DAILY MARKET COMMENTARY
15 March 2012 – 8:00 GMT
Thursday
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Market Analysis Desk
Foreign Exchange Research: www.fibosignals.com/5585/resources.html
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FUNDAMENTAL ANALYSIS at 0800 GMT
WORLD
Broad USD strength amid the post-FOMC rise in US Tresury yields remains the dominant theme. While USDJPY broke above 84 in the Asia session, EURUSD is threatening to slip through 1.30. Although Japanese bonds were under pressure, USDJPY was driven by the widening 2y UST-JGB yield spread on expectations of a Fed-BoJ policy divergence. USDJPY still has upside risk, with the Fed backing away from more QE and BoJ boasting plenty of room to expand, amend, and extend its Asset Purchase Programme (APP) as early as next month - perhaps in conjunction with the release of its Outlook Report on April 27.
Repatriation flows are not yet prominent in the run-up to the March 31 book closing in Japan. MoF data released earlier today confirmed that Japanese investors purchased a net Y 367 bn of foreign bonds last week. Japan names bought foreign bonds worth JPY5.9 trn in 9 of the 10 weeks through March 9. Although Fitch's downgrade of UK ratings outlook to negative from stable didn't add anything new to the equation, cable dipped below 1.5640 and traded heavy.
EURCHF continues to hold above 1.21 after its sudden jump yesterday, with the policy spotlight now on the SNB's quarterly Monetary Policy Assessment. While the SNB may upgrade its growth view alongside a downward revision to the short-term inflation outlook, our baseline scenario assumes the 1.20 floor will remain in place for at least the next 6 months. Apart from our long CADCHF recommendation via a call spread, playing Swiss franc weakness against the US dollar looks attractive. Our central view remains the same: the US dollar and related currencies (CAD, MXN) will continue to performer well as Fed keeps rates on hold and other central banks try taming their currencies ( JPY, CHF). USDJPY traded between 83.65 and 84.18 in the Asia session, with EURUSD at 1.3004-1.3039.
EUR
EU HICP was confirmed at 0.5% m/m and 2.7% y/y for February. Core inflation remained stable at 1.5% y/y (vs the UBS and consensus estimates of 1.6% y/y). EU industrial production for January disappointed, with the 0.2% m/m increase feeding into a 1.2% y/y decline.
The Eurogroup formally announced that the second bailout for Greece had been finalised, and the EFSF would now disburse EUR 39.4 bn to Greece in tranches. The Eurogroup said that this would return the Greek economy to growth and a sustainable path would be "good for everyone".
Italy sold EUR 6 bn in BTPs, at the maximum level targeted. The indicative levels note that borrowing costs on three-year debt are now the lowest in close to 18 months and demand appears resilient.
EU Economics Commissioner Rehn said that the Portuguese situation is very different from Greece and he "trusted the Portugal programme will remain on track". The comments were likely made to allay fears of a PSI for the country.
GBP
Fitch revised the UK's ratings outlook to negative, bringing it in line with Moody's. The agency affirmed that the UK's current fiscal consolidation plan is "credible", but also said the outlook revision is a warning "to anyone who believes there can be deficit-financed giveaway in the UK budget".
UK labour market data for February showed that claimant count unemployment was up by 7.2k, higher than market expectations of 6.0k and the previous 7.0k. Wage growth at 1.4% y/y was much lower than the 1.9% y/y anticipated by markets. Wages ex-bonuses, i.e. underlying wages, expanded by 1.7% y/y instead of the 1.9% y/y expected and the previous 2.0% y/y result.
On the more positive side, the number of people in employment rose by 9k in the 3 months to January, compared with the 3m to October. The ILO unemployment rate (3m) was steady at 8.4% in January..
JPY
MoF's International Transactions in Securities report showed that Japanese investors were net buyers of foreign bonds (JPY 367 bn) and money market instruments (JPY 32 bn), yet net sellers of foreign equities (JPY 49 bn) last week. In the current quarter to date, the Japanese have sold a net JPY 678 bn of foreign equities, while purchasing JPY 163 bn of foreign money market instruments - and most significantly, JPY 5.9 trn of foreign bonds, refuting any lingering fears of repatriation ahead of the fiscal year-end.
The Business Outlook Survey revealed sluggish sentiment in Q1, with the all-industry business conditions DI for large firms coming in at -2.7 after the -2.5 result registered in the previous quarter. The manufacturing index was conspicuously soft at -7.3, reflecting the weakness in exports in the face of the strong yen, weak demand conditions in Europe, and the Chinese New Year. The non-manufacturing DI was far less depressed at -0.1. Growth bulls could at least seek comfort in the outlook DIs, which were more positive for all industries (+1.3 for Q2 and +7.3 for Q3), manufacturers (+2.3 and +9.2), and non-manufacturers (+0.7 and +6.3). Also note that the bulk of the responses were received by February 15, before USDJPY rebounded over the 80 level. Nonetheless, the survey results were far from strong, with smaller firms continuing to lag well behind their larger counterparts.
A. White
Analyst at Fibosignals.com
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