S&P revises China's credit outlook, NFPs in focus

Forex News and Events

S&P revises China’s credit outlook to negative (by Arnaud Masset)

Chinese manufacturing PMI surprised massively to the upside, suggesting that the effects of the several rounds of easing undertaken by the PBoC, together with the government’s fiscal stimulus did actually help the economy to adapt to the “new normal” of slower growth. The official manufacturing PMI passed the 50 mark that separates growth from contraction, printing at 50.2 in March from 49 in February (also beating median forecast of 49.4). Similarly, the non-manufacturing PMI rose to 53.8 from 52.7 in the previous month. However, according to private data, the manufacturing sector is still in contraction as the Caixin manufacturing PMI printed at 49.7, beating consensus of 48.3 and the previous month’s reading of 48 but still below the 50 threshold.

However this good news, which has to be viewed cautiously due to the strong seasonality effect of the Chinese New Year holiday in early February, has been overshadowed by the downward revision of China’s credit rating by Standard & Poor’s to negative from stable. Even though it was a surprise, it still send a negative signal to investor, acting as a reminder that there is still much to be done in the fiscal adjustment field to face the new weak global demand environment. Over the last few months, the market does not know where to stand, which was translated in trendless trading for Chinese equities.

Japan takes another turn for the worst (by Yann Quelenn)

The first quarter Tankan report released last night showed a continued drop in market sentiment compared with three months ago. Large manufacturing index has declined below expectations which can certainly be attributed to the overall weaker demand and the current merging markets slowdown. The state of the Japanese economy despite massive stimulus continues to worry. The recent appreciation of the yen can be attributed to the global increased risk-off sentiment and does not reflect any improvement in the economy. We consider that the adoption of negative rates and the limitless stimulus have only managed to keep the Japanese economy afloat.

Yet, weakness continues and the BoJ is expected to carry on with their reactive stance. Financial markets have increased the likelihood of further easing at the next monetary policy meeting at the end of April. However, from our standpoint the BoJ has gone too far to back off even if its inefficient strategy has been clearly exposed. Inflation remains stuck at zero and we do not spot any ongoing momentum that would suggest a further increase. Currency-wise, we are bearish USDJPY which sounds ironic but we believe the greenback to be overvalued.

Low expectations for NFP (by Peter Rosenstreich)

With volume still suffering from post-holiday disorder, traders will be focused on today’s payrolls for a volatility catalyst. However, given expectations for a strong NFP read and supportive ADP data it’s unlikely we get traditional payroll excitement. The Fed has made it clear that international development remains a key determinate for monetary policy, so it’s questionable if reinforcement of already health payrolls will influence rate hike expectations. What traders should keep an eye on is wage inflation which is expected to rise 2.2% on unusually warm weather supporting outdoors business such as construction. Reaction to wage data should be asymmetrical with a strong read providing a small USD rally while a significant disappoint will trigger a board USD sell-off. Clearly watch out for an April 1st head fake.

GBP/USD - Moving Up And Down

The Risk Today

Yann Quelenn

EUR/USD keeps on pushing higher and has broken hourly resistance at 1.1376 (11/02/2016 high). Hourly support is given at 1.1144 (24/03/2016 low). Stronger support is located a 1.1058 (16/03/2016 low). Expected to show further consolidation around 1.1400. In the longer term, the technical structure favours a bearish bias as long as resistance at 1.1746 ( holds. Key resistance is located region at 1.1453 (range high) and 1.1640 (11/11/2005 low) is likely to cap any price appreciation. The current technical deterioration implies a gradual decline towards the support at 1.0504 (21/03/2003 low).

GBP/USD is still trading rangy despite the medium-term technical structure is clearly bearish. Hourly resistance is given at 1.4591 (05/02/2016 high) while hourly support can be found at 1.4033 (03/03/2016 low). A break of stronger resistance at 1.4668 (04/02/2016) is nonetheless needed to show a reverse in the medium-term momentum. The long-term technical pattern is negative and favours a further decline towards key support at 1.3503 (23/01/2009 low), as long as prices remain below the resistance at 1.5340/64 (04/11/2015 low see also the 200 day moving average). However, the general oversold conditions and the recent pick-up in buying interest pave the way for a rebound.

USD/JPY's medium term momentum is clearly negative. On the short-term, the pair has broken short-term uptrend channel. Hourly resistance is given at 113.80 (29/03/2016 high) while stronger resistance is given at 114.91 (16/02/2016 high). Hourly support is given at 110.67 (17/03/2016 low). Expected to remain mixed. We favour a long-term bearish bias. Support at 105.23 (15/10/2014 low) is on target. A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems now less likely. Another key support can be found at 105.23 (15/10/2014 low).

USD/CHF continues to weaken which confirms increasing selling pressures. Hourly support at 0.9599 has been broken while hourly resistance is located at 0.9788 (25/03/2016 high). Stronger resistance can be found at 0.9913 (16/03/2016 high). Expected to show continued weakness. In the long-term, the pair is setting highs since mid-2015. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours a long term bullish bias.

Resistance and Support: