FX Daily Planet: Sydney/Asia Open

FX Daily Planet: Sydney/Asia Open

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View for the day

Stocks are grinding higher in afternoon trading and the USD is giving up some of its overnight gains against most majors as markets take a cup-half-full attitude towards mixed US data releases. Major US indices are higher by 0.75% to 1%. Commodity currencies are outperforming and CAD in particular is stronger across the board following 4Q GDP numbers which were a fair bit stronger than expected and stronger than the BoC has factored into its forecasts (the Bank expected GDP to rise 3.3%ar in 4Q). We're looking for the BOC to remain on hold tomorrow, but today’s strong GDP numbers set the stage for the BoC to begin to normalize policy and we wouldn't be surprised if there is some hawkish commentary accompanying tomorrow’s decision which could boost CAD on the crosses. Our economics team expects the first rate hike at the July rate announcement and for three additional 25bp hikes in 2010. GBP remains lower following confirmation that Prudential will buy AIG’s Asia unit. This involves $25bn of cash ($20 from a underwritten UK rights issue, $5bn from a debt issue) and $10.5 of shares. The possibility of $20bn selling in GBP (with the risk of the total selling amounting to $30bn, if AIG sells the shares and repatriate to USD) is of course a major millstone for GBP which started to wrestle in earnest with the deficit issue ahead of the general election. GBP remains more than 1.5 lower against the USD and 1% lower vs. the EUR post the M&A announcement. We continue to see more downside risks to GBP in terms of both monetary and fiscal policies and stay short GBP against USD, EUR and CHF.

In economic news, today’s PCE report was fairly mixed overall, with personal income increasing 0.1%m/m, under expectations, but compensated for somewhat by strong consumption which increased 0.3%m/m which was greater than forecast. Core PCE was flat as expected, further reaffirming the notion that core inflation continues to moderate. The ISM manufacturing report also disappointed some, coming in at 56.5, slightly below expectations for 57.9, but still well within the territory signifying continued strong growth in manufacturing. Within that report, the ISM employment index moved higher by nearly 3pts, possibly a good sign for this Friday’s labor report. Despite this, we (and consensus) are looking for a pretty grisly decline in Payrolls on Friday as weather conditions postpone improvement in labor conditions.

Tomorrow features the first set of policy announcements this week as we’ll hear from the RBA in the Asian session and later from the Bank of Canada. We expect the RBA to remain on hold as in February. Data continues to surprise on the downside in that country with the exception of the jobs data for January and Q4 investment data. In addition, lingering concerns over China policy tightening remain unresolved, and this is likely to influence policy makers there. A hike is more than 50% priced, so AUD should weaken on unchanged rates. As previously mentioned, today’s GDP report lays the groundwork for a change in policy bias in Canada and we wouldn’t be surprised by hawkish commentary from the BoC tomorrow. Although we're looking for the BOC to remain on hold through July, the end of the BoC’s commitment to leave rates on hold is likely approaching, and we favor being long CAD vs. other commodity currencies where aggressive central bank expectations are already priced.

Overnight news

CAD: Canada GDP For Dec increased 0.6%m/m vs. 0.4%m/m f/c. Q4 GDP increased 5%q/q (saar), better than forecast (Cons: 4.2% forecast).

USD: US Personal income increased 0.1%m/m vs. 0.4% forecast. Personal spending increased 0.5%m/m vs. 0.4%m/m forecast; Core PCE deflator was flat on the month as expected; Feb ISM mfg. (index, sa) came in at 56.5 slightly below forecasts (JPM: 57.0, Cons: 58.0); Jan construction spending was down 0.6% (%m/m, sa) (JPM: -1.1, Cons: -0.6)

USD: Fed Vice Chairman Kohn announced he will resign this June, which is also when his current four-year term as Vice Chair expires.

GBP: Prudential has confirmed the deal to buy AIG. This involves $25bn of cash ($20bn of which will come from a underwritten UK rights issue, $5bn from a debt issue), $10.5bn in shares. AIG has said it will 'monetise $10.5bn face value of Prudential securities'

GBP: Feb PMI manufacturing printed in line with at 56.6 with the previous figure revised down to 56.6; January M4 growth slightly decelerated to 4.9%oya (prev.: 5.7%). Hometrack house prices index posted an oya growth (+0.4%) in February for the first time since March 2008.

EUR: February PMI manufacturing final figure was upwardly revised by 0.1pt for both Euro area and Germany to 54.2 and 57.2 respectively; January Euro area unemployment rate printed stronger at 9.9% vs 10.1%.

EUR: WSJ reported that a plan led by Germany and France to bail out Greece as much as EUR30 bln began to take shape.

NOK: January retail sales turned out much weaker than expected at -0.4%m/m vs 0.0% consensus.

SEK: 4Q GDP turned out much weaker than expected at -0.6%q/q, sa vs +0.3% consensus. February PMI manufacturing printed below expectation at 61.5 vs 62.0 consensus.

CHF: February PMI manufacturing turned out much stronger than expected at 57.4 vs 56.0 consensus.

Today’s watchlist (all times GMT; +11hrs for Sydney, +9hrs for Tokyo, -5hrs for New York)

JPY: Jan unemployment rate (%, sa) @23:30 (JPM: 5.1, Cons: 5.1); Jan jobs to applicants ratio (sa) @23:30 (JPM: 0.47, Cons: 0.47); Jan household spending (%oya) @23:30 (JPM: 2.1, Cons: 2.5); Feb monetary base (%oya) @23:50 (Prev: 4.9)

AUD: @ 00:30 Building approvals (%m/m, sa) (JPM: -2.0, 1.0); @ 00:30 Retail sales (%m/m, sa) (JPM: 0.0, Cons: 0.5); @ 03:30 RBA rate announcement (JPM: 3.75, Cons: 4.00)

Overnight price action

FX: GBP remains lower on the back the confirmed M&A deal, although has bounced some off its low this morning; SEK has also moved off its lows after underperforming on weak GDP data. Commodity currencies are outperforming today. CAD in particular is higher on strong GDP data.

FX vol: FX vols are higher across most of the majors. Vols are moving lower in CAD following today’s strong GDP release.

Commodities: Gold is up nearly 2%; oil is down about 1%.

Bonds: Yields are lower by about 1-2bp in shorter maturities, and about flat out past the 10y. 2/10s is 280bp.

Equities: US equities are up 0.5-1% in afternoon trading.

Technical View for the day

The bearish action in GBP continues to dominate the current technical setup. While the near term setup can allow for some pause, the overall risks suggest additional underperformance is likely in line with the trending bias. And while we exited our short Cable position yesterday following the test of our 1.4860 target area (61.8% retracement), the overall medium term bearish risks are intact particularly given the break in the crosses. Again, last week’s breakout in EUR/GBP and impulsive collapses in GBP/SEK and GBP/JPY confirm the bearish GBP backdrop. Moreover, yesterday’s violation in GBP/CHF below the important January low seems consistent with a renewed trending bias considering the corrective advance from the December ’08 low. In turn, we have entered into a new short position for this cross. While EUR/USD and USD/CHF maintain the short term range bias, the action in AUD and CAD showed some improvement as prices have failed to follow-through after last week’s poor action. As such, our focus remains on the .9090/.9150 resistance zone for AUD/USD which should continue to define whether a deeper retracement is underway. Also, the decline in USD/CAD has taken on a more impulsive bias which seems consistent with another turn within the medium term range. Moreover, the commodity FX outperformance on the crosses suggests that the medium term trends are showing some residual downside and are not currently positioned for a consolidation phase. The near term pause continues to develop for USD/JPY and cross JPY, but the price action continues to develop in a corrective manner. This still seems consistent with additional JPY strength particularly following last week’s impulsive price action. Again, our focus remains on the 88.55/25 support zone as breaks of this area confirm a deeper pullback into the December/November lows.
ENDS

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