FX Daily Planet: Sydney/Asia Open

FX Daily Planet: Sydney/Asia Open

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View for the day

CAD is today’s key outperformer following the BOC meeting. There were no major surprises from the BoC, but several nuanced statements which indicate a gradual change in policy focus is taking place. In particular, the Bank removed indications that the Canadian economy is operating below capacity and omitted the phrase that it has considerable flexibility to conduct policy at low rates, both of which signal policy normalization this year in our view. In addition, the BoC has been forced to acknowledge that both growth and inflation have been on the firmer side than it expected. Undoubtedly, the BoC will be reluctant to tighten policy quickly; despite this, our economics team expects the first rate hike at the July rate announcement and three additional 25bp hikes in 2010. Given the scope for rate expectations to adjust further, CAD remains our top pick within the commodity bloc. Elsewhere, US equities are making gains in afternoon trading with little in the way of economic news to speak of. The USD is letting go of most of its overnight gains in concert with the general tone, and remains lower against AUD (which is benefiting from the overnight interest rate hike), but is moving lower against EUR, CHF and JPY. Tomorrow features a few notable economic releases in the Asian session including Australian GDP, nominal wages from Japan, and the National Peoples Congress in China.

Overnight news

CAD: BoC leaves rates unchanged at 0.25% (JPM: 0.25, Cons: 0.25); the statement maintains that the target overnight rate is expected to remain at its current level of 0.25% until the end of 2010:Q2, as before; The BoC also removed a reference about the extent to which the Canadian economy is operating below capacity.

USD: Hoenig: the Fed should raise rates “sooner rather than later” and rates may need to be hiked despite high unemployment. He also said that the Fed can’t move to a 1% rate target without “causing problems.”

NZD: Milk fats fell 5.4% in today's March auction, following a 7.9% drop in Feb. This is the 3rd decline in 4 months. Milk powder was up 0.8%.

EUR: Feb HICP flash in line with expectation at 0.9%oya; January PPI at -1.0%oya vs cons. -1.1%.

EUR: Greece’s federation of civil servants said it will hold a new 24-hour strike on March 16.

EUR: Head of Greek debt management agency said that Greece is under no pressure to sell bonds and will do so when market conditions are “favorable”.

NOK: Finance Minister Johnsen said low interest rates in the U.S. and Europe over a long period of time have ‘big importance’ for Norway.

CHF: 4Q GDP stronger at 0.7%q/q vs 0.4%.

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

CNY: National People’s Congress plenary session

AUD: GDP (%oya) for 4Q09 (JPM: 1.1, Cons: 2.4)

JPY: Nominal wages (%oya) for January (JPM: -1.0, Cons: -1.2)

Overnight price action

FX: The dollar is down against CAD and AUD (both have benefited following their respective central bank meetings), and moving lower versus EUR, and NOK. GBP continues to underperform the majors.

FX vol: vols are lower across the majors, with 1m vols down anywhere from 0.2-0.5vols in some cases. USDCAD vols are grinding lower following the BoC policy announcement. Similarly, AUD and NZD vols remain down sharply following the rate hike overnight.

Commodities: oil is up nearly 1.4% and gold is up more than 1.5%.

Bonds: Yields are slightly lower in the short end and belly of the curve and flat or slightly higher farther out the curve. 2/10s is 282bp.

Equities: US equities are higher by around 0.5%.

Technical View for the day

AUD extended the bullish tone yesterday following the RBA hike while raising the risk of additional outperformance. As mentioned in the NY Open, the reversal in AUD/USD from last week’s low is quickly approaching the key .9070/.9090 resistance zone as breaks here would suggest a deeper retracement from the January high is underway. Moreover, the action in AUD/NZD is consistent with this bullish view following yesterday’s bullish breakout through the important 1.2965 resistance and medium term range highs from July 2008 (while stopping us out of our short position). In turn, the short term risks suggest an extension is likely which should allow for a closer test of the 1.3150/1.3300 zone. In line with the yesterday’s CAD outperformance, we see room for this trend to extend as well. This follows the break several key levels starting with violation of last week’s 1.0370 low for USD/CAD. This should now allow for a closer test of the critical medium term range lows near 1.0225/05 Importantly, this broad range still reflects an overall corrective bias which seems consistent with new lows/additional CAD outperformance. Moreover, EUR/CAD is seeking a closer test of the critical 1.40/1.39 medium term support area, while NZD/CAD has once again staged an impulsive decline and argues for additional downside initially into the .7090/.7045 support zone. We maintain our overall bearish view on GBP particularly as yesterday’s initial pause failed to retrace higher. The risks continue to point to new lows for Cable despite the well-defined weekly 1.4755 trendline support from the Jan ’09 low. Finally, we still see room for additional short term JPY outperformance as this week’s pause retains a corrective spin. The 88.55/25 support zone for USD/JPY stays key and will define whether a deeper retracement from the November low is underway.

ENDS

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