FOREX TRADING

• USD: Higher, pending home sales surge, non- manufacturing ISM beats expectations, Dow approaches 11k
• JPY: Higher, diminished threat of BOJ ease, Yuan revaluation speculation
• EUR: Lower, pressured by rising US bond yields/strong US employment, housing and services data
• GBP: Higher, election polls point to a Conservative majority diminishing the risk of a hung parliament
• CHF: Mixed, EUR/CHF rebounds from record low on SNB intervention
• CAD and AUD: AUD lower & CAD higher, rumors that the RBA will hold monetary policy steady Tuesday

Overview

USD traded mixed to firmer Monday extending Friday’s gains versus the EUR and weakening versus the JPY and commodity currencies. USD traded higher Friday supported by report that the US economy added the most jobs in three years and in reaction to the rise in 10 year bond yields to a 10 month high. The main focus of Monday’s trade was UK election polls, Yuan revaluation speculation and strong US data. UK election polls show that the Tories have a 10 point lead over Labor. A Tory victory would reduce the risk of a hung parliament and may diminish concern about an imminent downgrade of the UK’s sovereign debt rating. The U.S. Treasury will delay the April 15th currency report on China in hopes that the delay will encourage China to strengthen the Yuan. JPY edged higher supported by Yuan revaluation speculation and diminished ease speculation. Recent weakness of the JPY will diminish the odds of the BOJ rate cut at this week’s policy meeting. AUD traded lower pressured by rumors that the RBA will hold rate policy steady at Tuesday’s policy meeting. Today’s US economic data was positive with pending home sales posting an unexpected rise and non manufacturing ISM beat expectations. The pending home sales rise may reflect the fact that the home buyers tax credit will expire at the end of April. The employment component and the business outlook of the non-manufacturing ISM posted strong gains. CFTC commitment of traders for last week showed that speculators increased USD long positions the highest level since February 23rd. Bullish USD sentiment is rising with US bond yields. US ten-year yields are approaching 4% as the US economy improves.

This week’s main focus will be central bank policy meetings in Australia Tuesday, Japan Wednesday and Europe Thursday. The RBA is expected to hike rates 25 basis points to 4.25% but the RBA policy decision is a close call. The BOJ is expected to leave monetary policy unchanged in reaction to recent weakness of the JPY. The ECB and BOE are expected to remain on hold.

Today’s US data:

February pending home sales index rose by 8.2% to 97.6, a reading of 90.3 was expected. March ISM non- manufacturing index rose to 55.4, a reading of 54 was expected.

Upcoming US data:

On April 7th February consumer credit will be released expected 2.8bln compared to 5bln last month. On April 8th initial jobless claims for week ending 04/03 will be released expected at 432k compared to 439k last week. On April 9th March wholesale inventories and sales will be released. Wholesale inventories are expected to rise by 0.3% compared to -0.2% last month. Wholesale sales are expected to rise by 0.1% compared to 1.3% last month.

JPY

JPY traded higher in Monday’s trade rebounding from a seven month low versus the USD. JPY was supported by Yuan revaluation speculation and diminished threat of BOJ monetary policy ease. The U.S. Treasury will delay the April 15th currency report on China. There has been pressure in the U.S. Congress for the US to name China a currency manipulator. The delay in the currency report on China will hopefully allow time for a diplomatic solution to US and China currency tensions. Reuters reports that China may be ready to change its Yuan policy and allow the Yuan to strengthen. JPY sometimes trades as a proxy for Yuan revaluation speculation. JPY was also supported by short covering ahead of this week’s BOJ policy meeting. Recent weakness in the JPY will make it less likely that the BOJ will ease monetary policy at this week’s policy meeting. The BOJ will hold a two day policy meeting starting Tuesday. The BOJ is expected to hold interest rates unchanged and maintain its current level of funding activity. 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. JPY traded at a seven month low versus the USD Friday in reaction to report of positive US nonfarm payrolls growth and spike in US bond yields to a 10 month high. Steady BOJ policy decision may lend temporary support to the JPY but JPY remains vulnerable to improving risk sentiment, strengthening US economic recovery and rising US bond yields.

This week’s Japanese economic calendar includes the April 6th release of February leading indicators expected at 1.8% compared to 2.1% last month. BOJ will hold a two-day policy meeting starting on Tuesday, April 6th.No policy change is expected. On April 8th February current account will be released expected at ¥1.62trln compared to ¥0.90. On April 9th February machinery orders will be released expected at 3.7% compared to -3.7% last month.

Key technical levels to watch in USD/JPY include support at 93.55 the April 2nd low with resistance at 95.10 the August 24th high.

EUR

European markets were closed for holiday Monday limiting price action. EUR traded mixed to lower pressured by Friday’s US nonfarm payrolls report, by selling in cross trade to the GBP and in reaction to rising US bond yields. Friday the US reported that March nfp rose by 162k. This marked the strongest US jobs growth in three years. US bond yields rose to a 10 month high in reaction to the jobs report. EUR is pressured by rising US bond yields and widening of yield gap to the US. Ongoing concern about sovereign debt risks in peripheral European nations is seen as a threat to the recovery and will likely limit the ECB from an early exit from accommodative monetary policy. The ECB will hold a monetary policy meeting Thursday. The ECB is expected to hold monetary policy unchanged and maintain a dovish outlook. EUR was pressured in cross trade to the GBP with selling sparked by UK election polls which show the Tories expanding their lead over Labor party. A Tory majority in the UK Parliament would reduce the near-term risk of a downgrade of UK sovereign debt rating.

This week’s EU economic calendar includes the April 6th release of EU April Sentix index expected at -6 compared to -7.5 last month. On April 7th, March EU service PMI will be released expected at 52 compared to 51.8 last month along with Q4 GDP expected to rise by 0.3% and Q4 PPI expected at 0.8%. February German industrial orders will also be released on April 7th expected at 2% compared to 4.3% last month. On April 8th EU February retail sales will be released expected at -0.2% compared to -1.3% last month along with February German industrial production and trade balance. The German industrial production is expected to rise by 0.7% and the trade balance is expected to narrow to 8bln from 8.7bln last month. ECB meet on April 8th .No policy change is expected.

The technical outlook for the EUR is negative as EUR trades below 1.3500. Expect EUR support at 1.3384 the March 31st low with resistance at 1.3590 the April 1st high.

CHF

CHF traded mixed to lower pressured by threat of SNB intervention and rising US bond yields. The CHF rallied to a record high versus the EUR late last week with CHF gains limited by rumors that the SNB had intervened. The rumored intervention helped to boost the EUR/CHF cross back above 1.4400 from the record low of 1.4143 in Thursday’s trade. SNB’s Danthine said the SNB would take action to stop any excessive appreciation of the CHF. Last week Switzerland reported stronger than expected KOF Swiss leading indicator. The KOF index confirms improving Swiss domestic economy and may encourage speculation that the SNB will soon end its accommodative monetary policy. US 10 year bond yields are approaching 4% in reaction to Friday’s report that US nfp rose by hundred 162k. This marked the strongest US job growth in three years and suggests that US companies are beginning to hire new workers. The impact of rising US bond yields is partly offset by Swiss economic data and SNB policy outlook. This week’s Swiss economic calendar includes the April 6th release of March CPI expected at 1.4% compared to 0.9% last month along with the April 7th release of retail sales expected at 3.2% compared to 3.7% last month. On April 8th March unemployment will be released expected unchanged at 4.1%.Expect USD/CHF support at 1.0435 the April 1st low with resistance at 1.0752 the March 25th high.

GBP

GBP edged higher supported by the latest UK election polls. UK election polls suggest that the Conservatives have widened their lead over the Labor party by 10 points. The Conservatives lead diminishes the risk of a hung UK Parliament. UK will hold a general election on May 6th. There is concern that the UK election has been so close that no party would emerge with a majority. Lack of majority in parliament would hinder the UK government’s efforts to reduce its deficit. Ratings agencies have warned the UK that UK sovereign debt is at risk to downgrade if quick action is not taken to reduce the UK budget deficit. The Conservatives have run on the platform to take action to reduce the UK budget deficit. 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. Apart from UK election news this week’s main focus will be Thursday’s BOE policy meeting. Last week’s UK economic data was mixed with Q4 GDP revised higher manufacturing PMI reported at its highest level in 15 years. Mortgage approvals however declined to a nine-month low. The BOE is expected to maintain steady rate policy and keep its current asset purchases unchanged at £200bln. Investors will be closely monitoring whether the BOE leaves the door open for future asset purchases or signals that improvement in the economy will reduce the need for more asset purchases by the BOE. The former appears to be the most likely outcome from Thursday’s BOE policy meeting. GBP may weaken in reaction to a dovish BOE policy bias.

This week’s UK economic calendar includes the April 7th release of March consumer confidence expected at 81 compared to 80 last month along with March services PMI expected at 58.2 compared to 58.4 last month. On April 8th February industrial production will be released expected at -0.1%compared to -0.4% last month. BOE meet on April 8th.No policy change is expected. On April 10th March PPI will be released expected at 0.5% % compared to 0.3′% last month.

The technical outlook for GBP is positive as GBP traded above 1.5200. Expect near-term support at 1.5174 the April 1st low with resistance at 1.5475 the February 23rd high.

CAD

CAD traded higher supported by a surge in the price of crude and firmer global equity markets. Crude prices traded above $86 a barrel. No major Canadian economic data was released in today’s trade. CAD continues to outperform supported by improving Canadian domestic economic outlook. Last 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 this Friday’s release of Canadian unemployment.

This week’s Canadian economic calendar includes the April 7th release of February building permits expected at 2% compared to -4.9% last month along with March Ivey PMI expected 54 compared to 51.9 last month. On April 9th March unemployment rate and employment growth will be released. The unemployment rate is expected to fall by 0.1% to 8.1% with employment growth at 29K compared to 20.9k last month.

The technical outlook for CAD is positive as USD/CAD trades below 1.0100. Look for near-term support at 0.9975 the July 15th low with resistance at 1.0230 the March 30th high.

AUD

AUD traded mixed with gains limited by uncertainty about RBA policy outlook. The RBA will hold a policy meeting on Tuesday and general market consensus is the RBA will hike rates 25 bps to 4%. Recent mixed economic data from Australia and a report in Saturday’s Sydney Morning Herald that the RBA will keep rates on hold clouds the outlook for Tuesday’s RBA policy decision. In addition a Washington based think tank (Medley) downgraded the prospect for a 25bps rate hike stating that the recent rise in Australian house prices was temporary. Recent statements from RBA officials indicate that they are concerned about rising house prices. Last 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 Tuesday. McCrann’s comments follow a 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 25bps Tuesday 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 Tuesday 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. If the RBA does not hike rates AUD could experience a sharp sell off. AUD downside was limited by firmer equities and commodity prices and Yuan revaluation speculation. As noted above the US has delayed the currency report on China until US and Chinese officials meet later in the month. There is hope that this meeting could produce a diplomatic settlement in regard to the Yuan value in which China would allow the Yuan to strengthen. Yuan revaluation would be positive for global economic outlook and export trade.

This week’s Australian economic calendar includes the RBA policy meeting on April 6th. The RBA is expected to hike rates 25bps to 4.25%. ANZ jobs ads will also be released on April 6th expected at 8% compared to 13.1% last month On April 8th March employment will be released expected unchanged at 5.3% with employment growth expected at 30k compared to 20k last month.

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.

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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