Daily Forex Report-USD lower, stocks rise, growth currencies outperform

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• USD: Lower, improving risk sentiment, RBA rate hike speculation, diminished Greek uncertainty
• JPY: Lower, retail sales post best annual gain in 12 years, selling in cross trade
• EUR: Higher, EU economic confidence rises to a two year high, Greek bond spreads remain wide
• GBP: Higher, consumer credit rises, mortgage approvals dropped, Conservatives expand lead
• CHF: Higher, EUR/CHF rebounds from all-time low, threat of intervention
• CAD and AUD: AUD & CAD higher, hawkish comments from the RBA, firmer equities, higher crude

Overview
The USD starts the week lower pressured by improving risk appetite as equity markets firm. The improvement in risk sentiment is attributed to last weeks announcement of an EU/IMF aid plan for Greece, stronger economic data from the EU and Japan and speculation that this week’s US nonfarm payrolls will post a sharp rise. The EU/ IMF aid plan for Greece limits some of the uncertainty about Greece and reduces the risk of a Greek debt default. The head of the IMF says there is no immediate sign that Greece needs help. EU economic confidence rose to a two year high and Japan’s retail sales rose at the fastest pace in 12 years. These reports fuel optimism about the strength of the global recovery. Commodity currencies traded higher tracking the improvement in equities and firmer commodity prices. AUD traded higher supported by hawkish comments from the RBA Governor Stevens that interest rates are too low and could not remain at prior levels.  This week’s main focus will be Friday’s release of US March unemployment. Nonfarm payrolls are expected to rise by as much as 190k. Anticipation of improving US employment outlook adds today’s improvement in risk appetite. Today’s US economic data was mixed with personal income unchanged, and personal consumption in line with expectation. Bloomberg reports that analysts at Goldman Sachs have changed their negative USD bias stating that the USD is supported by low inflation, rising equities and safe haven demand sparked by the Greek fiscal crisis.

Today’s US data:
February personal income was unchanged, a reading of 0.1% was expected. February personal consumption at 0.3% as expected.

Upcoming US data:
On March 30th January Case Shiller Home Price Index will be released expected at -3.3% compared to -3.1% last month along with March consumer confidence expected at 49.5 compared to 46 last month. On March 31st March ADP employment will be released expected at 20k compared to -20k last month. Also on March 31st March Chicago PMI and factory orders will be released. The Chicago PMI is expected at 61 compared to 62.6 last month and factory orders are expected to rise by 0.5% compared to a 1.7% rise last month. On April 1st initial claims for the week ending 3/27 will be released expected at 438k compared to 442k last week along with February construction spending, the March ISM index and March domestic auto sales. Construction spending is expected to fall by 1.1% compared to a 0.6% decline last month. The ISM index is expected unchanged at 56.5. On April 2nd the March unemployment rate and nonfarm payrolls will be released. Nonfarm payrolls are expected to rise by 168k compared to -36k last month and the unemployment rate is expected unchanged at 9.7%.

JPY
JPY drifted lower pressured by improving risk sentiment and selling in cross trade. Japan’s February retail sales rose at the fastest annual rate in 12 years. February retail sales rose by 0.9%m/m and 4.2% y/y. The strong Japanese retail sales data Japan helped to fuel today’s improvement in risk sentiment. JPY weakened in cross trade to the EUR with the EUR supported by less uncertainty about the Greek fiscal outlook and report of strong EU economic confidence. GBP/JPY traded higher with GBP supported by S&P affirmation of the UK AAA credit rating and UK election polls which suggest the Conservatives are expanding their lead over the Labor Party. AUD/JPY traded over 1% higher with the AUD supported by hawkish comments from the RBA Governor Stevens. Last week, Japan reported that CPI declined for the 12th consecutive month. The CPI report confirms that deflationary pressures continue in Japan. The CPI report is likely to increase pressure on the BOJ to ease monetary policy to try and combat deflationary pressures. Today’s report of strong Japanese retail sales may make it more difficult for the BOJ to take action to combat deflation. At the March BOJ policy meeting the BOJ elected to expand its funding operation but the policy board was split over this decision with some board members stating that it’s more difficult to justify BOJ ease as the economy is improving. JPY is trading at a two-month low  versus the USD pressured by widening yield gap with the US and concern about Japan’s budget outlook. US bond yields are trading near their highest level since last June. In light of the recent easing of monetary policy by the BOJ and spike in US bond yields, yield differential is moving in favor of the USD. The widening of the US and Japanese yield gap makes the USD less attractive as a funding currency. Yield differential is emerging as a key driver for JPY trade. Japan announced a record $1trln budget for next fiscal year. The budget includes a record ¥44.3trln in new bond issues. The sharp increase in Japan’s bond issuance and budget deficit increases the risk that Japan will face a downgrade of its debt rating. Focus turns to this week’s release of Japan’s tankan business sentiment survey and US March unemployment report.

This week’s Japanese economic calendar includes the March 30th release of February household spending, unemployment and industrial output. The household spending is expected to rise by 1.4% compared to 1.7% last month. Unemployment is expected to rise by 0.1% to 5% from 4.9% last month and industrial output is expected to fall by 1.5% compared to 2.7% rise last month. On March 31st February housing starts and construction orders will be released.  Housing starts are expected to rise by 2% compared to 5.4% rise last month. Construction orders are expected at 9.1% compared to 15.7% last month On April 1st March tankan survey will be released expected -16 compared to -24 last month with CAPEX spending expected -11.5% and -13.8% last quarter.

Key technical levels to watch in USD/JPY include support at 91.75 the March 25th low with resistance at 93.80 the January 8th high.

EUR
EUR traded higher supported by diminished threat of Greek debt default and strong EU economic data. Last week’s announcement of an EU/IMF plan to aid Greece if necessary helps to reduce the imminent threat of a Greek debt default. Investors are watching the reception of today’s Greek bond auction. Despite the EU/IMF safety net for Greece there remains concern about whether Greece will follow through on plans to cut its deficit. EUR gains were limited as the spreads for the Greek bonds widened to pre EU/IMF aid plan levels generating concern that the cost of funding the Greek debt will remain high. Investors will be looking to see how upcoming Greek bond auctions are received to determine whether there’s been any change in sentiment about the Greek fiscal outlook in light of the announcement of an aid plan for Greece. EU March economic sentiment improved to 97.7 from 95.9 last month. EU economic sentiment is at its best level in two years. Improving EU economic outlook is overshadowed by EU sovereign debt risk and speculation that the ECB will remain on hold because of the potential drag the Greek debt crisis may have on the EU economic recovery. ECB’s Weber said that current interest rate levels are appropriate. Focus may shift from Greek worries to yield and growth differential. The Wall Street Journal notes that the EUR has been pressured by the Greek crisis and the EUR may experience additional selling pressure with the USD supported by the recovery in the US economy and rising US bond yields. This week’s release of US March unemployment report will be key to the outlook for the US recovery and interest rates.

On March 31st, German March unemployment will be released expected unchanged at 8.2% along with EU HICP for March expected at 1% compared to 0.9% last month. On April 1st EU March manufacturing PMI will be released expected 54.2.

The technical outlook for the EUR is negative as EUR trades below 1.3400. Expect EUR support at 1.3350 with resistance at 1.3506 the March 29th high.

GBP
GBP traded higher supported by S & P affirmation of the UK AAA credit rating and mixed UK economic data. S&P maintains its negative outlook for UK debt and affirmed the UK AAA credit rating. S&P said that it will review the UK credit rating after the general election and warned that absent a strong plan to reduce its debt UK debt rating may be at risk. The UK election is expected on May 6th. The latest election polls show the Conservatives expanding a slight lead over the Labor Party. The Conservatives have pledged to take action to reduce the UK debt. The main risk for the GBP is the possibility that the election results in a hung parliament. A hung parliament will make it difficult for the UK to take action to reduce its deficit. UK mortgage approvals declined to nine month low at 47,094 from 48,099 last month. February consumer credit rose to 0.528bln from 0.349bln last month and mortgage lending improved to 1.586bln from 1.53 6bln last month. Last week the UK reported weaker than expected inflation and stronger retail sales. Today’s report of improving consumer credit and weaker mortgage approvals will encourage the BOE to maintain steady rate policy. GDP direction will be linked to UK debt and election outlook.

On March 30th GFK consumer confidence will be released expected -13 compared to -14 last month. On April 1st March CIPS manufacturing PMI will be released expected at 56.8 compared to 56.6 last month.

The technical outlook for GBP is mixed as GBP retests 1.5000. Expect near-term support at 1.4781 the March 1st low with resistance at 1.5038 the March 24th high.

CHF
CHF traded mixed with gains limited by selling in cross trade to the EUR. The main focus of CHF trade is the EUR/CHF cross. The EUR/CHF cross traded at record low 1.4232 last week with demand for CHF attributed to safe haven flows related to Greek fiscal worries and indications that the SNB is preparing for a tightening of monetary policy. The price movement of the EUR/CHF has increased the risk of intervention but so far the SNB has refrained. One Swiss firm suggests that the CHF has made most of its gains versus the EUR. The EUR traded higher versus the CHF Monday supported by report of strong EU economic confidence and diminished worries about Greek debt  default in light of last week’s EU/ IMF plan to aid Greece. In addition, the SNB monthly says that Swiss banks are going to start to buy foreign assets to improve their balance sheets. This week’s Swiss economic calendar includes March 30th release of UBS February consumption indicator expected at 1.39 compared to 1.36 last month. On March 31st March KOF leading indicator will be released expected at 1.99 compared to 1.87 last month. On April 1st SVME purchasing manager index will be released expected 59.5 compared to 57 for last month. Expect USD/CHF support at 1.0507 the March 17th low with resistance at 1.0795 the March 10th high. Rumors are circulating that the SNB may intervene at 1.4200 in EUR/CHF.

CAD
CAD traded higher supported by firmer equity and commodity markets and improving risk sentiment. Diminished risk of imminent Greek debt default coupled with the release of strong economic data from the EU and Japan sparked demand for equities and commodities in Monday’s trade. CAD was also supported by firmer crude prices with crude oil approaching $82 a barrel. CAD is expected to remain well supported on breaks by speculation that the BOC may hike interest rates as early as June and in reaction to the improving Canadian domestic economy. CAD traded higher last week supported by hawkish comments from BOC Governor Carney. Carney said that the Canadian recovery was faster than expected and he suggested that he was open to consideration of possible rate hike as early as June 1st. The BOC has pledged to maintain low yields through June of 2010 conditional on inflation remaining in check. Canada’s core inflation rate rose to its highest level in 16 months. Canada’s February CPI rose by 0.4%, a 0.3% rise was expected. The core inflation rate rose by 2.1%. The core inflation rate is above the BOC’s 2% inflation target. The above target CPI increases the risk of an earlier BOC rate hike.  Carney suggested that the higher than expected inflation was result of transitory factors and underlying economic strength. He went on to state that BOC plan to hold interest rates low was conditional. CAD has been outperforming supported by improving Canadian domestic economic outlook and speculation that rising Canadian inflation will encourage the BOC to make an earlier rate hike. CAD should remain well supported on breaks by speculation that the BOC will hike rates before the Fed. Focus turns to this week’s release of Canada’s GDP. The trade will be looking to the GDP for confirmation that the Canadian recovery is gaining momentum. CAD direction will track the price of crude and equities.

This week’s Canadian economic calendar includes the March 30th release of February IPPI and RMPI. IPPI is expected flat and RMPI expected at -1%.On March 31st January GDP will be released expected unchanged at 0.5%.

The technical outlook for CAD is positive as USD/CAD trades below 1.0100. Look for near-term support at 1.0170 the March 25th low with resistance at 1.0304 the March 26th high.

AUD
AUD traded sharply higher supported by hawkish comments from RBA Governor Stevens. Stevens said that interest rates are too low and cannot remain at prior levels. His comments fuel speculation that the RBA will hike rates at the April RBA policy meeting. AUD gains have been limited by RBA policy uncertainty. Last week Stevens said that he sees stronger growth in Asia. His comments follow a statement from the RBA assistant governor Lowe last Thursday that interest rates will continue to rise towards normal and that waiting for improving global outlook to raise rates would be too late. The Stevens and Lowe comments increase the odds that the RBA will hike interest rates at the April policy meeting. The RBA is expected to hike rates from the current 4% level to 5% by year-end. Futures markets are pricing a 65% chance of an RBA rate hike next week. Next RBA policy meeting will be held on April 6th. The RBA is expected to hike rates 25 bps to 4.25%. AUD was also supported by improving risk sentiment as equities rise in reaction to diminished fear of an imminent Greek debt default, stronger economic data from the EU and Japan and anticipation of a strong US nonfarm payrolls report Friday.

This week’s Australian economic calendar includes the March 31st release of February building approvals expected at 3.5% compared to -7% last month along with February retail sales expected at 0.8% compared to 1.2% last month and February private sector credit expected unchanged at 0.4%. On April 1st February trade balance will be released expected at -1.63bln compared to -1.18bln last month. 

The technical outlook for the AUD is positive as the AUD rallies above 9100. Expect AUD support at 9034 the March 29th low with resistance at 9253 the March 17th high.