GBP weakens again on negative Retail Sales and House Price Data. USDJPY pulls back higher from attempt at new low on Fed story.

MAJOR HEADLINES - PREVIOUS SESSION

Overnight developments:

• UK BRC reported Feb. like-for-like sales rose +1.5% YoY
• UK Feb. RICS House Price Balance fell to -64.1% vs. -54.7% expected
• UK Feb. NIESR GDP estimate out at +0.5%
• Australia Jan. Home Loans rose +2.3% vs. +1.0% expected
• Australia Jan. Investment Lending rose +8.3% vs. -2.2% in Dec.
• Australia Feb. NAB Business Confidence rose to -2 from -4 in Jan.
• China Feb. CPI rose to 8.7% YoY vs. 7.9% expected and 7.1% in Jan

THEMES TO WATCH - UPCOMING SESSION

Key event risks today (all times GMT):

• Sweden Feb. CPI (0830)
• UK Jan. DCLG House Prices (0930)
• Germany and EuroZone Mar. ZEW Survey (1000)
• US Jan. Trade Balance (1230)
• Canada Jan. International Merchandise Trade (1230)
• Canada Jan. New Housing Price Index (1230)
• US Fed’s Kroszner to speak (1400)
• UK Jan. Leading Indicator Index (1530)
• US Weekly Crude Oil and Product Inventories (1530)
• US Weekly ABC Consumer Confidence (2100)
• Australia Mar. Westpac Consumer Confidence (2330)
• Japan BoJ Publishes minutes from latest meeting (2350)
• Japan Q4 Final GDP estimate (2350)
• China Feb. Retail Sales (0200)
• Japan Feb. Consumer Confidence (0500)

Market Comments

Trichet was out yesterday with mild verbal intervention on the rise in the Euro. ‘In present circumstances, we are concerned about excessive exchange rate moves.’ EURUSD sold off on this, but was unable to push lower through the first support at 1.5315. Still, it looks as if we are beginning to get a bit more two way traffic at these levels.

A boost to risk appetite materialized overnight as an article out in the Wall Street Journal suggested that the Fed is considering a wider array of options other than the interest rate mechanism in attempts to bring relief to credit markets. The most interesting ideas include possible lending to financial institutions other than banks and the direct purchase of mortgage-backed-securities, apparently in an attempt to provide a market for securities that no institution is willing to touch and thus avoiding the perils of mark-to-market accounting. This story comes after panic quickly spread yesterday on rumors of Bear Stearns insolvency. That company’s stock close down over 10% on the day. The renewed credit market woes had USDJPY trying Friday’s multi-year lows overnight down around 101.45, but the pair managed to survive the test for now and rose later in the Asian session to above 102.00. This type of action shows how difficult the risk aversion theme can be to trade as the trader is victim of ad hoc stories and rumors that generate whipsaw moves in the market. We don’t expect the risk aversion theme to fade away, but the ride may be very bumpy in this environment.

EuroDollar Stirs traded a bit lower overnight, possibly on the WSJ article, and are offering the USD a bit of support. EURUSD may be in for a reasonable consolidation here if the first support level at 1.5315 gives way. A basic retracement level comes in around 1.5200 for now.

The data from the UK is cause for further worry about the trajectory of the UK economy. The BRC Retail Sales Monitor report was reasonably solid according to some commentators, and quite weak according to others. Apparently, the ‘like-for-like’ measure (sales adjusted for changes in total retail floor space) shows a deceleration of growth and other measures of the BRC data pointed to most strength coming in food sales, which we can imagine are mostly inflation driven considering the enormous rise in food prices of late. All in all, not a positive report. The RICS housing survey, our favorite as it tends to indicate the future direction of the other surveys, showed a continue deceleration in the housing sector as it registered the lowest reading since 1990. EURGBP was back higher after an attempt at a sell-off overnight and GBPUSD was back below its 200-day moving average (approx. 2.0130).

USDCAD managed to pull higher despite further positive data from Canada in the form of a much stronger than expected housing starts number yesterday and despite yet another record day for crude oil. This suggests that CAD could remain weak, but USDCAD has yet to punch through some key resistance areas (see chart below). There are signs that the broader investing public is pouring money into commodity index tracking funds in record amounts as commodities are seen as a safe haven in this macroeconomic environment of paltry government bond yields and tumbling stocks. Still, AUDUSD remains below the important first resistance level at 0.9220 as AUD may be most concerned with the risk picture and equities. AUDUSD needs to see further damage before we can call the bull trend finished. The next big line of support comes in just above 0.9100

We’ll watch the US Trade Balance number closely today. Although oil prices are very worrisome for their effect on the US terms of trade picture, the ‘ex Petroleum’ trade balance picture has been improving dramatically in recent months and may continue to do so. Also watch the Canadian International Merchandise Trade number, as Canada is showing the opposite tendency of the US: a dramatically shrinking trade surplus. The last trade number showed the smallest surplus in 10 years and the trend is clearly falling. This adds to the upward pressure on USDCAD in the big picture.

Chart focus: USDCAD

USDCAD followed through higher on Friday’s bullish reversal formation, and may be ready for further gains. Yet it faces an array of resistance levels just above the psychologically significant parity level (in addition to that level itself, of course). First we have the 0.618 Fibo for the most recent downmove at around 1.0010. This is followed quickly by the 55-day SMA at 1.0018 and the most significant 200-day moving average is higher, at around 1.0150.

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