FOREX TRADING

USD Pares Gains as Stocks Rally

• USD: Higher, Greek bailout doubts, existing home sales come in slightly better than expected
• JPY: Lower, BOJ March minutes suggest deflationary pressures may be stronger than forecast
• EUR: Lower, no Greek aid plan yet, EU summit March 25th and 26th
• GBP: Lower, CBI retail sales disappoint, CPI falls more than expected
• CAD and AUD: AUD & CAD mixed, China may post an 8bln trade deficit in March, Canada LEI as expected

Overview

The USD traded higher Tuesday supported by worries that the EU will not agree on a plan to aid Greece and the increased threat of SNB intervention as EUR/CHF cross trades at a 10 year low. Ahead of the EU summit scheduled for March 25th and 26th there are conflicting reports about whether EU officials will come up with an aid plan for Greece. The latest report suggests that EU officials may be leaning towards some form of loan arrangement with Greece but skepticism abounds about whether the EU will come up with a credible plan to aid Greece. SNB president Hildebrand says that the central bank is ready to take decisive action against excessive CHF gains versus the EUR.CHF traded higher despite the threat of intervention. GBP traded lower pressured by report of weaker than expected UK annual CPI and soft UK retail sales. Commodity currencies were pressured by weaker CRB and a statement from China’s Premier Wen that China may run an 8bln trade deficit in March. This would be the first monthly Chinese trade deficit since April 2004.Wen’s comments may increase worries about global trade tensions. JPY traded mixed to lower with selling pressure attributed to the release of the BOJ minutes for March which state that Japan’s CPI may be weaker than forecast. Today’s dollar strength is impressive in light of the fact that the Fed’s Evans and Lockhart made dovish comments. Evans said that interest rates may stay at historic lows for at least another six months and accommodative policy may be needed into 2011. Lockhart warned against lifting the Feds extended rate pledge to soon. US existing home sales declined by 0.6% compared to 2% decline in December. USD pared early gains in reaction to stronger US equity market trade.

Today’s US data:

Existing home sales for February came in at 502mln units, a reading of 505mln units was expected.

Upcoming US data:

On March 24th February durable goods will be released expected flat compared to a 3% rise last month. February new home sales will also be released on March 24th expected at 320k compared to 309k last month. 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 mixed to lower pressured by the release of the BOJ minutes for the March policy meeting. The BOJ policy minutes state that Japan’s CPI may be weaker than forecast in January and that Japan’s economic growth may be stronger than expected. The BOJ pledged to act quickly and decisively to support the economy. The weaker outlook for Japan’s CPI coupled with the BOJ pledge to take action to boost the economy revives speculation that the BOJ may consider additional easing measures. JPY was pressured in today’s trade by BOJ ease speculation. Last week the BOJ elected to hold rate policy unchanged and raised its lending operations to ¥20trln from ¥10trln. The BOJ however stopped short of announcing a plan to buy Japanese bonds. The purchase of Japanese bonds would be seen as a more aggressive ease by the BOJ. The BOJ has been under significant pressure from the Japanese government to take more action to combat deflationary pressures. This week’s main focus for the JPY will be Thursday’s 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 price direction is caught between the outlook for lower Japanese yields and uncertain risk sentiment. JPY has benefited from gains in cross trade to Europe sparked by sovereign debt risks in peripheral European nations and the UK. JPY downside was limited by gains in cross trade to the EUR sparked by worries that the EU will not agree to an aid plan for Greece and by gains in cross to the GBP with GBP pressured by report of weaker than expected UK retail sales and inflation.

This week’s Japanese economic calendar includes March 24th release of February trade balance expected at ¥0.79trln compared to ¥0.06trln. 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 89.63 the March 9th low with resistance at 91.30 the February 23rd high.

EUR

EUR traded lower pressured by concern that the EU will not come up with a credible plan to aid Greece. According to European press, ECB president Trichet says that any aid to Greece should be a loan with strict terms and German Chancellor Merkel says that IMF aid for Greece cannot be ruled out. EU officials are grappling with what type of bailout is allowed under the EMU treaty. ECB’s Constancio says that the treaty forbids the monetary union or any country to assume the debt of another member country. He went on to say that credit is not a bailout. This week’s main focus will be the EU summit scheduled for March 25th and 26th. If the EU summit fails to produce a credible plan to aid Greece the EUR may experience additional selling pressure. A number of analysts warn that the huge increase in net short EUR short positions makes the EUR ripe for a sharp short covering rally if the EU summit produces a surprise compromise on aid for Greece. The EUR was also pressured by speculation that the ECB will be slow to raise interest rates because the sovereign debt risks in peripheral European nations will be a drag on the EU recovery. Uncertainty about the Greek debt crisis will encourage the ECB to maintain steady rate policy. Rumors of a possible EU compromise on Greek debt and stronger US equities limits EUR downside. Focus turns to Wednesday’s release of EU services and manufacturing PMI.

This week’s EU economic calendar includes the March 24th release of EU manufacturing and services PMI along with March German IFO index. Manufacturing PMI is expected at 54.6 compared to 54.2 last month. Services PMI is expected at 52 compared to 51.8 last month. The IFO is expected at 94.9 compared to 95.2 last month. 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 1.3500. Expect EUR support at 1.3433 the March 2nd low with resistance at 1.3627 the March19th high.

GBP

GBP traded lower pressured by report of disappointing UK retail sales and weaker than expected UK CPI. UK March CBI sales came in at +13 compared to +23 and February. UK annual rate of inflation declined to 3% from 3.5% in January. The trade had expected a reading of 3.1% for the UK annual inflation rate. 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. There was limited reaction to report that February mortgage lending rose 2.8bln from 2.6bln last month and February mortgage approvals rose to 35,176 from 35,154 last month. Focus turns to Wednesday’s UK 2011 budget report. The trade will be looking for the UK government’s economic forecast and the size of the deficit.UK budget outlook is key to the UK sovereign debt rating.

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 1.5100. Expect near-term support at 1.4873 the March 10th low with resistance at 1.5200.

CAD

CAD traded mixed initially pressured by weaker crude prices and broad USD gains against the majors sparked by worries about the Greek fiscal outlook. There is speculation that the EU may not agree to an aid plan for Greece at this week’s EU summit. Uncertainty about an EU aid plan for Greece sparked selling of the EUR and the spike in risk aversion. CAD downside was limited by report of as expected February leading index and firmer equity markets. The February leading index rose by 0.8%. 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 1.0062 the March 19th low with resistance at 1.0323 the March 11th high.

AUD

AUD started the session lower pressured by a spike in risk aversion sparked by worries that the EU will not agree to a plan to aid Greece and in reaction to the report that China may run a large trade deficit in March. Although European and US equity markets traded higher, uncertainty about EU aid for Greece contributes to diminish risk appetite and demand for high-yield currencies. AUD turned higher for the day as US equities rally to a new high for the year. China’s Premier Wen says that China may run an 8bln trade deficit in March. This would be the first monthly Chinese trade deficit in April 2004. The trade balance swing from surplus to deficit may increase investor concern about global trade imbalances and US and China trade tensions. US officials have increased pressure on China to revalue the Yuan and Chinese officials have pushed back against this pressure stating that China would not allow foreign influence to dictate its currency policy. A stronger Yuan could reduce China’s trade surplus and export sales. In light of today’s comments from China’s Wen Chinese officials may be even more reluctant to allow the Yuan to rise. Commodity currencies like the AUD would likely benefit if China were to allow the Yuan to appreciate as countries like Australia are big exporters to China. Today’s weaker AUD trade may partly reflect diminishing hope for an imminent Yuan revaluation. AUD is vulnerable to diminished RBA rate hike speculation and concern that China is considering withdrawing of fiscal stimulus. There is speculation that the RBA will pause in its rate hike cycle at the April policy meeting if Greek debt crisis is unresolved and China takes additional measures to curb lending. 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. 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.

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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