FX Daily Planet: New York Open

FX Daily Planet: New York Open

Click here for the full Note and disclosures.

View for the day

Despite European equities posting solid increases during the session, high beta currencies are in the red versus USD. Sentiment towards USD is being helped following speculation of another rise in the Fed discount rate in an attempt to normalize monetary policy and to encourage banks to borrow from the financial market. GBP has been under pressure following comments by Bank of England MPC member Sentance who warned of the risks of a double dip recession, though this is not the central scenario. CHF continues to perform strongly in the aftermath of SNB comments that the Swiss should prepare for higher rates and that FX moves will be driven by the market. CHF is transitioning towards a more freely floating currency. The market is still thinking about this being another step adjustment in EUR/CHF, similar to the 2.5% adjustment after the December SNB meeting. But we think we need to consider the prospect of a more sustained adjustment, as the SNB acknowledges the constraints on its freedom to weaken the currency at a time when it needs to tighten policy. CHF is losing its European funding currency status, which combined with a normalization in the FX regime offers the prospect of a more substantial and persistent revaluation in CHF. The Greek debate seems no nearer to being resolved as German officials harden their stance on a potential bailout. Bundesbank member Sarazin says that Greece should go bankrupt if it can't refinance, that such a bankruptcy wouldn't hurt EUR. It does seem as though Germany’s stance towards aid has distinctly hardened over the past week or two.

Separately, today’s Nikkei morning edition reported that Prime Minister Hatoyama considered a redenomination of the yen when he took office in September, citing a person close to Hatoyama. Hatoyama asked former Fin. Minister Fujii to handle the change, but it did not realize because Fujii stepped down in January. The discussion over the redenomination sometimes comes up as a tool to stimulate economy; redenomination of a currency will sharply boost demand for printing, machine, and computer software. Some people say it may have inflationary impact because corporate and shops raise the price slightly when they adjust the price according to the redenominated currency. In addition, there is an incentive to cut “two zeros” to make Japanese currency unit in line with USD, EUR and other major currencies. However, we do not see any imminent possibility of Japanese government really going forward with the discussion over redenomination and realizing it.

Overnight news

GBP: Bank of England MPC member Sentance comments that there is some risk of a double dip recession in the UK
EUR: Bundesbank member Sarazin says Greece should go bankrupt if it cannot refinance its debt.
JPY: Jan all industry activity index rose 3.8 %m/m vs. consensus 1.5% mainly driven by the sharp rise in the tertiary industry and construction activity.
JPY: The Nikkei reported that Prime Minister Hatoyama considered a redenomination of the yen when he took office in September, citing a person close to Hatoyama.
CNY: Head of the Ministry of Commerce’s department of American and Oceanian affairs said the U.S. and China can resolve their disagreement on trade as long as they don’t become “emotional” and don’t politicize the issue. He also said the pressure from the US Congress complicates the issue on CNY.

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

CAD: Feb CPI (%oya) @11:00 (JPM: 1.7, Cons: 1.4); Feb CPI core (%oya) @11:00 (JPM: 1.9, Cons: 1.7); Jan retail sales (%m/m, sa) @12:30 (JPM: 1.2, Cons: 0.6); Jan retail sales ex autos (%m/m, sa) @12:30 (JPM: 1.3, Cons: 0.5)
MXN: Banxico rate announcement @15:00 (JPM: 4.50, Cons: 4.50)

Overnight price action

FX: USD remains bid despite the rise in European and Asian equities
FX vol: Front-end vol is relatively stable.
Commodities: Oil and gold both trade lower
Bonds: European bond futures are broadly higher.
Credit: European credit markets are broadly stable
Equities: European stocks are higher. .

Technical View for the day

Given the latest failure of the EUR to break key-resistance at 1.3840/71 and it’s following sell-off the question is really arising whether we are just experiencing the delayed realization that European politicians have basically cancelled parts of the EU-stability pact as mentioned in a well regarded German newspaper two days ago. Looking at the bigger picture though, it still takes a break below the 1.3530/25 handle before a resumption of the broader down-trend would be confirmed GBP on the other hand shows a remarkable stability while holding on to its latest gains. But as long as key-barriers at 1.5424 and at 1.5584 in Cable are still capping the upside it is rather a question of time until GBP is going to join this bear-market impulse. Commodity currencies are on the other hand facing an increased setback risk as projected targets like 1.3743/01 in EUR/CAD or 7.9158 in EUR/NOK are in close reach now. Only EUR/NZD (target 1.8567) and EUR/AUD (target 1.4146/1.4073) seem to have slightly more room but look highly stretched too.

Research from the region you may have missed

World Financial Markets: Second-quarter 2010

ends

© Scoop Media