FX Daily Planet: Sydney/Asia Open

FX Daily Planet: Sydney/Asia Open

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View for the day

Positive news surrounding Greece has helped to EUR to push about 0.7% higher against the USD today. The Greek government announced additional austerity measures to the tune of EUR4.8bn in the European morning session. The measures were in line with the media leak and include 2% pt hike in VAT, a cut in civil-servants bonus payments, and a freeze on pensions. If achieved, this would keep Greece on target to cut its deficit by 4% cut this year. The measures are moderately good news for EUR. The fact that the government has acted quickly to consider fresh cuts, as demanded by the EU, demonstrates that it appreciates the severity of the situation and the need to keep the rest of the euro area on board. Greece knows there is no prospect of unconditional support and is hence doing what it needs to secure the prospect of conditional support. EUR/USD has become increasingly cheap over the past few weeks relative to high-frequency valuation models, reflecting the euro's failure to rally despite the recent reduction in equity vol and the 50bp tightening in the 10Y Greek-Bund spread. Together with extreme positioning in the euro, this weakness highlights the potential for a squeeze should the news flow around Greece turn slightly more positive. Separately, positive momentum from the overnight session continues to push the majors higher versus the USD, with GBP, NOK and CHF leading the way. GBP remains today’s best performing currency, still boosted likely by the much stronger than expected services PMI overnight. NZD remains today’s notable laggard, down 0.33% versus the USD and 0.5% versus AUD.

In economic news today, the ISM non-manufacturing index moved up 2pts to 53 in February. Despite this improvement, the index remains well below the manufacturing index a divergence that highlights the still narrow-based nature of the recovery. One positive note from the underlying details of the report is the employment index, which moved up a full 4pts to 48.6. The ADP employment report showed a 20k decline in February, right at expectations. Due to the survey methodology, the ADP number is likely to be relatively unaffected by the winter weather, and so is likely to be the focus of investors this month. Our economics team expects that the Friday’s release will report a 90k drop in payrolls, an estimate which factors in a 100k drop in payrolls due to weather conditions. In view of this data, and the widely anticipated weakness in payrolls due to weather problems in February, high-beta FX are likely to be well-supported in the face of all but exceptional weakness in the labor market data on Friday.

Overnight news

USD: ADP employment report showed a 20k decline in February, right at consensus (Cons: -20); Feb ISM non-mfg. (index, sa) came in at 53, better than forecast (JPM: 51.0, Cons: 51.0)

USD: Fed releases Beige Book which stated that nine of the twelve Fed districts say that economic activity has improved modestly in February. The Fed also noted that loan demand remains weak, that lending standards are tight and that banks remain cautious about making loans.

EUR: Greek Prime Minister Papandreou announced an additional EUR4.8 bn of deficit cuts. The government decided to cut civil servants’ bonus-salary payments by 30 percent, to freeze pensions and to raise the VAT to 21 percent from 19 percent,

EUR: Germany February PMI services final 51.9 vs 51.7 consensus; January retail sales 0.0%m/m vs -0.6%; February PMI services final 51.8 vs 52.0 consensus; February PMI composite final in line with expectation at 53.7; January retail sales in line with expectation at -0.3%m/m.

EUR: The European Commission President Barroso said "We have to have solidarity in the European Union"and "The concrete instruments (to aid financially distressed governments in the euro area), we will present them in due time. I should not feed this kind of speculation at this moment.”

EUR: Germany's FDP commented on Greece's deficit-cutting measures announced today, calling it as a "definitely" positive development.

GBP: February Nationwide consumer confidence at 80 vs 73 consensus; February PMI services much stronger at 58.4 vs 55.0 consensus.

SEK: 4Q current account recorded surplus of SEK40.8bn vs SEK54.0bn.

Today’s watchlist (all times GMT; +11hrs for Sydney, +9hrs for Tokyo, -5hrs for New York)

AUD: Trade balance (AUD, bn) for January (JPM:-1.5, Cons: -1.6) @ 00:30

JPY: BoJ board member Noda speaks @ 01:30

IDR: BI rate announcement (JPM: -1.5, Cons: -1.5) @ 06:00

MYR: BNM rate announcement (Cons: 2.25) @ 10:00

Overnight price action

FX: The majors are broadly higher against the USD, with GBP, NOK and CHF leading the way.

FX vol: Short maturity vols are lower to the tune of 0.25 to 0.5vols.

Commodities: oil is up 1.4%, and gold is up slightly.

Bonds: Yields are higher by 2bp across the curve. 2/10s are 282bp.

Equities: US equities are about flat in afternoon trading.

Technical View for the day

Yesterday’s bearish shift for the USD affirmed the short term corrective phase while arguing for additional weakness. Importantly, the price action still reflects a corrective bias which is consistent with the view that the recent retracement is within the context of the prevailing medium term trends. Still, we are closely monitoring key near term levels for signs of a more protracted corrective phase. In that regard, the setup in USD/CAD presents another critical test as the decline from last week’s high has developed an impulsive bias while positioning for a retest of the important 1.0205/35 support zone and medium term range lows. While we sense the near term setup can allow for some bounce, the risks of a downside break will remain intact against the 1.0680 resistance area particularly given the maturity of the consolidation phase, as well as the broader CAD outperformance bias. Note that NZD maintains the underperforming bias in line with the bearishly skewed range against the USD, as well as the continued break in AUD/NZD and NZD/CAD. Note the retracement in the European currencies extended through some key initial levels including the important 1.3693 recent high. In turn, we sense some additional near term retracement can develop with the focus now on the more important 1.3790/1.3850 levels Also, GBP/USD made the argument for additional corrective action particularly after holding the key 1.4860/1.4755 support zone (2009 trendline and 61.8% retracement). However, there is still little evidence of a sustained reversal at this point particularly given the corrective action on the GBP crosses including EUR/GBP and GBP/CHF. USD/JPY continued to drift lower with the violation of the 88.55 support. The focus remains on the 88.25, 61.8% retracement support as breaks here would increase the odds that a deeper retracement of the November-January rally is underway.

ENDS

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