Easter Holidays

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11.1 G20, IMF and TALF to boost risk appetite.

Forecast (week March 15th - 20th)
EUR/USD: support @ 1.2800; resistance @ 1.3200
GBP/USD: support @ 1.3860; resistance @ 1.4300
USD/JPY: support @ 95.75; resistance @ 100.00
EUR/CHF: look for buying opportunities ±1.51
EUR/GBP: look for buying opportunities ±0.9200

This week's outlook
This weekend’s G20 meeting has been slated as a clash between the US (increased economic stimulus) and Europe (increased financial regulation) and is unlikely to resolve anything. However, the group should announce a boost to the IMF’s resources to bail-out failing countries and this should keep risk appetite buoyant. Keep tracking the equity markets throughout the week, as rising stocks will favor higher yielding currencies. Also watch the EUR/CHF rate after the SNB’s intervention and consider buying the euro if price falls to the 1.50 region because the bank could well step in again.

Calendar
US: Wednesday’s FOMC interest rate announcement (18:15) will be the big news of the week. Although there are reports of dissent in the ranks, I’m expecting the Fed to keep up recent rhetoric. The Fed is due to launch its TALF program on March 17th, expect fireworks if there is any delay. Other US data worthy of note include regional manufacturing numbers (Empire State – Monday, 12:30 and the Philly Fed – Thursday, 14:00); industrial production (Monday, 13:15); housing data (building permits and housing starts both on Tuesday, 12:30), inflation numbers (producer prices – Tuesday and consumer prices – Wednesday, both at 12:30) and Thursday’s regular new unemployment claims (12:30).

Euro zone: There’s Inflation data on Monday (consumer prices, 10:00) and Friday (German producer prices, 10:00). Tuesday’s influential ZEW economic sentiment is out at 10:00 and often moves the market, while the zone’s industrial production (10:00) rounds off the European data week.

UK: There’s more housing data out in the early hours of Monday morning (Rightmove HPI – 00:00). Wednesday sees crucial jobs data at 09:30 and the minutes of the March 5^th’s Monetary Policy Committee meeting at the same time. The CBI’s survey of the country’s top 550 manufacturers’ expectations will be released on Thursday at 11:00.

Japan: The early hours of Wednesday morning sees the release of the Bank of Japan’s monetary policy statement, while the central bank’s monthly report is published on Thursday (05:00).

Top Central Bankers: ECB President Jean-Claude Trichet will be speaking at La Tribune conference in Paris on Tuesday (19:15) and the Governor of the Bank of England will be addressing the Worshipful Company of International Bankers Dinner in London on the same evening (20:10). Fed Chairman Ben Bernanke is speaking about the financial crisis and community banking in Phoenix on Friday (16:00).

Last week's action
The week opened in the same vein as the previous week closed, with a continuing high level of risk aversion. Asian markets fell as Japan posted its first current account deficit in 13 years, triggering a 26-year low for the Nikkei 225. The gloom continued as the European session opened and EUR/USD followed stocks down, hitting the week’s low at 1.2555 at lunchtime. The euro recovered somewhat as New York opened and found support at 1.26 as the session progressed, a level that was not to be broken down for the rest of the week. Tuesday’s disappointing data out of France and Germany did little to ruffle the euro as markets soared after Citigroup Inc reported that it had actually made money in the last couple of months. The news was enthusiastically welcomed as a sign that things might not get much worse for the US banking sector and Wall Street saw its best day of 2009. Axel Weber, a member of the ECB governing council, gave the euro further support when he said that he thought 1% refinancing rates were about as low as they should go. EUR/USD tested support a shade above 1.26 a couple of times late Tuesday/early Wednesday, but rising risk appetite soon had the pair testing resistance at 1.2850. The big news on Thursday was the Swiss National Bank’s intervention to weaken the franc against the euro. The euro retested support at $1.2750 immediately after the news; rose against the greenback throughout the US session and broke through 1.29 late Thursday to hit the high of the week of 1.2956 on Friday morning. The euro closed the week at $1.2928, with traders pondering the prospect of resistance at the key psych level of 1.30.

Sterling’s fall on Monday was given added impetus by last weekend’s news that Lloyds bank would be nationalized in all but name and that Barclays could also be joining the UK government’s Asset Protection Scheme in return for shares. UK manufacturing and industrial data came in worse than expected and cable fell through the US and Asian sessions to a weekly low of 1.3663. A weak pound doesn’t seem to be giving UK trade a boost as the trade balance shrank more than expected on Wednesday. However, growing risk appetite saw sterling’s decline slow and cable tested 1.39. The Swiss National Bank’s intervention saw it fall to smidgeon above 1.37, only to rise on market optimism to break the key psychological of 1.40 as the G20 meeting opened in Southern England. The pair closed the week right on the button at 1.40 with sterling weakening against the dollar for the third week running.

10.1 UK banking fiasco could push euro to strengthen against sterling

Last week's wrap:
The euro opened the week by gapping down with the on-going atmosphere of risk aversion, disappointment over the non-event that was the European crisis summit and anticipation of an almost certain ECB rate cut on Thursday all adding to euro weakness.
The Reserve Bank of Australia’s decision to hold interest rates at 3.25% early on Tuesday surprised many and led to a temporary respite in risk aversion. This buoyed the euro, which tested 1.2675 before falling back in the opening hours of London trading. The Bank of Canada struck a less optimistic note later the same day. The central bank cut its rates 50 bps to 0.50% and hinted it would provide additional financial stimulus through credit and quantitative easing if required. This Canadian caution seems justified. Terrible US housing data brought further downside pressure onto the 16-nation unit and, when Australian GDP came in at -0.5%, EUR/USD hit its week low at 1.2456. The euro recovered as China’s official PMI saw manufacturing in the People’s Republic grow for the third month running. However, when a much-anticipated announcement of a fresh stimulus package from the Chinese government failed to materialize, the euro started the march south once more. Thursday’s run up to the ECB’s interest rate announcement saw more bad news out of the European powerhouse as German retail sales fell unexpectedly. The ECB cut by 50bps to 1.50% as expected and when the bank’s president, Jean-Claude Trichet, would not rule out further cuts the euro fell to 1.2480. However, the bank now seems to accept the urgency of the situation and expressed its readiness to act, so the euro could (just could) be turning the corner. Friday was NFP day. The data showed that US employers had cut more jobs than expected and the unemployment rate rose to a 25-year high. Nevertheless. although you might expect the dollar to strengthen on risk aversion, EUR/USD leapt above 1.27 during the hour after the publication of the numbers. Bloomberg put the rise down to the fact the pace of the cuts was slowing down, but perhaps it marks a shift in underlying dollar sentiment – only time will tell. The euro went on to weaken as the US session progressed and closed the week at 1.2634.

Sterling spent the week ranging between 1.43 and 1.40 and essentially tracked the euro’s ups and downs. GBP/USD fell to 1.3983 to reconfirm strong support at 1.40, on the release of Australia’s disappointing Q4 GDP. Thursday saw the Bank of England cut rates 50bps to 0.50% as expected with the central bank promising that it would now boost the money supply in a bid to revive the economy. Although the UK media widely misinterpreted this as a bid to print money, cable found support at 1.4050 after the news and then went on to recover. The pair tested 1.43 immediately after Friday’s US job numbers before closing the week at 1.4070. News broke on Saturday that the UK government is going to underwrite £260B of Lloyd TSB’s risky assets. This move will give the British government a 75% stake in the group and would not have been necessary if the bank had resisted government pressure to merge with stricken bank HBOS last September. It looks like sterling is in for a rocky ride this coming week.

Calendar notes
It promises to be a relatively quiet week in terms of economic data.

US: Tuesday sees Fed Chairman Ben Bernanke delivering a speech about financial reform. There’s the federal government budget balance on Wednesday, while Thursday has retail sales numbers and new unemployment claims lined up. Friday brings the US trade balance and the University of Michigan’s preliminary consumer sentiment.
Euro-zone: Expect important data out of Germany including the trade balance on Tuesday, producer price inflation and factory orders on Wednesday and industrial production on Thursday. The ECB monthly bulletin is also released on Thursday as is the euro-zone’s PPI. Friday 13^th sees EZ retail sales.
UK: Retail sales and house price numbers kick things off for the UK in the early hours of Tuesday. The trade balance will be released on Wednesday.
Japan: Keep your eye out for Japan’s final GDP, which is expected to be revised down.
Switzerland: The Swiss National Bank is expected to cut rates another 25bps to 0.25% on Thursday afternoon.
New Zealand: The Reserve Bank of New Zealand is expected to cut its interest rates 75bps to 2.75%.

Forecast
EUR/USD support: 1.2330; resistance: 1.2730 with an upside breakout seeing further resistance at 1.2830.
GBP/USD: support 1.3525; resistance 1.4300
USD/JPY: support 94.50; resistance: 99.70

EUR/GBP: The Lloyds TSB fiasco could well push this pair to an upside breakout of 0.9000. You’ll find some technical background on this here.

9.2 Crisis summit rejects Sarkhozy style protectionism

The EU crisis summit ended with a promise to avoid protectionism. The Czech prime minister, Mirek Topolanek, who chaired the summit assured the press conference that the EU was not going to leave anyone in the lurch. However, Hungary's call for a 180B euro aid package for Central and Eastern Europe was rejected. Germany's Chancellor, Angela Merkel said that not all of the former communist countries were in the same boat and European Commission President Jose Barroso stated that the situation would have to be assessed on a country-by-country basis.

I came across this table in The Economist, which sums up the situation in a number of key emerging economies in Central and Eastern Europe:

7.1 Risk aversion still reigns in the face of US rescue and stimulus packages

Pessimism stalks the markets as flight from riskier assets saw the dollar and the yen gain against most of the other majors.

European markets opened with optimism as traders anticipated the Obama administration’s new financial rescue package and the passing of its fiscal stimulus plans, both due this week. EUR/USD followed this optimism up and the euro tested 1.3092 Monday mid-afternoon before falling back to 1.30 as the US session drew to a close. The euro came under more pressure early Tuesday on a report that Russian companies were looking to restructure $400B of their outstanding corporate debt. There is a deal of concern about the euro-zone’s vulnerability to problems in emerging Europe, and the subsequent flight from risk saw the euro test support a little below 1.2850. The euro recovered as the European session got underway on Tuesday and rose above 1.30 for the second time this week, until US Treasury Secretary Tim Geithner unveiled the new US financial rescue package to allocate $2000B for cleaning up toxic assets in the financial system and restart credit markets. Geithner’s speech was described as long on rhetoric yet short on details and US markets plunged. The euro followed optimism down to test 1.2850 once more. Wednesday saw high-ranking ECB official, Juergen Stark, noting that the central bank had room to cut interest rates in March to stimulate economic activity if necessary. Meanwhile on the other side of the pond, US lawmakers finally agreed on a compromise stimulus package to pump $789B into the spluttering US economy, meaning that the package could be passed before the end of the week. Thursday saw the euro take a dive against the background of an all-time record drop in euro-zone industrial production. There was more bad news for the euro-economies on Friday, as the zone’s GDP retracted a worse than expected 1.5%. This was the third quarterly contraction in a row, and the biggest fall since the creation of the euro in 1999. Later on Friday, the US fiscal stimulus package was finally passed and all it needs now is for President Obama to sign it on Monday. President Obama also announced that he would unveil plans to save ordinary American homeowners from losing their homes. However, the atmosphere of pessimism remained pervasive as mounting problems in the global financial system seem far from resolution. EUR/USD closed the week a little below 1.29.

Sterling fell against the greenback this week as risk aversion continued to exert downside pressure on the pound. Bank of England Governor Mervyn King said on Wednesday that the UK is in a deep recession and predicted that the economy could shrink by as much as 4% in the summer. Mr. King indicated that interest rates could be cut once again in March, whilst preparing the ground for measures to increase the money supply. UK woes deepened on Friday when the malaise affecting British banks took a turn for the worse on Friday. Lloyds banking group forecast losses of £11B for its subsidiary HBOS. The news precipitated a decline in UK banking stocks and saw the pound fall more than a cent against the US dollar.

Calendar Notes
USA: Banks will be closed in the US on Monday for Presidents Day. Monday should see President Obama signing the stimulus package. We get regional snapshots of US economic activity on Tuesday with Empire State Manufacturing and on Thursday with the Philly Fed Manufacturing Index. Wednesday sees the release of FOMC meetings, always worth reading for hints to future policy. Keep your eyes open on Thursday for the weekly US new unemployment claims. Thursday also sees the Producer Price Index (PPI), while consumer prices (CPI) are surveyed the next day. Key US housing data will be out on Wednesday with Building Permits and Housing Starts.
Euro-zone: Tuesday’s ZEW economic sentiment numbers often move the market. Friday sees a raft of PMI data, giving us some insight into economic activity across the zone.
UK: The Consumer Price Index (CPI) is out on Tuesday and Retail sales are due on Friday. Wednesday’s Monetary Policy Committee meeting minutes will shed light on the voting and discussion behind February 5^th’s 50bps cut. We will also be checking for clues to future policy.

Forecast
EUR/USD: EUR has closed below 1.30 for the third week running with any breaks above that level failing before 1.31. Should the pair see a breakdown of 1.2720, downside pressure could test support at 1.2330.
GBP/USD: Resistance should hold at 1.50. A breakdown of 1.40 could see support next at 1.3550.
USD/JPY: If the pair can break out of 92 then expect resistance at 94. We see support at 90.

6.1 Risk appetite increases as traders anticipate Obama’s stimulus package.

Last week saw investor confidence rise as shocking US jobs data fed hopes that Barack Obama’s financial stimulus would soon be passed. The dollar weakened against most currencies except the yen as traders left safe havens in search of riskier assets.

The euro closed the week up against the dollar for the first time in six weeks. Good news out of the US, including better than expected manufacturing PMI and Pending Home Sales, improved risk appetite and gave the euro a boost on Monday and Tuesday. However, the 16-nation currency stumbled on Wednesday as the Fitch international rating agency downgraded Russia’s credit rating to BBB. Russia is a significant partner of the euro zone and the deteriorating situation in the world’s largest country can only spell trouble for Europe’s economic health. The euro continued to fall through the afternoon, as discouraging US job data gave the market the jitters as it looked forward to Friday’s Non-Farm payrolls. The ECB met market expectations by holding interest rates at 2.00% on Thursday. Jean-Claude Trichet followed up the announcement by signaling that the bank will be cutting rates by 50 bps in March and, at the same time, more bad news from the US jobs front sent the euro to test 1.28 once more. Friday saw the much anticipated NFP and Unemployment rate both come in worse than expected. However, in a departure from the recent pattern, the markets surged, taking the euro up with them, as traders gambled that the massive jobless figure would spur Congress into passing President Obama’s stimulus package. EUR/USD rose to just shy of 1.30 before closing the week at 1.2924.

Sterling started the week off on the wrong foot and fell some 4 cents against the greenback on Monday as rating agency, Moody’s, cut the credit rating of Barclays bank. However, after testing support at 1.41 mid-Monday, cable spent the week on the up. There were some positive signs from UK data this week with PMIs across the sectors coming in better than expected and the Halifax house price survey finding that house prices rose an average of 1.9% in January. However, the news was not all positive. Downbeat releases included Wednesday’s consumer confidence, which found sentiment at record lows and Friday’s UK manufacturing production, which contracted for the tenth month in a row. On Thursday the Bank of England cut rates to an all-time low of 1.00%. The cut was widely anticipated and sterling climbed 100 pips against the dollar after the announcement. The pair closed the week a little above 1.48 at 1.4806.

The yen weakened significantly against the other majors as demand for the safe-haven currency fell and traders speculated that the passing of the US stimulus package was a done deal. Thursday saw US trading take the pair through key psychological resistance at 90.00 to close the week at 91.99

The big news this coming week will undoubtedly be the progress of Barack Obama’s financial rescue package. New US Treasury secretary Tim Geithner is scheduled to unveil full details of the revamped bail-out on Monday. However, the timing of the announcement has yet to be confirmed and The Wall Street Journal reported that it may be moved to Tuesday. The US Senate is expected to vote to slim down its version of the package on Monday and on Tuesday it will most probably pass it. Unfortunately, that won’t be the end of the story because lawmakers will have to reconcile the differences between the Senate’s and the House of Representative’s versions of the package. This could take a few days after which the Senate can vote to pass the final version and send it on to the President to sign or veto. Investor confidence could well spike at each successful stage of this process.

Other US news stories to note this week will be Fed Chairman Ben Bernanke testifying before the House Financial Services Committee and the Tim Geithner testifying on the TARP oversight before the Senate Banking Committee. US economic data releases of note this week include the trade balance on Wednesday; retail sales on Thursday and the University of Michigan’s consumer sentiment on Friday.

Things are pretty quiet data-wise in the euro-zone until Thursday brings the ECB’s monthly bulletin and industrial production numbers. Friday has GDP data for Germany, France, Italy and the euro-zone as a whole.

Tuesday is a busy day for UK data, with retail sales numbers, the house price balance and Britain’s trade balance. Wednesday includes the release of the latest jobless numbers and the Bank of England inflation report.

Friday sees the start of the G7 meeting in Rome where they are due to discuss a number of currency related issues as well as the provision of a global banking agency.

I see EUR/USD finding support at 1.2746 and resistance at 1.3330.
GBP/USD should find support at 1.43 and resistance at 1.53
I expect USD/JPY to encounter support at 90.70 and if this support holds, the pair should rise to test resistance at 94.60

5.2 Do BRICS (and Germans) eat PIGS

A very interesting read for all those musing on the fate of the euro from Absolute Return Partners.