollar was dragged down by strength in stocks, which were then boosted by solid corporate earnings. Euro was the next weakest on political uncertainties in Eurozone France and the Netherlands. Also, S&P's downgrade of Spain weighed on the common currency. Yen jumped across the board as markets were clearly dissatisfied with BoJ's QE expansion. Canadian dollar and Aussie were both strong, next to yen, on risk appetite. Sterling shrugged off disappointing Q1 GDP and strengthened against other European majors.
As expected, the Fed maintained the policy rate unchanged at 0-0.25% and did not add further monetary easing measures. Fed Chairman Ben Bernanke reiterated that the central bank has 'prepared to do more as needed to make sure that this recovery continues and that inflation stays close to target'. The language to leave interest rates at exceptionally low level at least until mid-2014 remained unchanged. In the economic forecasts, Fed officials revised up GDP growth for 2012 to a midpoint of +2.45%, up from +2.65% projected in January, but lowered its estimates for 2013 and 2014 to 2.90% and 3.35% respectively. Unemployment rate was lowered for this year as well as for 2013 and 2014. The fact that the Fed did not change the full employment estimate, retaining it at 5.2% to 6.0%, is inconsistent with the changed in GDP and inflation forecasts. Moreover, policymakers continued to forecast a upper limit of +2% for inflation.
Economic data from US were disappointing. US economy grew a mere 2.2% annualized rate in Q1, slowed from 3% in Q4. Also, that's notably lower than market expectation of 2.5% growth. Looking at the details, consumer spending rose at 2.9%, fastest since Q4 2010, home constructions also rose at the fastest pace since Q2 2010, these are the brighter spots. However, business spending dropped for the first time since Q4 of 2009, by -2.1%. Initial jobless claims dropped by a mere 1k in the week ended April 21 to 388k, from upwardly revised 389k. The figure was firstly the highest level in nearly three months since January. Secondly, it's worse than expectation of 375k. And more importantly, it marked the third consecutive that claims were above 380k level. The four week moving average also rose to 381.75k, highest level since January 7. Continuing claims rose slightly to 3.32m in the week ended April 14. Durable goods orders dropped sharply by -4.2% in March with ex-transport orders down -1.1%. Consumer confidence also missed expectation and dripped to 69.2 in April.
Euro was weighed down by political uncertainties in France and Holland. In the first round of France's presidential vote, current president Sarkozy came in second to Socialist Hollande. The second round takes place on May 6. Dutch prime minister Mark Rutte and his cabinet resigned after talks on a new austerity package failed. There will be political vacuum in the Netherlands next elections in September. S&P downgraded the Spain's long-term sovereign credit rating to BBB+, by two notches from A. This was also the second downgrade this year. Also S&P gave Spain a negative outlook. The rating agency warned that "Spain’s budget trajectory will likely deteriorate against a background of economic contraction". Meanwhile, there is needed for "further fiscal support to the banking sector". And, thus, "there are heightened risks that Spain’s net general government debt could rise further." Spain 10 year yield breached 6% during the week even though it managed to close below this level.
UK GDP data showed -0.2% qoq contraction in Q1. Together with -0.3% qoq contraction in Q4, UK has now formally entered into a technical recession. That's psychologically much worse than expectation of a 0.1% qoq rise. On year-over-year basis, GDP was unchanged versus expectation of 0.3% rise. Also, the data marked that the first double-dip recessions in UK since 1970s. Nonetheless, Osborne pledged that he won't ditch his austerity plan as he said that "the one thing that would make the situation even worse would be to abandon our credible plan and deliberately add more borrowing and even more debt". In spite of the figure, it's still believed that BoE will pause the GBP 325b asset purchase program when they meet next month.
SNB president Jordan said that there are "considerable challenges" remain for the Swiss economy despite the "minimum exchange rate". While the EUR/CHF floor reduced the "very substantial overvaluation," Swiss Franc is still overvalued. Jordan also noted that Eurozone debt crisis still "presents the biggest risks" with "potential to seriously affect the international financial system as well as international economic development."
BoE increased monetary easy to boost the economic recovery and inflation last week. With unanimous vote, the central bank announced to expand its Asset Purchase Program by 5 trillion yen to 70 trillion yen with some adjustment in the composition of the portfolio. The composition of the program includes 1) an increase in the purchase of Japanese government bonds (JGBs) by about 10 trillion yen; 2) An increase in the purchases of exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) by about 200 billion yen and 10 billion yen, respectively and 3) A reduction in the maximum outstanding amount of the Bank's fixed-rate funds-supplying operation against pooled collateral with a six-month term, by about 5 trillion yen, taking into account the recent episodes of under-subscription. The bank also extended deadline for the asset buying target by six months, with 2012 year end target unchanged at 65 trillion yen and the new 70 trillion yen target will be met in June 2013. This could be the main point that markets are dissatisfied with as that's more like an extension of the program rather than an expansion.
At the semi-annual outlook report, the BOJ unveiled that the GDP growth forecast is revised up to +2.3% from +2.0% for 2012 and to +1.7% from +1.6% for 2013. The core CPI was also revised higher to +0.3% from +0.1% for 2012 and to +0.7% from +0.5% for 2013. The forecasts indicated that the central bank sees inflation approaching its medium- to long-term price stability goal of 1% y/y 'not too long'.
The RBNZ left the OCR unchanged at 2.5%. Moreover, Governor Alan Bollard signaled that the pause might be prolonged due to strength in the New Zealand dollar. Concerning the global economic outlook, Bollard stated that 'near-term indicators have moderated and financial market sentiment is still fragile'. Domestic economy has, however, shown signs of recovery. As housing market activity 'continues to increase and a recovery in building activity appears to be under way as forecast'. He believed that the recovery will strengthen as 'repairs and reconstruction in Canterbury pick up later in the year'. Price levels would continue to 'stay near the middle of the bank's target range'. Concerning monetary policies, policymakers believed that 'it is appropriate for the official cash rate to remain at 2.5%' but pledged that the RBNZ would 'reassess the outlook for monetary policy settings' and act whenever appropriate.
We noted last week that recent price actions in dollar index could either be viewed as a triangle consolidation that started at 81.78, which is bullish, or a triangle consolidation that's started at 78.09, which is bearish. Last week's sharp decline is clearing up the outlook for the bearish case. Also that's accompanied by breakout in GBP/USD, USD/JPY and USD/CAD. Initial focus will be on 78.66 minor support this week. Break will add more favor to the bearish case and target 78.09. Further break there will affirm the case that rebound from 72.69 has already completed at 81.78 and pave the way to deeper fall.
The Week Ahead
US economic data, including ISM indices and non-farm payrolls will be the main driver in the currency market next week. Sterling survived weak GDP data last week but would be vulnerable if this week's PMIs miss expectations. ECB is expected to keep rates unchanged and might not have big impact on the markets. RBA is widely expected to cut rates by 25bps to 4.00% this week. The chance for a deeper cut of 50bps is slim even though markets are expecting at least one more 25bps cut in June.
- Monday: Eurozone M3, CPI flash; Canada GDP, RMPI, IPPI; US personal income and spending, Chicago PMI
- Tuesday: China Manufacturing PMI; RBA rate decision; UK manufacturing PMI; US ISM manufacturing, construction spending
- Wednesday: Swiss retail sales, SVME PMI; Germany unemployment, Eurozone unemployment; UK construction PMI; US ADP employment, factory orders; New Zealand employment
- Thursday: UK services PMI; Eurozone PPI; ECB rate decision; UK ISM non-manufacturing index
- Friday: Eurozone retail sales; US non-farm payrolls; Canada Ivey PMI
USD/CAD Weekly Outlook
USD/CAD finally broke out of recent range and resumed whole decline from 1.0656 last week, reaching as low as 0.9799 so far. Initial bias remains on the downside this week and current fall should extend towards 0.9725 support. Though, we'd expect strong support from that level to contain downside and thus, we'll be focusing on reversal signal. Nonetheless, break of 0.9870 resistance is needed to signal short term bottoming first. Otherwise, outlook will remain bearish even in case of recovery.
In the bigger picture, 0.9406 is a medium term bottom and rise from there is not finished yet. Fall from 1.0656 should merely be a correction and would finish soon and above 0.9725 support. The third leg of the pattern from 0.9406 should then start and send USD/CAD through 1.0656 towards 38.2% retracement of 1.3063 to 0.9406 at 1.0803 and above. After all, price actions from 0.9406 medium term bottom could either be consolidation to fall from 1.3063 or the third leg of the whole consolidation pattern from 2007 low of 0.9056. In either case, stronger rally is anticipated in medium term.
In the longer term picture, there is no clear indication that the long term down trend from 2002 high of 1.6196 has reversed even though bullish convergence condition was seen in monthly MACD. Current development dampens the case that fall from 1.3063 is resuming the such down trend. But there is no change in the long term bearish view so far. A break of 0.9056 low is still anticipated after all the consolidative price actions complete.
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