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Lea Jakobiak
Unemployment in Britain has fallen to a five year low. The pound rose on the latest good news from Britain.
Article / 03 April 2012 at 13:51 GMT

Strong USDJPY bounce. GBPUSD discomfort above 1.60

John J Hardy John J Hardy
Head of FX Strategy / Saxo Bank
Denmark

The USDJPY sell-off reversed with a vengeance by early US hours. Was that it for the USDJPY correction? GBPUSD runs into altitude sickness above 1.60. ECB and world services PMI day on tap for tomorrow.

Today’s European session got off to a very slow start after yesterday’s far more dramatic gyrations. By the early New York hours, however, the USD was putting up a bit of a fight again, pushing EURUSD back toward 1.3300 ahead of tomorrow’s ECB meeting and sending GBPUSD back at least for a time through the 1.6000 level as that pair finally got a deserved bit of altitude sickness. The Asian session had produced a bit more excitement, with USDJPY and other JPY crosses pushing sharply lower on the bizarre monetary base data before they reversed almost equally sharply later in the session. The Aussie, meanwhile, generally resumed its weakening ways of late in Europe today after an initial push lower in the Asian session on dovish RBA comments that make a cut at the next RBA meeting more likely.

Today’s Spanish budget presentation reminds us of the lengths to which a country must go to reduce a large budget deficit. Consider also that the starting point for Spain was a deficit-to-GDP of 8.5% in 2011 – about the same as the US deficit relative to the size of the economy. Despite announcing cuts and tax increases that are supposed to see the deficit cut to 5.3% of GDP, Spain’s overall debt level is expected to push wider by more than 10% of GDP because of the necessity. The irony of a country in trouble borrowing money to rescue itself is there for all to see…. And even before the austerity measures go into effect, Spain is in a recession and expected to contract more than -1.5% this year as well. The bailout watch continues. A WSJ article says that Spain will need to auction EUR 186 billion in debt this year, of which nearly EUR 37 billion will be net new issuance.

Chart: GBPUSD
GBPUSD posted a doji close yesterday after two previous sharp rally days. It’s rather interesting to consider that GBPUSD recently has a lower ATR (50-day) – even expressed in pips despite GBP’s higher valuation – than EURUSD. That could have something to do with the 0.91 correlation of EURUSD and EURGBP over the last 200 trading days. Compare that with a -0.05 correlation for GBPUSD and EURGBP.. Anyway, the move back below 1.6000 doesn’t look very pretty if it holds into the close today, as this was the previous high, though a further break lower through the current channel and then the 200-day moving average also need to fail if the bulls are to be thoroughly discouraged.GBPUSD

Looking ahead
Watch out for the FOMC minutes later – these are from the meeting three weeks ago that hardly produced a ruffle in the statement. While one of Bernanke’s recent speeches got plenty of attention for the strength of his signal that the Fed was happy to act if conditions warrant, there is quite a mix of rhetoric coming from the Fed these days. Among the voting members, the out-and-out hawk Lacker has at least one sympathetic ear in the Cleveland Fed’s Pianalto, who has been out prominently recently touting the risk of inflation if the Fed pursues further asset purchases. She has been consistent in this message. Lockhart of the Atlanta Fed has also spoken out against further asset purchases recently to see if the economy was improving. It appears that Williams of the San Francisco Fed, is a bit more dovish.

Adding further intellectual weight to the argument against further QE, the St. Louis Fed’s Bullard (non-voting) the purported mastermind of QE2, was out giving a speech in China in which he suggested it might be important to consider not only the US output gap, but the output gap outside the US, especially given the number of countries that essentially peg to the US dollar and the global nature of the economy. So not only might Fed policy affect these countries, but their positive output gaps in a global economy could mean that the US sees inflation even if the US output gap is still negative.

Just before pixel time, USDJPY has turned interesting with a bullish reversal as of the early US hours as bonds first advanced and then retreated rather sharply today. We were looking for a JPY rally in recent days and we got one, but wonder if may already be over with after a session and a half, at least in terms of USDJPY downside. Stay tuned there and don’t underestimate the importance of the April 10 BoJ meeting as the next key test for the cycle in JPY crosses.

Tomorrow, we’ve got the ECB out and not likely having much to add to the equation as the focus is very likely going to be on the political process over the coming weeks. Note that the French election first round takes place on 22 April, and the socialist Hollande is still leading convincingly in the polls. This could change the dynamics for “Euro-deals” going forward, as Hollande will sympathize with the German opposition rather than the vulnerable Merkel. More on this later.

Economic Data Highlights

  • Australia RBA left rate unchanged at 4.25% as expected
  • Spain Mar. Unemployment rose +38.8k vs. +54k expected and vs. +112.3k in Feb.
  • UK Mar. Construction PMI out at 56.7 vs. 53.4 expected and 54.3 in Feb.
  • Euro Zone Feb. PPI out at +0.6% MoM and +3.6% YoY vs. +0.5%/+3.5% expected, respectively and vs. +3.8% YoY in Jan.

Upcoming Economic Calendar Highlights (all times GMT)

  • US Feb. Factory Orders (1400)
  • US FOMC Minutes (1800)
  • US Fed’s Williams to Speak (2005)
  • US Weekly API Crude Oil and Product Inventories (2100)
  • US Total Vehicle Sales (2100)
  • UK Mar. BRC Shop Price Index (2301)
  • Australia Mar. AiG Performance of Services Index (2330)
  • Australia Feb. Trade Balance (0130)

 

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