EU Morning Report - Bank of England and European Central bank rate decisions today both …

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Bank of England and European Central bank rate decisions today both expected to remain unchanged!

•  The markets had another choppy session yesterday as the mere thought of going long risk currencies proved unnerving for most ahead of the NFP report on Friday. ADP yesterday came as expected at -20000 job losses for the month of February. ADP is much less sensitive to weather conditions compared to the Non Farm payrolls report which is expected to come in at -90K. ISM Non manufacturing was also out yesterday and beat expectations coming in at 53.00 indicating a solid expansion in the US services sectors. Overall the USD weakened on the back of the new austerity measures announced by Greek Prime minister Papandreou. USDJPY price action yesterday was between 89.00 - 88.30.
•  In Europe the main story was Greek Prime minister George Papandreou announcement of EUR 4.8 bln in spending cuts and tax increases. New measures include reductions in public salaries, hikes in VAT, hikes in taxes on goods such as alcohol and tobacco. Civil unrest is a big issue now for the Greek government and may pose further risks to the economy. Following the announcement Papandreou said that ‘we now justifiably expect EU support” however Angela Merker said that the measures are welcome and should do a lot to improve investor confidence without committing to a bailout package for Greece. EZ PMI came out at 51.8 just below expectations and the EZ retail sales meeting expectations at -0.3% for the month. EURUSD price action yesterday was between 1.3590 - 1.3735.
•  Today we have two Central bank policy decisions by the BoE and the ECB. We saw 2 policy decisions already by the RBA and the BoC. RBA hiked the rates by 0.25bp and BOC followed the decision with hawkish statements. The key focus for the ECB rate decision will likely be on more details in regards to the ECB’s exist strategies. The BoE decision however is likely to be more volatile as the key focus will be on QE and if the BoE will resume its operations in the bond markets.

 Currency to watch out for: EURUSD & USDJPY

• § The EURUSD pivot point is at 1.3740 with a preference to enter into short positions at 1.3730
• § The USDJPY pivot point is at 88.75 with a preference to enter long positions at 88.70

 Today’s calendar and market movers:

• § Euro Zone GDP Q4 expected at 0.1%
• § BoE Rate Decision for March expected unchanged at 0.5%
• § ECB Rate Decision for March expected unchanged at 1%

 Equity Markets:

•  US equities closed mixed yesterday with the DJIA and the SP500 closing -0.09% and 0.04% respectively.  The European bourses were positive yesterday with the FTSE up 0.90% the DAX and the CAC closing positive at 0.72% and 0.80% respectively.  The NIKKEI and the HSI at the time of writing is -1.05% and -1.17% respectively.

Daily Forex Outlook - Greece Austerity Measures Help Euro

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CURRENCY TRADING SUMMARY - 4th March (00:30GMT)

U.S. Dollar Trading (USD) the market reacted well to the new Greece Austerity measures in Europe and the Euro led the majors higher against the greenback. Adding to the positive sentiment was the February ISM Services PMI at 53 vs. 51 forecast. February ADP Employment report was a relief at -20k as forecast. In US stocks, DJIA -9 points closing at 10396, S&P +1 points closing at 1118 and NASDAQ -1 points closing at 2280. Looking ahead, Weekly Jobless Claims are forecast at 470k vs. 496k previously. January Factory Orders are forecast at 1.8% vs. 1.0% previously. Finally, January Pending Home Sales are forecast at 1%.

The Euro (EUR) with over $6bn in new budget cuts announced from Greece the market took another leg higher breaking above resistance at 1.3700. EUR/GBP was volatile as the market rejected 0.9100 and Pound found strength on good data. Overall the EUR/USD traded with a low of 1.3591 and a high of 1.3737 before closing at 1.3700. Looking ahead, ECB Rate Announcement forecast to remain at 1.0%.

The Japanese Yen (JPY) Euro inspired USD weakness hurt the major as it broke below support at 88.50 and the gradual decline continued. Crosses held their ground and most finished with small gains. AUD/JPY continues to hold above Y80 and is one of the most closely watch trades for overall investor risk appetite. Overall the USDJPY traded with a low of 88.30 and a high of 89.02 before closing the day around 88.45 in the New York session.

The Sterling (GBP) broke above 1.5000 in Asia as the recovery continued and Europe continued with the theme as Economic data impressed. February Services PMI jumped to 58 vs 55. Also strong, February Nationwide Consumer Confidence at 80 vs. 71 previously. Overall the GBP/USD traded with a low of 1.4974 and a high of 1.5134 before closing the day at 1.5100 in the New York session. Looking ahead, BOE rate Announcement.

The Australian Dollar (AUD) was quiet as profit taking on the major in the high 0.90’s capped gains and traders looked to the crosses for action. AUD/NZD broke to fresh decade highs above 1.3000 and quickly ran up to the 1.31 level. Q4 GDP came in at 0.9% q/q as forecast. Overall the AUD/USD traded with a low of 0.9007 and a high of 0.9088 before closing the US session at 0.9035. Looking ahead, January Trade Balance is forecast at -1.5bn vs. -2.25bn.

Oil & Gold (XAU) took advantage of USD weakness to trade above $1140 for the first time since January. Overall trading with a low of USD$1131 and high of USD$1145 before ending the New York session at USD$1139 an ounce. Crude Oil broke above $80 on Bullish US inventories data. Crude Oil was up +$1.27 ending the New York session at $80.95.

TECHNICAL COMMENTARY

Euro - 1.3705

Initial support at 1.3436 (Mar 2 low) followed by 1.3424 (may 18 low). Initial resistance is now located at 1.3692 (Feb 23 high) followed by 1.3788 (Feb 17 high)

Yen - 88.45

Initial support is located at 88.25 (0.618 of 84.83-93.77) followed by 87.37 (Dec 9 low). Initial resistance is now at 89.50 (Feb 26 high) followed by 90.36 (Feb 23 high).

Pound - 1.5100

Initial support at 1.4855 (Mar 2 low) followed by 1.4784 (Mar 1 low). Initial resistance is now at 1.5209 (Mar 1 high) followed by 1.5317 (Feb 26 low).

Australian Dollar - 0.9055

Initial support at 0.8936 (Mar 1 low) followed by the 0.8863 (Feb 26 low). Initial resistance is now at 0.9093 (Jan 25 high) followed by 0.9147 (Jan 21 high).

Gold - 1139

Initial support at 1111 (Mar 1low) followed by 1104 (Feb 26 low). Initial resistance is now at 1146 (Jan 14 high) followed by 1161 (Jan 11 high).

Oil - 80.80

Initial support at 80.00 (Intraday Support) followed by 78.00 (Intraday Support). Initial resistance is now at 82.00 (Intraday Resistance) followed by 82.50 (Intraday Resistance).

Special Report-Bad weather may distort Friday’s US nfp

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US February unemployment and nonfarm payrolls (nfp) will be released on Friday, March 5th at 8:30 EST. Two major snowstorms hit large portions of the US during February. The bad weather may distort the February unemployment report and contribute to larger than expected job losses. One of the snowstorms hit during the survey period for the February unemployment report and this could add as much as 100k or more to the nonfarm payrolls losses. Before the storms hit many analysts were looking for the February nfp to post the first positive US jobs growth in over two years. The snowstorms have forced analysts to revise down their expectations for the February nfp. Recent US jobless claims data reflects the impact of bad weather with last week’s jobless claims rising to their highest level since last November at 496k. Jobless claims for the week ending 02/27 will be released Thursday and are expected to fall to 470k. Wednesday’s ADP employment report and the Challenger Gray employment survey confirmed that the trend in the US labor market had been improving prior to the February snowstorms. The ADP February employment declined by 20k. ADP said that jobs were created in the service and manufacturing sector and that that job growth may return next month for the first time in two years. The Challenger Gray survey for February said the corporate job cuts were at their lowest level since February 2006.

 In January, the US reported a nonfarm payrolls loss of 20k with the unemployment rate declining to 9.7% from 10%. The nonfarm payrolls came in close to market expectation but the headline unemployment drop was a surprise as the trade was looking for a reading of 9.9%.The decline in headline unemployment reflects a sharp increase in the number of discouraged workers who gave up looking for work. The number of people who gave up looking for work rose to 1.1mln in January from 734k a year ago. Parts of the January employment report suggest that the labor market is stabilizing. The number of persons who work part-time but can’t find full-time work fell from 9.2mln to 8.3mln. Employers added 52k in temporary jobs. Temporary jobs growth is seen as a step toward permanent hiring. In addition, the retail sector added 42k jobs along with jobs growth reported in the healthcare industry and federal government. The Federal government added 33k jobs. Manufacturing created 11k jobs during January. This marks the first gain in manufacturing jobs since January 2007. Despite the improvement in temporary hiring and job growth in healthcare, the service industry and manufacturing, construction employment declined by 75k and the number of long-term unemployed (those out of work for 27 weeks or more) rose to 6.3mln in January. The average duration of unemployment reached 30.2 weeks.

 The impact of the February unemployment report may be limited with the trade bracing for a weaker report because of bad weather in February. The report however may have significant impact on investor optimism about the US recovery. Recent US economic data has been disappointing with jobless claims rising, consumer confidence declining, existing home sales tanked and personal income is flat. The US recovery remains uneven with the main bright spot continued expansion in manufacturing and service PMI. The Fed’s Lockhart says fresh data points to slow growth. If the unemployment data continues to disappoint we may begin to see more speculation about the risk of a double dip recession for the US economy. The February unemployment rate is expected to rise by 0.1% to 9.8% with nonfarm payrolls expected to drop by 50k. The consensus on the nonfarm payroll ranges from 100k to -150k.

Daily Forex Report - USD lower, service PMI expands at best pace in two years

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• USD: Lower, ADP employment as expected, services PMI beat expectations, stocks rally
• JPY: Higher, Japan’s finance minister says the government and BOJ will combat deflation
• EUR: Higher, Greece announces extra austerity measures, retail sales and PMI weaken
• GBP: Higher, stronger than expected consumer confidence & PMI, uncertainty about the Prudential AIG deal
• CAD and AUD: AUD & CAD higher, Australian GDP strong, commodity prices rally

Overview  
The USD traded mixed in reaction to report that Greece has decided to take extra austerity measures to reduce its budget deficit. Greece plans to cut its deficit by a total of €4.8bln. The new Greek budget plan generates hope that the Greek fiscal crisis will be contained and that Greece will not default on its debt. EUR initially rallied in reaction to the Greek budget news but investors remain cautious and EUR gains were limited. Investors want to see if the Greek budget plans lead to EU solidarity and a plan to aid Greece. Greek officials said they will go to the IMF if the EU fails to give support. EUR upside was also limited by report of weaker than expected EU retail sales and services PMI. GBP traded higher for the first time in six days supported by report of improving consumer confidence and stronger services PMI. Commodity currencies were mixed with the AUD underperforming despite report of strong Australian Q4 GDP. CAD continues to outperform. JPY traded at its highest level since last December versus the USD supported by mixed risk sentiment and a statement from Japan’s finance minister that Japan is taking efforts to defeat deflation. US jobs data was encouraging. Challenging Gray said that February job cuts were at their lowest levels since February 2006. ADP employment declined by the smallest since last February. ADP says jobs growth may return next month for the first time in two years. ADP says the service and manufacturing sector added jobs last month. February non-manufacturing PMI came in stronger than expected posting its fastest growth in two years. US equity markets rallied to the day’s highs after the release of the non-manufacturing PMI and the USD traded lower. The USD traded to a new low for the day in reaction to an IMF statement the Greek budget plan is very strong.

Focus turns Thursday’s ECB and BOE policy meetings and Fridays release of US unemployment. The ECB is expected to remain on hold and there is uncertainty about whether the BOE will maintain its current level of asset purchases. US February unemployment is expected to post a modest rise with nonfarm payrolls declining by 50k.

Today’s US data:
ADP private-sector employment fell by 20k in February. January ADP employment was revised to -60k from -22k. The ADP report was in line with expectations. February non-manufacturing PMI rose to 53, a reading of 51 was expected

Upcoming US data:
On March 4th initial jobless claims for week ending 02/27 will be released expected at 490k compared to 496k last month. Q4 productivity, unit labor costs, January pending home sales and factory orders will also be released on March 4th. Q4 productivity is expected unchanged at 6.2%, unit labor costs are expected unchanged at -4.4%, factory orders are expected unchanged at 1% and pending home sales are expected at 98.4 compared to 96.6 last month. On March 5th February unemployment and nonfarm payrolls will be released along with January consumer credit. The unemployment rate is expected to rise 0.1% to 9.8%, nonfarm payrolls are expected unchanged at -50k and consumer credit is expected at -3.1bln compared to - 1.7bln last month.

JPY
JPY traded at its highest level versus the USD since last December supported by a statement from Japan’s finance minister that Japan is taking efforts to defeat deflation. JPY was also supported by mixed risk sentiment as equity markets trade sideways in Europe and higher in the US. JPY gains were limited by selling cross trade to European currencies with the EUR finding moderate support from the announcement of new Greek austerity measures and GBP supported by report of improving UK consumer confidence and stronger UK services PMI. The only economic data released in Japan today was report the January cash earnings rose by 0.1%. This marked the first rise since May of 2008. The cash earnings report follows yesterday’s report of an unexpected drop in Japan’s unemployment rate. These reports suggest that Japan’s domestic economy is strengthening. Recent JPY strength is attributed to gains versus European currencies sparked by concern about debt default risks in Europe, repatriation flows ahead of Japan’s fiscal year which ends on March 31st and rising risk aversion sparked by uncertainty about the global recovery. The IMF says JPY is line with fundamentals.

Key technical levels to watch in USD/JPY include support at 88.00 with resistance at 89.51 the February 26th high.

EUR
EUR traded higher supported by report that Greece has decided to take extra austerity measures to reduce its budget deficit totaling $6.5bln. The Greek plan to reduce its deficit generates hope that Greece will not default on its debt and that the size of the austerity measures will encourage the EU to agree to agree an aid plan for Greece. The Greek PM said that Greece may go to the IMF if the EU fails to give increased support. Should Greece seek IMF aid it could increase tensions between Greece and the EU and revive concern about the risk of a breakup of the European Union. EUR gains were partly limited by investor caution about the impact of the Greek budget plan as trade awaits EU reaction to the budget reduction plan. EUR gains were also limited by weaker than expected EU economic data with January retail sales reported to have declined by 0.3% in February the services PMI was revised down to 51.8 from 52 in the flash report. EUR re-rallied after the release of the ADP employment report which suggests that the US may begin to post jobs growth for the first time in two years next month. The ADP report contributes to the slight improvement in risk appetite. Focus turns to Thursday’s ECB policy meeting. No policy change is expected as the ECB is restricted by concern that the sovereign debt risk in Europe will be a drag on the EU recovery and EU inflation remains subdued. EUR remains vulnerable to concern about EU sovereign debt risk and ECB policy outlook.

ECB policy meeting will be held on March 4th, no change is expected.

The technical outlook for the EUR is negative. Expect EUR support at 1.3435 the March 2nd low with resistance at 1.3693 the February 23rd high.

GBP
GBP traded higher and rallied for the first time in six days supported by report of improving UK consumer confidence, stronger services PMI data and uncertainty about the Prudential AIG deal. UK February consumer confidence rose to 80 from 74. UK February services PMI rose to 58.4 from 54.5 last month. The UK service PMI expanded at its fastest pace since 2007. Part of yesterday’s sharp selloff in GBP was attributed to news that Prudential made a bid for AIG’s Asian insurance operation. The purchase would require significant short-term USD demand versus the GBP. If the deal fails it would reduce the need for selling of GBP for the merger. GBP traded sharply lower Tuesday pressured by the latest UK election polls which suggest that the UK may be faced with a hung parliament and may have its first minority government since 1974. A hung parliament may prevent the UK from taking credible action to reduce the UK deficit. Rating agencies have put the UK on notice that if credible action is not taken to reduce the UK deficit the UK AAA sovereign debt rating is at risk or downgrade. Analysts at Citigroup warn that if the UK election ends up producing a minority government that UK bond yields may rise sharply. This week’s main focus will be Thursday’s BOE policy meeting. The BOE is expected to hold rate policy unchanged and may consider expanding quantitative ease. Concern about the UK government debt outlook and uncertainty about the UK’s recovery may encourage the BOE expand quantitative ease. Last week a number of BOE officials including BOE King said the BOE may expand quantitative ease if needed. GBP remains vulnerable to concern about the rising UK budget deficit, the UK recovery and speculation that the BOE may be considering expanding quantitative ease. It’s a close call whether the BOE will elect to expand quantitative ease at Thursday’s meeting. Most analysts expect the BOE to take a continued wait and see approach leaving the door open for more quantitative ease if necessary.

BOE policy meeting will be held on March 4th, no policy change is expected but there is increased pressure on the BOE to expand quantitative ease.

The technical outlook for GBP is mixed as GBP trades back above 1.5000. Expect near-term support at 1.4960 the March 3rd low with resistance at 1.5205 March 2nd high.

CAD
CAD traded higher supported by last weeks week’s report of stronger than expected Canadian GDP and speculation that he BOC has made a modest shift in monetary policy. Last Friday Canada reported that Q4 GDP rose by 5%. This marked the fastest Canadian GDP rise since Q3 2000.  Tuesday the BOC elected to hold rate policy steady as expected and reaffirmed its commitment to maintaining record low yields until June 2010. The BOC however dropped language from its policy statement that inflation risks were tilted to the downside. In dropping this language the BOC appears to be signaling a slightly less dovish policy bias. Although the BOC gave no indication that it plans an earlier than expected rate hike, change in the policy statement language in regard to inflation is a mild positive for the CAD. CAD is also supported by firmer crude oil prices as crude trades back above $80 a barrel and improving risk sentiment has Greece takes action to reduce its deficit. Focus turns to Thursday’s release of Canada’s budget. Canada is expected to forecast a deficit of less than 3% of GDP and confirm relatively strong financial conditions in Canada. Canada’s fiscal outlook stands in stark contrast to rising fiscal deficits in Europe, Japan and the US.

On March 4th January building permits, Ivey PMI and Canada’s budget will be released. Building permits are expected at 1% and the PMI is expected at 57.

The technical outlook for CAD is positive as USD/CAD trades below 1.0500. Look for near-term support at 1.0249 the January 19th low with resistance at 1.0443 the March 2nd high.

AUD
AUD traded mixed despite positive Australian economic data, a modest uptick in risk sentiment and stronger commodity prices. As best we could tell AUD was pressured by a large sell order from an Asian bank an uncertainty about RBA policy. Australia’s Q4 GDP rose by 0.9%. Although the GDP rise was in line with expectations the GDP report was relatively strong. In addition, February new vehicle sales were reported to have risen by 9.8%. Tuesday the RBA hiked interest rates 25bps to 4%. In the statement accompanying the RBA rate hike the RBA appeared to have a balanced outlook towards inflation, growth and future policy decisions. This has sparked speculation that the RBA may pause its rate hike cycle in April. Today’s strong Australian GDP and vehicle sales report would tend to support arguments in favor of an April rate hike but uncertainty about near-term direction of RBA policy appears to be limiting demand for the AUD. In its policy statement the RBA made reference to the credit risks facing Europe. RBA concern that European credit risk may be a drag on global growth could be a limiting factor on the RBA’s decision to hike rates again in April. RBA watcher McCrann that the RBA is likely to pause its rate hike cycle in April. McCrann however still expects the RBA to hike rates to 5% by year end. AUD price direction will focus on risk sentiment in the direction of equity markets.

On March 4th January trade balance will be released expected at -2.5bln compared to -2.25bln last month.

The technical outlook for the AUD is positive as the AUD trades above 9000. Expect AUD support at 8935 the March 1st low with resistance at 9093 the January 25th high.

US Morning Notes - USD lower, hope that the Greek crisis will be contained

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FX Highlights

• The USD is trading mixed with light selling pressure attributed to speculation that Greece will not default on its debt, Reuters reports that Greece has decided to take extra austerity measures totaling $6.5bln, Greece may turn to the IMF if the EU fails to give support, EUR rallied in reaction to the announcement of Greek austerity measures, EUR gains were limited by soft retail sales and PMI data and investor caution about the Greek budget plan, GBP supported by report of improving consumer confidence, stronger services PMI and uncertainty about the Prudential AIG deal, AUD traded lower despite strong Australian Q4 GDP
• Focus turns to today’s release of US ADP employment and non-manufacturing ISM
• Greece plans to cut civil service pay and raise the sales tax, the Greek cabinet agrees to cost cuts totaling $6.5bln(€4.8bln), S&P says it is less pessimistic on Greece
• Australia’s Q4 GDP rose by 0.9%, February new vehicle sales rose 9.8%, AUD lower
• Japan’s Finance Minister Kan says Japan is taking efforts to defeat deflation, JPY trades at its highest level since December
• UK February consumer confidence rose to 80 from 74 last month, February BRC shop prices rose 1.7%, February services PMI rose to 58.4 from 54.5 last month, UK service PMI expanded at its fastest pace since 2007, GBP higher
• EU January retail sales declined by 0.3%, February services PMI revised down 51.8 from 52, EUR higher
• Fed Kocherlakota says monetary policy must be attuned to worst case scenario and he sees a subdued recovery with growth near 3% over the next two years and unemployment will remain above 8% by the end of next year, he expects inflation to remain subdued, he sees low odds of the creation of a global currency
• Challenger Gray says job cuts fell 41% from January, February job cuts were 77% lower than a year ago, employers cut 42,090 jobs in February, job cuts at the lowest level since February 2006
• US equity markets set to open mixed, European equities mixed, Nikkei closed 31 points higher

Upcoming Events

• US - Wednesday, February ADP employment will be released expected at -50k compared to -22k along with February non-manufacturing ISM expected at 51 compared to 50.5 last month
• CAN - Wednesday, no major economic data is due for release from Canada today

EU Morning Report - Markets awaiting further deficit cuts of up to $6.5 (Eur4.8 bln) bln in Greece!

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Markets awaiting further deficit cuts of up to $6.5 (Eur4.8 bln) bln in Greece!

•  The session yesterday saw a weakening dollar across the board as no major financial data releases were due and focus was on the GBP and EUR. The DJIA initially gained 54 pts and then immediately gave up some of those gains to close flat. Oil and gold also gained yesterday with Oil hitting $79.69 and XAUUSD touching $1136.50 oz. In other developments we had rhetoric coming from Kansas City Fed president Hoeing saying that zero rates are unsustainable and that lower for longer could cause problems in the future. The 2year US yield traded at the 0.8% support which also helped to keep the USDJPY grounded for most of the session. USDJPY price action yesterday was between 89.36 - 88.54.
•  In Europe the Greek Prime Minister George Papandreou said he will announce further deficit cuts today. The cuts are reported to be as much as $6.5 billion and following the news markets across the board remained elevated on hope of some good news. EU CPI yesterday was 0.9% year on year which beat expectations of 0.7%. On a more technical perspective the record short sellers currently betting against the Euro are likely to be nervous today ahead of Papandreou’s budget cuts. Stops are reported to lay around 1.3690 - 1.3710 and if these levels are hit we can expect significant short covering. EURUSD price action yesterday was between 1.3433 - 1.3653
•  In Canada yesterday we had the monthly policy rate decision which remained unchanged at 0.25%. The rhetoric which followed the decision came across as hawkish as references to ”having flexibility at low rates” were left out. Overall the USDCAD traded lower to 1.0306.
•  Today’s financial calendar will release Germany’s retail sales and PMI services reports both of which are expected to decline. In the US the highlight of the day will be the ADP employment report which is expected to show a loss of 20,000 jobs for February. ISM non manufacturing is also out today with a slight improvement in the index expected.

 Currency to watch out for: EURUSD & USDJPY

• § The EURUSD pivot point is at 1.3685 with a preference to enter into short positions at 1.3675
• § The USDJPY pivot point is at 89.25 with a preference to enter short positions at 89.20

 Today’s calendar and market movers:

• § Germany Retail sales for January expected to drop by -0.4%
• § Euro Zone PMI services for January expected to fall to 52
• § United States ADP National Employment for February expected to fall by -20K jobs

 Equity Markets:

•  US equities closed positive yesterday with the DJIA and the SP500 closing 0.02% and 0.23% respectively.  The European bourses were positive yesterday with the FTSE up 1.45 % the DAX and the CAC closing at 0.00% and 1.12% respectively.  The NIKKEI and the HSI at the time of writing is 0.31% and 0.08% respectively.

Daily Forex Outlook - GOLD hits record high against EURO and GBP

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CURRENCY TRADING SUMMARY - 3rd March (00:30GMT)

U.S. Dollar Trading (USD) was softer across the board after downside action on the Euro and GBP abated and commodities rallied in the US session. Stock markets struggled to hold gains but the damage to the USD was already done and fresh weakness can not be ruled out as positive sentiment prevails. In US stocks, DJIA +2 points closing at 10405, S&P +2 points closing at 1118 and NASDAQ +7 points closing at 2280. Looking ahead, February ADP employment forecast at -15k vs. -22k previously. Also released, February ISM Services PMI rose to 51 vs. 50.5 previously.

The Euro (EUR) hit new year lows under 1.3450 but then was bought for the rest of the day on positive developments from Greece. The Greece PM looking to sure up support for fresh Greek debt issuance stated he would be making ‘Brave Decisions’. Overall the EUR/USD traded with a low of 1.3459 and a high of 1.3659 before closing at 1.3610. Looking ahead, German Retail Sales are forecast at -0.5% vs. 0.9% previously.

The Japanese Yen (JPY) crosses did well in the ‘risk on’ environment but late USD weakness saw the the USD/JPY break down to fresh 2010 lows near 88.60. EUR/JPY found solid support under Y120 and could retrace if the Eurozone Sentiment improves again today. Overall the USDJPY traded with a low of 88.54 and a high of 89.39 before closing the day around 88.75 in the New York session.

The Sterling (GBP) encountered weakness at the start of Europe but this was contained and the pair rallied with the Euro up to 1.5000 resistance. EUR/GBP resumed its uptrend and closed at the 0.9100 level. Overall the GBP/USD traded with a low of 1.4852 and a high of 1.4992 before closing the day at 1.4980 in the New York session. Looking ahead, Service PMI is forecast at 55 vs. 54.5 previously.

The Australian Dollar (AUD) found support from the rise in Interest Rates from the RBA meeting yesterday as the central bank increased by 0.25% to 4.0%. Some traders were quick to take profit however as the statement declined to comment on the pace of further rate hikes this year. Strength was seen in the US session on the back of Gold’s move higher. Overall the AUD/USD traded with a low of 0.8957 and a high of 0.9060 before closing the US session at 0.9035. Looking ahead, Q4 GDP is forecast at 0.9% vs. 0.2% previously.

Oil & Gold (XAU) broke through resistance at $1130 as the bulls took control once again. Overall trading with a low of USD$1114 and high of USD$1138 before ending the New York session at USD$1114 an ounce. Crude Oil toyed with the $80 a barrel level as the Dollar weakened. Crude Oil was up +$0.91 ending the New York session at $79.68.

TECHNICAL COMMENTARY

Euro - 1.3610

Initial support at 1.3424 (May 18 low) followed by 1.3405 (0.618 of 1.2330-1.5144). Initial resistance is now located at 1.3692 (Feb 23 high) followed by 1.3788 (Feb 17 high)

Yen - 88.75

Initial support is located at 88.56 (Feb 4 low) followed by 88.25 (0.618 of 1.2330-1.5144). Initial resistance is now at 89.50 (Feb 26 high) followed by 90.36 (Feb 23 high).

Pound - 1.4960

Initial support at 1.4784 (Mar 1 low) followed by 1.4704 (April 30 low). Initial resistance is now at 1.5209 (Mar 1 high) followed by 1.5317 (Feb 26 low).

Australian Dollar - 0.9035

Initial support at 0.8936 (Mar 1 low) followed by the 0.8863 (Feb 26 low). Initial resistance is now at 0.9071 (Feb 23 high) followed by 0.9093 (Jan 25 high).

Gold - 1133

Initial support at 1111 (Mar 1low) followed by 1104 (Feb 26 low). Initial resistance is now at 1137 (Mar 2 high) followed by 1141.78 (Jan 20 high).

Oil - 79.60

Initial support at 78.00 (Intraday Support) followed by 77.00 (Intraday Support). Initial resistance is now at 80.00 (Intraday Resistance) followed by 82.50 (Intraday Resistance).

Special FX Report - EU debt crisis may spread – Is Spain next?

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Modest stability returned to the Forex markets Tuesday as investors await Wednesday’s release of the Greek budget plan and austerity measures. There is speculation that a credible austerity plan from Greece would increase the likelihood of EU aid to Greece. This could temporarily reduce investor concern about sovereign debt risks in Europe but focus may soon shift to fiscal risks in Spain. Last Friday S&P warned that weak growth and rising unemployment in Spain will limit the government’s plan to curb its budget deficit. S&P said it will keep its negative outlook for Spain’s credit rating. S&P’s current credit rating for Spain is AA+. According to S&P, Spain’s government deficit will likely remain above 5% and the debt burden may hit 80% of GDP by 2012. S&P said that it may be difficult for Spain to boost its domestic economy without increasing government spending. Spain could try and boost growth by shifting focus to exports. According to S&P the rigid labor market in Spain makes shifting to export led growth difficult. In addition, S&P warned that the recent significant decline in asset prices particularly in the Spanish housing market increases the risk to the Spanish banking sector. Rising unemployment, weak housing market and strains on the Spanish banking sector point to weak growth outlook for Spain. S&P expects Spain’s economy to grow by 0.6% a year between 2010 and 2013. The weak outlook for Spanish growth will make it difficult for the Spanish government to curb its budget deficit.

Spain’s economy is the fifth largest economy in the EU. Spain’s economy has been weakening with GDP contracting for the last four quarters. The unemployment rate has risen to 19%. The Spanish government increased deficit spending to try and boost Spain’s economy. Spain’s budget debt ratio is 11.4% of GDP. The economic and fiscal troubles facing Spain illustrate how European monetary union makes it difficult for many of the EU countries to tackle economic problems. The EU stability pact requires its members to seek a 3% GDP debt ratio. The stability pact makes it hard for countries like Spain to boost growth by increasing spending because of pressure to reduce government deficits. In addition, by joining EU and adopting the EUR Spain and other EU countries have given up autonomy and cannot devalue their currencies to increase competitiveness. Because Spain is now under the ECB umbrella Spain cannot independently lower interest rates or print money to try and boost growth. Because stability pact restrictions and constraints of the single currency (the EUR) Spain has been forced to increase its deficit spending to boost the economy. Spain will need to sell more bonds to cover its deficit. The recent turmoil in the Greek bond market makes it harder and more costly for the Spanish government to raise capital. The price to ensure against Spanish debt default in the credit default market has risen sharply over the last few months.

Spain’s economy is twice the size of Greece. According to S&P, Spain’s tax base has been closely tied to the real estate sector with half of total tax revenue coming from real estate. Spain’s real estate market has collapsed as byproduct of the global financial crisis. Lower tax revenue and rising unemployment are two of the biggest challenges facing Spain. Spain has a rigid and inflexible labor market because of strong unions. This makes it more difficult for Spain to try to grow its economy and increase revenue to reduce its deficit. One drastic solution Spain may consider to deal with its fiscal deficit and economy is leaving European Union. There has been a great deal of speculation whether Greece would consider leaving EU and if this type of speculation emerges in Spain it could contribute to greater risk of a financial crisis in the peripheral European nations. At this writing its remains uncertain if Greece or Spain will exit the EU. Spain however may be the next EU nation on the default risk radar screen and if Spain is next it would increase fear that the EU debt crisis may spread.

Daily Forex Report - USD mixed, Hoenig says zero rates not sustainable

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• USD: Lower, risk appetite improves as stocks rally, hope for Greek aid
• JPY: Higher, unemployment unexpectedly declines, government call for the BOJ to target inflation/buy JGB’s
• EUR: Lower, supported by short covering ahead of Wednesday’s Greek budget announcement
• GBP: Lower, construction PMI falls, election polls point to a hung parliament
• CAD and AUD: AUD & CAD higher, RBA rate hike, strong retail sales, BOC refers to higher CPI

Overview  
The EUR and GBP made new lows for the year in overseas trade pressured by concern about sovereign debt risk in peripheral European nations and UK debt. Despite ongoing uncertainty about the Greek fiscal outlook there was limited follow through selling of the EUR and the USD traded lower in the US session. Greece is expected to outline its budget plans Wednesday. Anticipation that Greece will announce significant austerity measures sparked a short covering rally in the EUR. If Greece takes credible action to reduce its deficit it will increase the likelihood of EU aid for Greece. GBP continued to underperform. The latest UK election polls point to a hung parliament which generates concern that the UK government may not have the political backing to cut the UK deficit. The AUD traded higher supported by the RBA’s 25bps rate hike. CAD continues to rally in reaction to yesterday’s release of stronger than expected Canadian Q4 GDP and a slightly less dovish bias from the BOC. The BOC elected to hold rate policy unchanged as expected but dropped language in its policy statement that inflation risk is “tilted to the downside.” JPY edged higher supported by better than expected January unemployment and report that Japan’s finance minister calls on the BOJ to consider targeting inflation. USD experienced light short covering ahead of tomorrow’s Greek budget plan announcement. USD downside was limited by hawkish comments from the Feds Hoenig. Hoenig said that zero rates are not sustainable and the Fed must be prepared to hike rates while unemployment rate is still high. Hoenig is seen as a minority voice on the FOMC but his comments helped to limit today’s USD selloff.

Focus turns Thursday’s ECB and BOE policy meetings and Fridays release of US unemployment. The ECB is expected to remain on hold and there is uncertainty about whether the BOE will maintain its current level of asset purchases. US February unemployment is expected to post a modest rise with nonfarm payrolls unchanged from last month.

Today’s US data:
There was no top-tier US economic data released in today’s trade. Domestic auto sales were mixed.

Upcoming US data:
On March 3rd February ADP employment will released expected at 10k compared to -22k last month. February manufacturing ISM Index will also be released on March 3rd expected at 51 compared to 50.5 last month. On March 4th initial jobless claims for week ending 02/27 will be released expected at 490k compared to 496k last month. Q4 productivity, unit labor costs, January pending home sales and factory orders will also be released on March 4th. Q4 productivity is expected unchanged at 6.2%, unit labor costs are expected unchanged at -4.4%, factory orders are expected unchanged at 1% and pending home sales are expected at 98.4 compared to 96.6 last month. On March 5th February unemployment and nonfarm payrolls will be released along with January consumer credit. The unemployment rate is expected to rise 0.1% to 9.8%, nonfarm payrolls are expected unchanged at -20k and consumer credit is expected at -3.1bln compared to - 1.7bln last month.

JPY
JPY edged higher supported by report of an unexpected drop in Japan’s unemployment rate and in reaction to call from Japan’s Finance Minister Kan for the BOJ to consider targeting inflation. Last Friday Japan reported that CPI fell by 1.3% in January. This marks the 11th straight monthly decline for Japan’s CPI confirming continuing deflationary pressure in Japan. Japan’s January unemployment rate declined to 4.9%, a reading of 5.2% was expected. January household spending however fell by 1.3%. Japan’s Finance Minister Kan said that the decline in the jobless rate was a good sign and he wants Japan to get out of deflation this year. Reuters reports that the Japanese government would like the BOJ to consider buying JGB’s as a way to boost growth and combat deflation. Recent JPY strength is attributed to gains versus European currencies sparked by concern about that default risks in Europe, repatriation flows ahead of Japan’s fiscal year which ends on March 31st and rising risk aversion sparked by uncertainty about the global recovery. The IMF says JPY is line with fundamentals.

On March 3rd Q4 capital spending will be released expected at -18.4% compared to -24.8% last month

Key technical levels to watch in USD/JPY include support at 88.55 the February 4th low with resistance at 90.33 the February 25th high.

EUR
EUR traded at new low for the year in overseas trade than rebounded to trade higher in the US session. The EUR has been pressured by concern about sovereign debt risk in Greece. Former ECB official Issing says that Greece should go to the IMF not the EU for aid. The WSJ reports that Greece will outline its proposed budget cuts Wednesday. If the Greek budget cuts are seen as credible the announcement could spark a relief rally in the EUR. EUR traded as low as 1.3435 after the release of an unexpected decline in EU inflation. EU February inflation dips to 0.9%, compared to 1% rise last month. Concern about sovereign debt risk in Europe coupled with weaker EU inflation will encourage the ECB to maintain steady rate policy at Thursday’s ECB policy meeting. Lack of inflationary pressure in the EU would allow the ECB cover to maintain a dovish bias. The IMF says that the EUR is closer to fair value but there is mixed opinion about where the EUR may be headed with analysts at Deutsche Bank suggesting the EUR could decline to 1.2750 pressured by speculation that the Fed will hike rates before the ECB. Analysts at Royal Bank of Scotland however suggest that the EUR could rise to 1.4000 if the EU announces a plan to aid Greece. There is significant debate as well as to whether the record short spec position in the EUR on the IMM makes the EUR vulnerable to a technical correction or if the spec positioning is confirmation of increasing negative sentiment towards and the negative sentiment will continue to pressure the EUR. Focus turns to Thursday’s ECB policy meeting. No policy change is expected as the ECB is restricted by concern that the sovereign debt risk in Europe will be a drag on the EU recovery. EUR remains vulnerable to concern about EU sovereign debt risk and ECB policy outlook.

On March 3rd EU February services PMI will be released expected at 52.3 compared with 52.5 last month along with January retail sales. January retail sales are expected at 0.2% compared to flat last month. ECB policy meeting will be held on March 4th, no change is expected.

The technical outlook for the EUR is negative. Expect EUR support at 1.3435 the March 2nd low with resistance at 1.3693 the February 23rd high.

GBP
GBP traded at a new low for the year pressured by UK election polls which point to a hung parliament and in reaction to report of an unexpected decline in UK construction PMI. UK election polls released Monday suggest increasing risk that the UK Parliament will be facing gridlock and the new government will not have the political backing to cut the UK deficit. Rating agencies have put the UK on notice that if credible action is not taken to reduce the UK deficit the UK AAA sovereign debt rating is at risk for downgrade. Analysts at Bank of Tokyo have cut their GBP forecast to 1.4000 because of the election polls show the UK in may find itself with a minority government. UK’s Mandelson said that deficit cuts will come only when the UK the economy returns to secure growth. UK February construction PMI dipped to 48.5 from 48.6 last month. The weaker UK construction PMI follows Monday’s report of weaker than expected mortgage approvals and lending data. These reports may encourage the BOE to consider expanding its asset purchase program to try and boost UK growth. This week’s main focus will be Thursday’s BOE policy meeting. The BOE is expected to hold rate policy unchanged and may consider expanding quantitative ease. Concern about the UK government debt outlook and uncertainty about the UK’s recovery may encourage the BOE expand quantitative ease. Last week a number of BOE officials including BOE King said the BOE may expand quantitative ease if needed. GBP remains vulnerable to concern about the rising UK budget deficit, the UK recovery and speculation that the BOE may be considering expanding quantitative ease. It’s a close call whether the BOE will elect to expand quantitative ease at Thursday’s meeting. Most analysts expect the BOE to take a continued wait and see approach leaving the door open for more quantitative ease if necessary. This GBP downside was limited by a rebound in risk appetite as global equity markets rally.

On March 3rd February consumer confidence index will be released expected at 68 compared to 69 last month along with February services PMI expected at 54 compared to 54.5 last month. BOE policy meeting will be held on March 4th, no policy change is expected but there is increased pressure on the BOE to expand quantitative ease.

The technical outlook for GBP is negative as GBP trades below 1.5000. Expect near-term support at 1.4702 the April 30th low with resistance at 1.5000 the range breakout.

CAD
CAD traded higher supported by Monday’s report of stronger than expected Q4 GDP growth, firmer equity markets and a slightly less dovish bias by the BOC. Canada reported that Q4 growth was 5%. The trade had expected a reading of 4.1% for Canada’s Q4 GDP. The Canadian GDP rise was the strongest quarterly growth since Q3 2000 supported by strong consumer spending and an uptick in exports. Exports rose 3.7% and consumer spending rose by 0.9%. The BOC elected to hold rate policy steady as expected at 0.25%. CAD extended its gains after the BOC policy announcement. In its policy statement accompanying the rate decision the BOC made reference to the fact that core inflation has been slightly firmer than unexpected and the BOC reaffirmed its commitment to maintain the current level of interest rates until the end of the second quarter 2010. The BOC said that the increase in core inflation reflected  a higher level of economic activity and the risk inflation is  balanced with the main downside risk a more protracted global recovery and strength of the CAD. The BOC statement dropped language that inflation risk is “tilted to the downside.” The dropping of this language sent the CAD to new highs for the day in reaction to a less dovish bias by the BOC. Canada will release its federal budget on March 4th. Canada is expected to forecast a deficit of less than 3% of GDP and confirm relatively strong financial conditions in Canada. Canada’s fiscal outlook stands in stark contrast to rising fiscal deficits in Europe, Japan and the US.

On March 4th January building permits and Canada’s budget will be released.

The technical outlook for CAD is positive as USD/CAD trades below 1.0500. Look for near-term support at 1.0249 the January 19th low with resistance at 1.0443 the March 2nd high.

AUD
AUD traded higher supported by today’s RBA hike and in reaction to the report of strong Australian retail sales. The RBA hiked rates 25bps to 4% as expected. In the statement accompanying the rate hike the RBA said that the global recovery is growing and Asian growth is strong. The RBA went on to say that unemployment rate has peaked and that it is appropriate for rates to rise closer to the average. The RBA also noted some of the credit risks facing Europe and that recovery in some countries may be more difficult. According to the RBA sovereign debt troubles in Europe could hurt the global recovery. Australian January retail sales rose by 1.2%. The strength of the retail sales was partly offset by report of a 7% decline in Australian building approvals. Building approvals were expected to have risen by 0.8%. Q4 public spending rose by 3.8%. AUD gains were partly limited by the report weaker buildings approval data and in reaction to a statement from RBA watcher McCrann that the RBA is likely to pause its rate hike cycle in April. McCrann however still expects the RBA to hike rates to 5% by year end. AUD price direction will focus on risk sentiment in the direction of equity markets.

On March 3rd Q4 GDP will be released expected at 0.3% compared to 0.2% last quarter. On March 4th January trade balance will be released expected at -2.5bln compared to -2.25bln last month.

The technical outlook for the AUD is positive as the AUD failed traded above 9000. Expect AUD support at 8935 the March 1st low with resistance at 9093 the January 25th high.

US Morning Notes - USD range bound, AUD supported by RBA rate hike

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FX Highlights

• The USD is trading range bound despite continued uncertainty about Greece, former ECB official Issing said that Greece should go to the IMF for aid not the EU, WSJ reports that Greece will outline its budget cut plans Wednesday, EU inflation dipped in February, the RBA hikes rates 25bps as expected, AUD initially rallied after the rate hike than weakened on profit-taking, GBP traded lower pressured by ongoing concern about UK budget deficit and report of weaker than expected UK construction PMI, UK election polls continue to point to a hung parliament which generates concern that the UK government may not have the political backing to cut the deficit, Japan’s Finance Minister Kan suggests that the BOJ target inflation, Japan’s unemployment rate dropped in January
• Focus turns to today’s release of US domestic auto sales and BOC policy announcement
• The RBA raised its overnight rate 25bps to 4%, RBA policy statement was balanced, Australia’s Jan retail sales rose by 1.2%, January building approvals declined by 7%, Q4 public spending rose by 3.8%, AUD higher
• Japan’s January unemployment falls to 4.9%, a 5.2% reading was expected, January household spending declined by 1.3%, JPY higher
• EU February inflation rose by 0.9% January PPI rose by 0.7%, EUR higher
• UK February construction PMI dips to 48.5 from 48.6 last month, GBP lower
• Fed’s Lacker says there is only a relatively minor risk of a double dip recession in the US
• Head of the IMF says one day the IMF may provide a global reserve asset, says EUR closer to fair value, JPY in line with fundamentals, expects 3.9% global GDP growth in 2010 and 4.3% in 2011
• Fed’s Kohn will resign effective June 23rd, he was considered a dove on policy, there are three Fed Governorships open and filling of these vacancies will be important to the breakdown of number of doves and hawks on the Fed policy board
• US equity markets set to open higher, European equities mixed, Nikkei closed 50 points higher

Upcoming Events

• US - Tuesday, February domestic auto sales are due for release
• CAN - Tuesday, no major economic data is due for release from Canada today, BOC rate announcement, BOC policy is expected to remain unchanged