USD Rebounds as Focus Shifts to EU Financial Risk

• USD: Higher, focus shifts to EU exposure to Eastern European bank troubles
• JPY: Lower, pressured by Japanese company hedge selling
• EUR: Lower, EU industrial production falls to record low, EU may consider a bigger rescue plan
• GBP: Lower, BOE chief economist says worst of recession may have passed
• CAD and AUD: AUD & CAD higher, CRB retreats, Canada's retail sales rise more than expected

Overview

USD rebounded Friday after experiencing its biggest one-day loss on Wednesday since 1985. JPY hedge selling pressure and report that the EU may double its rescue fund sparked the USD rise Friday. Japanese companies look to take advantage of the JPY rises to 94.00 before Japan's fiscal year end on March 31st and sold the JPY. German lawmakers suggest that the EU may double its crisis fund to €50 Billion. Report that the EU may increase its crisis fund sparked selling of the EUR as focus shifts to the potential increased EU exposure to financial turmoil in Eastern Europe. The EUR was also pressured by report that EU industrial production fell to a record low.

Commodity currencies were mixed as the CRB posts a modest setback. CAD traded higher supported by report that Canadian retail sales rise 1.9%. No major US economic reports were released in today's trade.

Next week's US economic calendar includes the March 23rd release of February existing home sales expected at 4450K compared to 4449K. On March 25th, February durable goods will be released expected at -2% compared to -1.9% last month, along with the release of February new home sales expected at 300K compared to 309K in January. On March 26th, initial jobless claims for the week ending 03/21 will be released expected at 640K. On March 27th final Q4 GDP will be released expected at -6.3%, along with February personal income expected at - 0.1% compared to 1% last month and final March University of Michigan sentiment expected at 56.6.

JPY

JPY traded lower pressured by Japanese company hedge fund selling in front of Japan's fiscal year-end. Japanese companies see this week's JPY rise to 94.00 as an opportunity to put USD hedges on at better levels. Monday, the JPY cross traded above 98.00 and this week's price action allows Japanese companies to hedge at about 4% better levels in the USD/JPY. Japanese markets were closed for holiday. No economic data was released from Japan Friday. JPY gains will likely be contained by Wednesday's BOJ announcement that the BOJ plans to increase purchase of JGB's. The BOJ will increase its purchase of JGB's to ¥21.6 Trillion. The BOJ is flooding the market with JPY, at the same time the Fed is flooding the market with USD. The BOJ purchase of JGB's is effectively an implementation of quantitative ease and JPY gains should be limited. A Reuter's poll says that Japanese firms expect USD/JPY to trade at 95 average during FY09/10.

Next week's Japanese economic calendar includes the March 25th release of the February trade balance and the March 27th release of February CPI. February retail sales, household spending, unemployment, industrial output and housing starts will also be released on March 31st.

Key technical levels to watch in USD/JPY include support at 94.15 the March 20th low and 93.40 which is 50% retracement of the 2009 87.15 - 99.70 range with resistance at 96.61 the March 19th high. Note in the graph below that USD/JPY is testing the recent breakout near 94.00. If the 94.00 level holds it could spark fresh selling of the JPY.

EUR

EUR traded lower pressured by report that the EU may double its rescue fund and in reaction to report that EU industrial production dropped to a record low and German producer prices continue to fall. There is confusion over reports that the EU may increase its rescue fund. German lawmakers indicated that they are considering increasing the rescue plan for Ireland and Greece. According to wire reports, the EU may double the rescue trust fund to €50 Billion. Other reports said that the ECB has denied that there will be an increase in the financial rescue plan. The bottom line is that the report of a possible doubling of the EU rescue plan brings focus back to potential increased EU exposure to possible bailout of Eastern European financial crisis. EU January industrial production falls 3.5% to record low and -17.3% y/y. German February producer prices dropped 0.5%. These reports will intensify pressure on the ECB to cut interest rates as the data points to significant deterioration in the EU economic outlook and increasing risk of deflation. ECB's Wellink said he does not see the risk of deflation in the EU. ECB officials have been reluctant to consider quantitative ease. There is a debate over whether the move to adopt quantitative ease by Fed, SNB, BOJ, and the Bank of England will force the ECB to consider a similar move. If the ECB fails to go along with what appears to be coordinated efforts by the G-7 central banks to fight deflation and boost global growth there is a risk that investors may sell the EUR. If the ECB follows the Fed action the EUR may also be sold. This leads us to conclude that the EUR rally may be limited to 1.4000.

Next week's EU economic calendar includes the March 23rd release of EU January foreign trade. On March 24th, EU flash manufacturing and services PMI will be released along with January industrial orders. On March 25th, March German CPI is due for release. On March 26th, German April GFK index is due for release along with French March consumer confidence.

The technical outlook for the EUR is turning mixed with the EUR struggling to hold gains above 1.3600. Expect key EUR support at 1.3420 the March 19th low with resistance at 1.3750 the January 9th high and 1.3900. Note the trendline resistance near 1.3800 in the graph below. If the EUR rally stalls at 1.3800 trendline look for fresh technical selling to emerge.

GBP

GBP traded lower pressured by the broad USD rebound against the EUR and JPY. GBP downside was limited by a statement for the Bank of England's chief economist that the worst may have passed for the UK recession. Wednesday's report of sharp increase in UK jobless claims and rising unemployment suggests that the UK economy still faces a risk of deepening recession. GDP is likely to continue to underperform because of concern about the UK economy and continued impact of BOE quantitative ease. Despite significant USD weakness midweek, GBP has not traded above the February high of 1.4660. If GBP rally continues to stall in front of this level look for fresh selling of GBP to emerge.

Next week's UK economic calendar includes the March 24th release of February CPI. On March 25th, March CBI distributive trade will be released. On March 26th, February retail sales are due for release. The final Q4 GDP and UK Q4 current account will be released on March 27th. The UK CPI report is the key one to watch next week as the trade will be looking to see if deflationary pressures intensified in the UK. The Bank of England is adopting quantitative ease to try to boost economic growth and combat deflationary pressure.

The technical outlook for GBP is mixed with the GBP approaching key resistance at 1.4660. Look for key GBP support at 1.4170 with resistance at 1.4660 the February 24th high.

CAD

CAD traded higher supported by report of better than expected Canadian retail sales data and firmer US equity market open. Canadian January retail sales rose 1.9%, the trade was looking for a 1% rise. CAD traded sharply higher this week breaking 1.23, supported by the Fed plan to buy 300 Billion long-term bonds and with additional support from a surge in commodity prices sparked by speculation that the Fed bond purchase will be inflationary. Canada reported Thursday that headline CPI rose 0.7% and the core was 0.5%. The higher than expected Canadian CPI and retail sales may dampen speculation that the Bank of Canada will adopt quantitative ease as deflation pressures in Canada may be moderating and the economy may be nearing a bottom. Further CAD price gains will hinge on whether commodity prices continue to rise and the improvement in risk sentiment continues. Next week's Canadian economic calendar is light, with the March 24th release of January employment insurance as the only report scheduled.

The technical outlook for CAD is mixed with USD/CAD approaching the February lows at 1.2130. Look for nearterm resistance at 1.2505 the March 19th high with support at 1.2192 the March 19th low. Key support for CAD is expected at 1.2090 the January 29th low and uptrend line support noted in the graph below.

AUD

AUD traded mixed consolidating this week's gains at 6900. AUD traded above 6900 Thursday, supported by surging commodity prices and widening of yield differential as the Fed plan to buy bonds drives down US bond yields. AUD is considered a more risky asset and flows to the AUD have been dependent on risk sentiment. The Fed plan is expected to help improve risk sentiment and fight deflationary pressures. Because Australia is a commodity exporting nation rising commodity prices will encourage additional flows to the AUD. Early in the month, the RBA elected to hold monetary policy steady. Steady RBA rate policy is an additional positive for the AUD as yield differentials move in favor of Australia. Further AUD gains will hinge on whether commodity prices can extend this week's rally. No major Australian economic data is scheduled for next week.

The fundamental outlook for the AUD continues to improve as commodity currencies try to carve out a bottom supported by speculation that the global economy will begin to recover in the midyear. The Fed plan may intensify speculation that the global economy will soon bottom.

The technical outlook for the AUD has improved with the break above 6900. Look for key AUD support at 6723 the March 19th low with resistance at 7045 January 12th High. AUD trade above 7045 could spark a move to 7300.

By Michael J. Malpede

Easy Forex

Michael J. Malpede is Chief Market Analyst with Easy-Forex® and has previously been featured on Bloomberg TV, Bloomberg radio, Reuters, MarketWatch, Wall Street Journal, Chicago Tribune, Chicago Sun Times, Toronto Star and Nikkei press. In analyzing the markets, he draws from 29 years of Foreign Exchange Research as a Foreign Exchange Analyst.

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