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Dollar Soared Broadly On Fed, Sterling Hardest Hit On Downgrade

Published 02/25/2013, 02:43 AM
Updated 03/09/2019, 08:30 AM
EUR/USD
-0.14%
GBP/USD
-0.01%
USD/JPY
-0.21%
EUR/GBP
-0.13%
USD/CAD
0.17%
EUR/AUD
0.22%
AUD/NZD
-0.14%
KING
0.00%
FTNMX551030
0.93%
NWSA
0.11%
BETI
0.31%
OPIN
0.00%
NOTE
2.47%

While dollar was boosted by the FOMC minutes last week, most major currencies are having their own problem. Sterling was the weakest one as pressured by the dovish BoE minutes as well as persistent chatter on rating downgrade. Indeed, Moody's did downgrade UK's Aaa debt rating to Aa1 towards the end of the week and that should extend the plunge in pound. Euro was weighed down by a couple of factors including uncertainties over Italy's election, weak economic data as well as disappointing LTRO repayment results. Canadian dollar dropped sharply as weak economic data reinforced the case that there will be no policy stimulus removable any time soon. New Zealand dollar was pressured by RBNZ's comments on intervention. Also, one important thing to note is that the Japanese was firm as partly helped by cross selling in yen crosses. More importantly, the failure to ride on G20 to extend its downtrend argues then yen has bottomed out at least in near term.

While we were correct in suggesting to continue with USD/CAD long, the expectation of uptrend resumption in USD/JPY was wrong as the pair just stuck in range. GBP/USD was the weakest major currency last week and took out the important structure support at 1.5268. The pound would continue to be the worst performing European major. Euro's outlook is a bit unclear. EUR/USD's fall from 1.3710 was admittedly deeper than expected, but then it's still holding comfortably above 1.3 psychological level. The development didn't warrant reversal yet and such a fall from 1.3710 could still be a correction only as originally expected. Crosses didn't review much information either as EUR/GBP is still maintaining its bullish outlook but EUR/AUD looks vulnerable. So, we'd tend to avoid Euro. Picture of Aussie was also unclear as bulls and bears are clearly fighting hard at the current level. The strong break of 1.0099 in USD/CAD confirmed up trend resumption and the rally seems to be accelerating. We're still bullish in USD/JPY, but as mentioned above, yen might have formed a bottom in near term at least. And, selling in yen crosses could continue to limit USD/JPY's upside. So overall, we'd prefer to continue USD/CAD long this week, plus we'd target to short GBP/USD.

Dollar was boosted strongly by FOMC minutes last week. The minutes for the January FOMC meeting indicated that policymakers were more upbeat on the US economic outlook as driven by improved business confidence and household consumption. Discussions on continuation of the asset purchase program remained hot. 'Several participants' suggested that the central bank should be prepared to 'vary the pace of asset purchases, either in response to changes in the economic outlook or as its evaluation of the efficacy and costs of such purchases evolved'. 'A number of participants' stated that the program should be tapered or ended before occurrence of a substantial improvement in the outlook for the labor market, in accordance with cost-benefit assessment. Yet, 'several' members warned of the potential costs of terminating and decreasing asset purchases too soon while 'a few' participants cited past experience of negative impacts on economic growth, employment, and price stability of premature ending of accommodative measures. Besides, there were opinions that the Fed might provide monetary accommodation by 'holding securities for a longer period than envisioned in the Committee's exit principles, either as a supplement to, or a replacement for, asset purchases.'

Euro was weighed down by a couple of factors. Italy's parliamentary election on February 24-26 was a major factor Democratic Party's Bersani is still the front runner but polls have been showing that former prime minister People of Freedom's Berlusconi continues to close the gap. Markets are expecting to see Bersani winning a majority in the lower house and forms a coalition with outgoing prime minister Monti in the upper house. However, markets are also complacent on the risk that scandal-mired Berlusconi might return to power. ECB said that 356 banks will pay back EUR 61.1b on February 27 as early repayment of the second three year LTRO. That's way short of market expectation of EUR 122.5b. Analysts said that would be a sign that banks are not finding enough demand for credit inside Eurozone, which indirectly indicates weak growth momentum.

While German ZEW and Ifo were solid, Eurozone PMIs triggered much concern of deepened recession in Q1. PMI manufacturing dropped slightly to 47.8 versus expectation of a rise to 48.4. PMI services unexpectedly dropped to 47.3 versus expectation of a rise to 49, hitting a three month low. The composite PMI dropped to a two month low of 47.3. Germany's data were mixed with PMI manufacturing rose slightly more than expected to 50.1 but PMI services dropped more than expected to 54.1. However, France's data was worrying. While PMI manufacturing rose to 43.6, it missed expectation of 43.9. PMI services even dropped to 42.7 unexpectedly versus expectation of rise to 44.5. Markit chief economist Chris Williamson noted that "a steepening rate of decline in February is a disappointment, and suggests that the eurozone is on course to contract for a fourth consecutive quarter." And, "if it wasn't for Germany, these would be really dire readings." Also, he said that the latest survey suggested that Eurozone economy would shrink 0.2% to 0.3% in Q1.

European Commission revised GDP forecast to -0.3% contraction in 2013, down from prior projection of 0.1% growth. Unemployment is expected to jumped further up to 12.2%, revised up from prior projection of 11.8%. EC warned that job market is a serious concern and the social consequences will also weigh on growth perspectives. Domestic demand is not expected to improve until 2013. Seven states are expected to contract this year, including the Netherlands, Italy, Spain, Portugal, Greece, Cyprus and Slovenia.

The BoE minutes unveiled that Governor Mervyn King, Paul Fisher and David Miles favored adding more stimuli to boost the economy but their proposal was rejected by 6 other members. The pound weakened further while UK stocks and gilts rebounded after the report amid expectations of more easing measures later in the year. Meanwhile, the central bank indicated the possibility of using measures other than asset purchases to boost the fragile economy in the future.

Moody's downgraded UK's debt rating from Aaa to Aa1 and changed the outlook to stable. Moody's said that economic growth in UK will be "subdued" because of weak global activities, as well as a drag "from the ongoing domestic public and private-sector de-leveraging process." It noted that the period of sluggish growth "poses challenges to the government's fiscal consolidation program, which we now assume will extend well into the next parliament." Also, the "rising debt burden" meant "a deterioration in the shock-absorption capacity of the government's balance sheet, which is unlikely to reverse before 2016." Chancellor of the Exchequer Osborne responded in a statement that "we have a stark reminder of the debt problems facing our country -- and the clearest possible warning to anyone who thinks we can run away from dealing with those problems."

Yen recovered on news that Japan would not buy foreign bonds. Also, traders took profits on their short positions as they are waiting the nomination of the next BoJ governor. So far, prime minister Abe has kept his mouth shut on whether former deputy BoJ governor Muto or Iwata would be nominated as the next BoJ governor and markets are still keenly awaiting the decision. It's believed that Muto is seen by many as a less aggressive option and would be more accepted by opposition DPJ. Indeed, DPJ's shadow finance minister Maehara said that they will not automatically reject Muto. The BOJ's minutes for the January meeting indicated that a few members were reserved about the upgrades of Japanese economic outlook. Meanwhile, 2 BOJ members expressed that extending the maturity of BOJ bond buys was an option.

Canadian dollar extended recent decline against dollar after another round of weak economic data. Retail sales dropped sharply by -2.1% in December, much weaker than expectation of -0.3%. Ex-auto sales was also weak and dropped -0.9% versus expectation of 0.1% rise. CPI moderated more than expected to 0.5% yoy in January while core CPI also moderated to 1.0% yoy.

New Zealand dollar was weighed down by RBNZ governor Wheeler's comments today and recovery in AUD/NZD helped lift Aussie mildly elsewhere. Wheeler warned that "when the New Zealand dollar is coming under upward pressure, we want investors to know that the kiwi is not a one- way bet." And he noted that RBNZ is "prepared to intervene to influence the kiwi" even though "given the strength of recent capital flows, we can only attempt to smooth the peaks." He said that the G3's ultra loose monetary policies "are aimed at stimulating growth but also have significant spillover effects," and many other countries are affected as investors sought higher yields. Nonetheless, Wheeler noted that limitation of intervention and a swiss-style cap isn't practical for Kiwi. Finance minister English also said last week that weakening the Kiwi through intervention against large scale speculation is "out in the war zone with a peashooter."

The RBA minutes released in Asian session unveiled that recent rate cuts have shown effects in boosting the economy while benign inflation might trigger further rate easing. Regarding developments in China and Japan, the minutes stated that "a wide range of indicators showed that growth in the Chinese economy had stabilized, underpinned by public spending and somewhat stimulatory financial policies... There had also been indicators of stronger growth of domestic demand" in East Asia with the exception of Japan.

After brief weakness, Aussie was limited by comments from RBA governor Stevens that the central bank has likely paused the rate cut cycle. Stevens said in his testimony to a parliamentary committee that last year's cuts were already "substantial" and rates are at "appropriate level right now." He emphasized that there is already a "good deal of interest-rate stimulus in the pipeline" and the board judged that it was "sensible" to allow time for the rate cuts to "do its work." Meanwhile, Stevens noted that Australian dollar exchange rate is "somewhat" overvalued. But he warned that "you need to be pretty confident that it is seriously over-valued, or the market is behaving in some quite irrational way, before you would launch large-scale intervention." Separately, Treasurer Swan said he's "beginning to see some of the signs of stimulus flowing from monetary policy into some of the non-mining sectors of the economy."

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