Although European Central Bank (ECB) President Jean Claude Trichet left out the word "vigilance" in signaling the bank's stance on inflation surveillance, his stance on inflation remains unequivocally hawkish, as he said the bank will "very closely monitor" prices developments and will act in a "firm and timely manner.”
We deem Trichet's decision to leave out "vigilance" as tactical, due to an already strengthening euro. Using the term "vigilance" would have been received as a guarantee of a May rate hike, thus risking further elevating the euro from its current two-year highs. Today's change of rhetorical tack does not preclude a second quarter rate hike; it only means the ECB is being cautious with the rising value of its currency.
The U.S. jobless claims rose to 342,000 from 323,000, overshooting expectations of 320,000. This pushed up four-week average by 7,000 to 323,000. Department of Labor attributes the jump to factors related to spring break, which should clear next week.
The dollar’s shaky foundation deteriorates as the currency hits new two-year lows against the euro (1.3476), new 17-year lows against the Aussie (.8271) and new four-and-a-half-month lows against the Canadian dollar (1.1372). Rising prices of oil, gold and other metals as well as rate hike expectations are fuelling the Aussie, while the combination of robust domestic growth and rising interest rates is fuelling the single currency. The yen remains the consistent loser, offering some relief to the dollar due to falling risk averseness and prolonged Bank of Japan cautiousness vis-à-vis the risk or renewed deflation. While the current return to carry trades pales in comparison to that of the past nine months, we are not seeing the return to the yen carry trades has been especially driven the Bank of Japan’s ongoing discomfort with deflation.
Despite yesterday’s confirmation from the FOMC minutes that inflation remains the principal risk to the Fed’s economic assessment, the dollar remains overshadowed by the risk of further slowing at home and robust abroad.
Markets leaves out "vigilance" but still means it Although Trichet left out the word "vigilance" in signaling the bank's stance on inflation surveillance, his stance on inflation remains unequivocally hawkish as he said the bank will "very closely monitor" prices developments will act in a firm and timely manner". Trichet's decision to leave out "vigilance" may be attributed to the already strengthening euro. Using the term would have been received as a guarantee of a May rate hike, and thus risking elevating the euro from its current two-year highs. Today's change of rhetorical tack does not preclude a second-quarter rate hike; it only means the ECB is being cautious with the rising euro.
The upward course of EUR/USD remains safely in check even in the case of a pullback to as low as 1.3280. The reasons to this assessment are both fundamental and technical. Fundamentally, the pair is being driven by a powerful trifecta of improved Euro zone domestic demand, steady ECB tightening campaign and downside U.S. risks. Technically (chart sent in yesterday’s analysis), the pair has climbed to two-year highs without any signs of overbought patterns or bearish divergences. Traders continue to deem the pair as fundamentally and technically sound, deeming periodical dips as opportune entry point. With support levels steady at 1.3398 and 1.3370, the pair is equipped to gather fresh momentum towards the 1.3480-85 figure.
We expect the euro to probe the 1.3490 target as long as Trichet sounds off “strong vigilance” on inflation. The only negative risk to the euro we see in the conference is in the unlikely event that Trichet addresses the U.S. slowdown as a potential headwind to the Euro zone. Mr. Trichet has described the U.S. housing slowdown as manageable. Support noted at 1.3440 and 1.3405.
USD/JPY struggles to break 119.50
USD/JPY pushed towards the 119.50 resistance on reports that the Bank of Japan will forecast a lower than previously forecasted 0.3% for the current fiscal year. The German and Chinese absence from this week’s G7 meeting will reduce the significance of any remarks and how they would relate to FX. Having failed to breach the 119.50 resistance (61.8% retracement of the decline from the year’s high to the year’s low), we could see the pair pull back to as low as 119. Downside seen extending to as low as 118.65, especially amid the onset of further protectionist rhetoric from Washington towards China, which is not expected to end any time soon. Technically speaking, however, there remains ample room towards the trend falling trend line resistance, with 119.80 remaining as a viable target.
AUD/CAD play still in effect
The overnight jobs figures from Australia showed employment rose by 10,000 last month, in line with expectations of 15,000 following a 24,000 rise in February. The drop in the unemployment rate to 4.5% from 4.6% lifted AUD/USD to a new 17-year high at 0.8271 on expectations that an RBA rate hike remains in the cards next month. While this may further help AUD/USD to as high as 0.8295, we stick with our negative view on AUD/CAD (see yesterday’s analysis), which has broken below the 5-week trend line support at .9405. The pair is expected to target 0.9370s, with a medium term objective at 0.934.
Canada’s improved fundamentals have lifted CAD to a fresh 4 ½ month high against the USD at 1.1366, shattering the 200 day moving average of 1.1450. Key target stands at 1.1340. But traders must watch out from any remarks from the Bank of Canada warning against currency appreciation as they have done in past episodes of loonie strength.
Cable downside seen re-emerging
We expect GBP/USD to start gradually forming a top, while any further gains are seen on the back of the EUR/USD rally. This makes 1.98 a key obstacle to breach. Yesterday’s talk of favorable tax laws to allow British-based companies to repatriate foreign profits tax-free triggered a sharp 2-cent rally in the pair. But preliminary steps by the Britain’s Financial Services Authority to investigate the UK’s GBP 15 billion sub-prime mortgage market has started to weigh. The latest jump in the February trade deficit to GBP 6.8 billion has also capped the pair.
Preliminary pressure stands at 1.98, while any subsequent advances on back of ECB seen capped at 1.9825. Support starts at 1.9730 and 1.97.
Chief FX Analyst
CMC Markets US
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