EURUSD treading water just below recent all−time highs

Mon, Mar 31 2008, 08:38 GMT
by John Hardy

Saxo Bank

GBP continues to feel the pain as EURGBP scales new heights. Quarterly Tankan sentiment survey up tonight.

MAJOR HEADLINES – PREVIOUS SESSION

Overnight developments:

• New Zealand Feb. Building Permits out at -6.5% vs. 3.3% in Jan.

• New Zealand Mar. Business Confidence out at -57.9 vs. -43.9 expected

• Japan Mar. Nomura/JMM Manufacturing PMI out at 49.5 vs. 50.8 in Feb.

• Japan Feb. Industrial Production out at -1.2% MoM vs. -2.0% expected.

• Australia Feb. HIA New Home Sales out at -5.3% MoM vs. 11.3% in Jan.

• Japan Feb. Housing Starts out at -5.0% YoY vs. -1.0% expected

• Japan Feb. Construction Orders out at 18.4% YoY vs. -2.5% in Jan.

THEMES TO WATCH – UPCOMING SESSION

Key event risks today (all times GMT):

• Sweden Mar. Consumer and Manufacturing Confidence (0800)

• EuroZone Mar. CPI Estimate (1000)

• EuroZone Mar. Consumer, Economic, Industrial and Services Confidence (1000)

• UK BOE's King to speak.

• Canada Jan. GDP (1330)

• US Mar. Chicago PMI (1445)

• US Secretary of Treasury Paulson to speak (1500)

• US Fed's Yellen to speak (1700)

• Australia Mar. AiG Performance of Manufacturing Index (2330)

• Japan Q1 Tankan Large Manufacturer's Index (0050)

• Australia RBA to announce Cash Target (0430)

Market Comments

On Friday, we pointed out that markets looked like they were at some kind of tipping point on the risk appetite front, and as of early this morning, we seem to be seeing little resolution on this issue as the market is scratching around for a direction ahead of a heavy data week. EURJPY, for example, which has been trying to make a commitment on either side of the 55-day moving average, attempted higher on Friday, but was viciously pushed back lower before reversing course just as violently back to the upside overnight. Some of the unpredictability here is no doubt due to the end of the financial year, so the action may continue to be very choppy in the shortest term. And if you are looking for volatility to calm as we enter the new financial year in Japan, think again, as April has proven one of the most volatile months of the year in the last 7 years. A large trading range for the month would seem inevitable for USDJPY considering its 8+% of volatility in March. As of this writing, the JPY was back on the front foot after Merrill Lynch said UBS may face more writedowns. This should remind us of the treacherous nature of this market, as news items like this move sentiment from hour to hour.

On the commodity currency front of risk appetite, USDCAD seems well supported for now as last week it passed the test of the 40-week moving average, but still needs a solid break higher above 1.0300 again to get trending potential, as the range is so well-established. AUDUSD was all the way to the brink of resistance at 0.9250 on Friday, only to be pushed lower again. 0.9250 and perhaps 0.9000 are the two signposts for that pair. We prefer the downside there, but last week's resilience in the pair make us wary for now - especially if gold takes off again. In NZDUSD, on the other hand, we appear to be at the edge of an abyss that opens up below 0.7870 and the pair is trading just below its 55-day moving average as of this writing, a close below here and we may be looking at much more downside to come.

By far the weakest currency at the moment is the pound, as GBPUSD failed to hold above 2.0000 once again and sees lower support failing as well this morning. The 55-day moving average at 1.9795 may soon come under fire. Structurally speaking, GBPUSD would look even uglier if the 1.9750 area can't hold, in which case we would expect a full test lower toward 1.9340. In EURGBP, we wonder if 0.8000 could come under fire, and in any case, won't likely top out until EURUSD also tops out.

Looking ahead at the data calendar this week, we have a pretty heavy schedule, including the Unemployment numbers for Germany (tomorrow), Canada (Fri) and the US (Fri). The US employment picture began deteriorating about 12 months ago, while European unemployment rates seem to be in a terminal decline - surely this begins to change some time soon? Also, tomorrow we get the Manufacturing PMI data from Europe and the ISM from the US. On Thursday we see the Services PMI for Europe and Non-manufacturing ISM from the US. The preliminary PMI numbers from Europe from 10 days ago looks reasonably stable and the US employment report looks like it may be a very ugly one, so that could keep the pressure on the USD for the short term vs. EUR, JPY and CHF. 1.5660 is the first key support for EURUSD. Watch out for verbal intervention if 1.6000 approaches.