Key resistance giving way in equities triggers further JPY weakness.
MAJOR HEADLINES – PREVIOUS SESSION
- Germany Mar. Preliminary PMI Manufacturing out at 32.4 vs. 32.0 expected and 32.1 in Feb.
- Germany Mar. Preliminary PMI Services out at 41.7 vs. 41.0 expected and 41.3 in Feb.
- Sweden Feb. PPI out at -0.2% MoM vs. +0.3% expected
- EuroZone Jan. Current Account out at -12.7B vs. -7.6B in Dec.
- EuroZone Mar. Preliminary Manufacturing out at 34.0 vs. 33.5 expected and 33.5 in Feb.
- EuroZone Mar. Preliminary Services out at 40.1 vs. 39.1 expected and 39.2 in Feb.
- UK Feb. CPI out at +0.9% vs. +0.3% expected and -0.7% in Jan. (YoY at 3.2% vs. 2.6% expected)
- UK Feb. RPI out at +0.6% vs. -0.1% expected
- UK Feb. BBA Loans for House Purchase rose to 28,179 from 24,278 in Jan.
THEMES TO WATCH – UPCOMING SESSION
- US Jan. House Price Index (1400)
- US Mar. Richmond Fed (1400)
- US Fed's Bernanke and Treasury's Geithner Testify on AIG (1400)
- UK BoE's King and others to Testify (1530)
- Switzerland SNB's Roth to Speak (1715)
- UK BoE's Blanchflower to Speak (1830)
- US Weekly ABC Consumer Confidence (2100)
- Japan Feb. Merchandise Trade Balance (2350)
- New Zealand Q1 Westpac Consumer Confidence (0100)
- Japan BoJ's Yamaguchi to Speak (0200)
Market Comment:
The big mover in today's trade has been the pound sterling, which found support on two developments. First, GBP seems to be having a slightly delayed reaction to the PPIP plan from Geithner and company, which has risk appetite surging higher again as this plan looks far better than anything that has preceded it - at least as judged by its free market with public backstop principles. The question will inevitably be whether market participants show the requisite enthusiasm in bidding on assets that will allow the plan to have the desired long-term stabilizing effect. Regardless, a reasonably effective PPIP and some of the plans from the UK could be positive for banks, and if any country is exposed to the financial sector it is the UK. This factor could trump the competitive devaluation theme that has been hitting GBP so hard of late.
The other GBP-supportive factor was rhetoric from the BoE's King, who was still rather dour on the economy and the credit market's current status, but who also expressed optimism on the outlook ("stocks can't be cut indefinitely") and who expressed caution on the aggressiveness of the BoE's monetary easing ("government will want to be cautious on second stimulus"). As well, Mr. King was forced to write a note on inflation to the government as the CPI surprisingly strayed above the 3.0% YoY level. He expressed surprise that inflation remained so high, suggesting that the weak pound played a large part and expressed the need for caution on inflation levels, though he still expects inflation to continue to abate. On the pound, Mr. King said that he didn't see any reason for the currency to go any lower, and this triggered quite a surge in GBP crosses. See more on EURGBP in charts below.
JPY weakness reached a new crescendo yesterday with the surge in risk appetite brought on by the PPIP plan. Although this plan could show some promise in stabilizing bank balance sheets and some types of lending, the upside potential in risk appetite from these levels may be rather subscribed, and the effect on the "real economy" is likely to be negligible in the short to medium term due to the negative momentum that has already been achieved. Still, the 800 resistance level falling in S&P was an important technical trigger and room must be given for a further rise in risk appetite until/if the averages slip back below their 55-day moving averages. On the other hand, we also must keep in mind that the financial year end is fast approaching for Japan and this very often provides a pivot point for the JPY.
Trichet was out yesterday saying that no further stimulus was necessary for the EuroZone economy as he continues to take a very different stance than his hyperexpansive colleagues at the Fed and the BoE. Still, he also said that the bank could cut rates further. With the EUR at its current levels of strength, it would seem very likely that the ECB cuts 50 basis points next Thursday, which is not fully priced in. EUR is beginning to show signs of weakness in many of the crosses and on a broad basis, this second bout of EUR strength (after the very sharp and exaggerated peak of late 2008) may have topped out for the cycle.
Chart: EURGBP
EURGBP was knocked for steep losses today on the BoE's rhetoric today, but also on the general surge in risk appetite of late. Has the chart topped for now? The move back below the old high was a bearish trigger, but the other important structural supports are still in place: first, the 21-day moving average currently around 0.9125 and then the 55-day moving average (currently around 0.9050) and the huge trend line and flatline area at 0.9000. If this last area gives way, it would like usher in a new bear market for the pair. To the upside, a move back above 0.9400 is needed to help the bullish argument, perhaps supported by the competitive devaluation theme.
