EUR/GBP Made New Record High, EUR/USD to Follow?

Euro was the main focus of the markets last week. The common currency rode on much better than expected business climate and hawkish comments from ECB and surged across the board. The strength was apparent that four euro paris topped the weekly top mover chart. EUR/GBP has already made new record high of 0.7929 while EUR/USD is set to break record high of 1.5902. Dollar on the other hand, was generally softer after another round of weak data. The Japanese yen was generally lower in crosses as risk aversion took a back seat. A number of important economic data will be released in this first week of second quarter, including Japanese Tankan, ISMs and PMIs, NFPs as well as Bernanke’s testimony, together with RBA rate decision. All eyes will be on when EUR/USD will make another record high again.

Currency Heat Map Weekly View

Housing data in US were generally weak again. New home sales dropped -1.8% from upwardly revised 601K to 590K in Feb. The S&P/Case-Shiller home-price index dropped for the 13 consecutive months to 10.7% in Jan, the steepest fall on record. The report indicated that housing recession is probably continuing to deepen and is having no sign of stabilization yet. Though, new existing home sales unexpectedly rose for the first time in seven months by 2.9% in Feb to 5.03M annualized rate.

Consumer confidence in the US remains extremely weak. Conference board consumer confidence dropped sharply from revised 76.4 to 64.5 in Mar versus consensus of 74.0. The reading is the second worst since Oct 93. U of michigan consumer sentiment was revised further lower from 70.8 to 69.5 in Mar. Personal spending growth slowed sharply to a 17 month low of 0.1% in Feb even though personal income rose more than expected by 0.5%. Headline PCE deflator slowed slightly from 3.5% yoy to 3.4% yoy while core PCE deflator was unchanged at 2.0%. Note that real spending, thus, was unchanged in Feb and was taken by some economists as another sign of a recession.

Another sign of recession can be seen in durable goods orders which unexpectedly dropped for a second month by -1.7% in Feb, much worse than expectation of 0.8% rise. Ex-transport orders also dropped more than expected by -2.6%. Final print of Q4 GDP growth in US was left unchanged at 0.6%. Though the core CPE growth was revised down from 2.7% qoq to 2.5% qoq. Personal consumption, on the other hand, was revised up from 1.9% to 2.3%. Jobless claims improved slightly from revised 375k to 366k.

Euro’s strong rally took off after release of unexpectedly strong Germany Ifo. The Germany Ifo business Climate beat expectation again in Mar, rising from 104.1 to 104.8. Both the Current Situation and Business Expectations component showed improvements too. The data suggested that the business confidence largest economy in the Eurozone remains robust and positive growth is anticipated even though global growth would likely decline.

Speaking to European lawmakers, ECB president Trichet said that "the current monetary-policy stance will contribute to achieving our price-stability objective." Also, "In the Governing Council’s view, the risks to the medium-term outlook for inflation are on the upside." Eurozone’s economic fundamentals are still described as "sound". Though Trichet said that they’re concerned about "excessive exchange-rate moves."

Other data from Eurozone saw industrial orders rose strongly by 2.0% yoy, pushing yoy rate from 2.1% to 7.3% in Jan. Current account deficit widened slightly to -10.6b. German Gfk consumer confidence improved from 4.5 to 4.6.

The story in Sterling was totally different from that of Euro. The pound was sent lower following dovish comments from BoE King. King told lawmakers in UK in his testimony to Parliament’s Treasury Select Committee in London that economic growth is likely to slow down sharply this year. While inflation is expected to remain elevated above 2% target, it should be dragged down later in the year. Chief economist Bean said that "given the size of the UK current account gap, sterling is likely to move to the downside"

UK Gfk consumer confidence slumped to a 15 year low of -19 in Mar. Nationwide house price dropped more than expected by -0.6% mom in Mar, slowing the yoy rate sharply from 2.7% to 1.1%. Q6 GDP growth was revised lower rom 2.9% yoy to 2.8%. Though current account deficit was narrower than expected at -8.46b. CBI distributive trade which unexpectedly improved from -3 to +1 versus expectation of worsening to -5.

Japan National CPI climbed more than expected from 0.7% yoy to 1.0% yoy in Feb, highest in a decade. However, unemployment rated edged higher for the first time in five months from 3.8% to 3.9%. Household spending was unexpectedly flat yoy only. Retail sales dropped -1.0% mom only, leaving yoy rate at 3.1%. The data indicates that Japan, like US, is starting to face the problem of higher inflation and sluggish growth. Whether the Japanese economy will enter into a recession is still a question. But the data will continue to support the speculation that BoJ will cut rates from 0.5% this year to stimulate growth.

Commodity currencies stabilized with recovery in gold and oil. Canadian retail sales report showed 1.5% mom growth in headline sales and 1.3% mom in ex-auto sales versus consensus of 0.9% and 0.5% respectively.New Zealand trade surplus improved to 2.58m in Feb, thanks to much stronger than expected exports of 3.71b. Current account surplus came in at 4.41b. New Zealand’s GDP grew 1.0% qoq seasonally adjusted in the Q4 of 2007, significantly higher from the 0.5% qoq recorded in the Q3. Yoy rate was pushed higher to 3.7%.

Suggested Readings:

• This Week’s Market Outlook
• Weekly Focus: Some Improvement again - but Road to Full Recovery is Long
• Financial Markets Still Struggling, Traders Bet On Another 50Bp In April
• (BOE) Treasury Committee Hearings Opening Statement 26 March 2008
• (ECB) Jean-Claude Trichet - Hearing at the Economic and Monetary Affairs Committee of the European Parliament

The Week Ahead

A number of market moving events are scheduled this week which could shape the trend for Q2. Focus be particularly on those events from US and Eurozone and on whether EUR/USD can take away 1.59 level and heads to 1.6. Another focus will be on the development in the commodity markets. Gold’s recovery from 940.40 might have completed at 954.7 after meeting 38.2% retracement. Another sharp fall which takes out 940.40 low, might firstly trigger some sell off in commodity currencies. Secondly, if the stock markets is dragged down by another fall in gold, the Japanese yen will likely be boosted on risk aversions again. Such development, if happens, could shadow the impact of the upcoming economic data.

From US, main focus will be on ISM indices, NFP and Bernanke’s testimony. ISM manufacturing is expected to remain contractionary and dip further from 48.3 to 48.1. in Mar. The same is expected for ISM services which is expected dip from 49.3 to 48.5. Non-farm payroll is expected to show another month of contraction of -50k job growths, with unemployment rate back up from 4.8% to 5.0% in Mar. Bernanke will testify before Joint Economic Committee on Wed.

From Eurozone, main focus will be on Mar CPI estimate which is expected to edge higher further to 3.3% yoy. Manufacturing and Service PMI are expected to be unchanged and remain above 50. Labor market is expected to remain tight with unemployment rate unchanged at 7.1% in Feb. Retail sales is also expected to be solid with 0.2% mom growth in Feb. M3 money supply growth is expected to remain strong at 11.5% yoy in Feb.

Main focus in Japan is on Q1 Tankan survey. Large manufacturer survey is expected to drop sharply from 19 to 13. Q1 capex is also expected to slow sharply from 10.5% growth to 0.1% growth. The data is believed to be important to determine whether BoJ will cut rates to stimulate growth in Q2.

Other important data include UK manufacturing and Services PMI. Swiss SVEM PMI and CPI.

From Canadian a number of important growth data will be released, including Jan GDP which is expected to rebound from -0.7% mom contraction to 0.5% growth in Jan. Employment report will be released on Friday and is expected to show 15k job growth with unemployment rate unchanged at 5.8% in Mar. Ivey PMI is expected to drop from 62 to 59.5.

RBA is widely expected to keep rates unchanged at 7.25% this week after last statement and minutes suggest that RBA will be on hold for a while. RBA Governor will also testify to Parliament on Thu.

Suggested Readings:

• Economic Calendar Summary 3/30 - 4/4
• Weekly Economic and Financial Commentary
• Economic Outlook: Will Bernanke be Grilled in Congress?
• The Weekly Bottom Line
• Will Strong Growth Eliminate The Need For a BoC Cut?
• Australian & New Zealand Weekly: RBA to Take More Forward View on Inflation
• FX Briefing: Further Upward Potential for the Euro is Limited
• Eur/$, New Highs… Eventually…
• $/Yen, Good Risk/Reward…

EUR/USD Weekly Outlook

After edging lower to 1.5342, EUR/USD was supported by 38.2% retracement of 1.4437 to 1.5902 at 1.5342 and rebounded strongly. Rise from there is tentatively treated as resumption of rally from 1.4309. Though, an intraday top should be in place with 4 hours MACD dragged below signal line by sideway trading towards the end of last week. Having said that, some more sideway consolidation could be seen initially this week. But further upside is still expected to 1.5902 record high and above. Sustained break will confirm medium term up trend has resumed for next target at 1.6 psychological resistance.

On the downside, below 1.5582 will firstly suggest that rise from 1.5342 has completed. Secondly, it will argue that consolidation from 1.5902 is still in progress and has started the third falling leg. In other words, another fall should then be seen to retest 1.5342 low before completing the consolidation from 1.5902.

In the bigger picture, rise from 1.4309 has just missed 100% projection of 1.3360 to 1.4966 from 1.4309 at 1.5915. Though, the structure of the rise from 1.4309 suggest that there should at least be another rally attempt, probably to 1.6000 psychological resistance before completion. Hence, even though below 1.5342 low again will indicate that deeper correction should be seen, downside should be contained above 1.4951 resistance turned support and bring another rise. Though, below 1.4591 will dampen this view and argue that a medium term top is already in place.

In the longer term picture, medium term up trend from 1.1639 is still in progress. Regardless of internal structure, it is treated as resumption of long term up trend from 0.8223 (00 low) to 1.3668 (04 high). There is no clear sign of reversal yet. Further medium term rally could still be seen towards 100% projection of 0.8223 to 1.3668 from 1.1639 at 1.7084. Sustained trading below 55 weeks EMA (now at 1.5142) is needed for starting to consider the possibility of completion of such up trend.

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