FX Daily Planet: Sydney/Asia Open

FX Daily Planet: Sydney/Asia Open

Click here for the full Note and disclosures.

View for the day

Today’s statement left the FOMC’s key policy guidance intact: that economic conditions "are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” Beyond this the economic outlook paragraph was marginally more upbeat but still very cautious and the language on inflation was unchanged. The paragraph on the outlook for economic growth was just a touch more constructive on the labor market and business spending, but still very cautions on outlook. There is nothing in this statement to change our assessment that the Fed will keep the funds rate on hold for all of 2010. Risk markets are broadly higher following the FOMC announcement, with high beta FX adding to earlier gains against the USD. While no surprise to most observers, the unchanged language likely will weigh on lingering expectations for rate hikes in 2H10, as most see the language as commitment to keep the fed funds rate unchanged for roughly six months. As a result, it should add to downward pressure on the USD over time.

Earlier, we received the interim assessment of the Greek stability and growth plan which resulted in Euro area finance ministers endorsing the first of Greece's progress reports. This news, which was largely expected, was further compounded by an S&P statement that Greece was removed from negative ratings watch. The combined news helped EUR to move higher early in the session, currently up by about 0.7% against the USD. As we wrote in the weekly, the FX market has been more reluctant than the bond market to reduce the sovereign risk premium. This news should help to redress the balance and assist the slow rehabilitation of the EUR. The Greek government needs to submit another regular report by 15 May 2010. We added long EUR/USD recommendations in cash and options to our portfolio last week, largely to exploit lagging EUR gains driven by the improved sovereign risk outlook in the Euro area.

Tomorrow, the focus will remain on monetary policy as the BoJ reports. We now expect the BoJ to announce further measures on monetary easing on Wednesday with the most likely scenario being the expansion in the amount of the new fixed rate operation introduced December last year. Otherwise, the bank could instead extend the maturity of its new operations from 3 months to 6 months, or increase its outright purchases of JGBs. Although many market participants seem to think further monetary easing should push JPY further down, we do not think additional QE measures would lead to a sustainable decline in JPY (see Mar 12 BoJ’s monetary policy has little impact on USD/JPY) as the experience in the QE period between 2001 and 2006 suggests that there is no clear relationship between the extent of monetary easing and the strength of JPY. Despite this, a surprise announcement would likely result in increased volatility in the very near term.

Overnight news

EUR: Interim assessment of Greek stability and growth plan : Euro area finance ministers endorsed the first of Greece's progress reports. Eurozone finance ministers are "of the opinion that the additional fiscal measures announced by the Greek authorities on 3 March 2010 and adopted by parliament on 5 March 2010 appear sufficient to safeguard the 2010 budgetary target provided that they are effectively, fully and timely implemented".

USD: Feb housing starts were 575k (saar) (JPM: 560, Cons: 570); Feb building permits were 612k (saar) @12:30 (JPM: 600, Cons: 601)

USD: The FOMC rate announcement left rates unchanged and resulted in no notable changes to the statement. The statement left the FOMC’s key policy guidance intact: that economic conditions "are likely to warrant exceptionally low levels of the federal funds rate for an extended period”; the economic outlook paragraph was marginally more upbeat but still very cautious and the language on inflation was unchanged.

EUR: German ZEW survey is better than expected at 44.5. European Finance Minister agree on emergency loans to Greece in the event of a fiscal meltdown.

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

AUD: Jan Westpac leading index (%m/m, sa) @23:30 (Prev: 0.5)

JPY: Jan tertiary sector activity index (%m/m, sa) @23:50 (JPM: 0.8, Cons: 1.3)

JPY: BoJ rate announcement (JPM: 0.1, Cons: 0.1); BoJ Governor Shirakawa holds press conference @ 06:30

Overnight price action

FX: High beta FX adds to earlier gains following the FOMC.

FX vol: Front end vol moves lower post FOMC.

Commodities: gold is up 2% and oil is up 2.6%.

Bonds: Yields are about 3bp lower in the front end, and 4-5bp lower farther out the curve.

Equities: Equities are up 0.7% on the day.

Technical View for the day

The USD shifted again yesterday with a broad-based decline as the two-sided bias continues to dominate the current price action. While the post-Fed reaction led to follow-through USD weakness, we are once again monitoring the well-defined levels for signs of direction highlighted by the important 13840/50 area in EUR/USD and the critical 79.50 range lows for the Dollar index. Until a sustained break, the short term range action will likely persist in line with the medium term trends. Note that the other key levels are so far holding as well, but we continue to see some differentiation within G10. In this regard, the breakdown in USD/CAD continues to develop following the violation of the important 1.0205/25 medium term range lows while arguing for additional CAD outperformance. The levels for other USD pairs remain well-defined including the .9200 area for AUD/USD as well as the key .7100/.7155 area for NZD/USD. Note that yesterday’s price action implies an important test for both in the coming days as the recent advances stay resilient and raise the risk for further upside. Again, the ability to extend through the key .9200 area for AUD/USD should allow for a closer test of the critical .9330 January high. We still sense NZD is vulnerable to additional weakness despite yesterday’s outperformance with the .7155 area against the USD acting as the key short term pivot area. GBP/USD extended above the 1.5200 resistance area with a bullish reversal day while suggesting additional near term strength, but we still favor the overall GBP underperformance view for the crosses. The range bias for USD/JPY is intact while the price action continues to consolidate below the next line of important resistance in the 91.25/75 zone. Importantly, a break above this area is necessary to reassert the upside bias for a retest of the January, if not February highs. While additional near term consolidation is likely for cross JPY, note that nearby support levels have thus far held suggesting a growing risk of an extension. Again, we view corrective retracements as buying opportunities given last week’s breakout through a number of important resistance levels.

ENDS

© Scoop Media