- China March PMIs come in very solid but data to be taken with a grain of salt
- China HSBC Markit PMIs less encouraging and mitigate favorable reaction
- Aussie building approvals come in much weaker than expected
- Bank of Japan Tankan results show an ongoing concern over the outlook for the economy
- Fed Kocherlakota out with some hawkish Fed speak; policy could reverse sooner than later
- EU bailout package increased but the news might be somewhat misleading
Initial market reaction into early Monday trade was risk positive with participants welcoming the shocking weekend China March PMI data, which came in well above expectations, helping to ease concerns over a hard landing in the massive emerging economy. However, we should not be getting too excited with the revelations, given the favorable historical performance for the data series in March, and recommend taking the PMIs with a grain of salt. The subsequent release of HSBC Markit PMIs was actually softer than previous and certainly took some of the wind out of the sails of risk appetite. A much weaker than expected round of building approvals from Australia was also not overlooked and has further depressed some of the positive follow through seen in early Asia trade on the back of the weekend China PMIs.
Moving on, the Bank of Japan Q1 Tankan review came in generally weaker than expected, despite a softer Yen, positive signs in the US, and some stability in the Eurozone. In our opinion, this offers yet another reason to not be optimistic with the outlook for the global economy. We are looking for more underperformance in risk correlated assets going forward.
Elsewhere, we continue to hear more and more from the hawkish members of the Fed, with the latest comments from non-voting Kocherlakota suggesting that policy could in fact be reversed sooner than investors have been pricing. Clearly, this would lead to a net US Dollar bullish development, one in which yield differentials would narrow markedly back in favor of the buck.
Still, the technical fate of the US Dollar is less clear over the short-term, and we see risks for some additional US Dollar depreciation before the buck finally looks to reassert in 2012. The latest Euro consolidation above 1.3300 has now opened the door for a potential acceleration of gains back towards the 2012 highs just shy of 1.3500. We would not rule out the possibility for a push to challenge the 200-Day SMA just shy of 1.3600 before the anticipated underlying bearish resumption within the more definable downtrend off of the record highs in 2008. A break and daily close back under 1.3250 in EUR/USD would now be required to officially negate this outlook and put the buck back in a more attractive setting.
One other major themes in the markets right now is the EU bailout package, with the latest news of a fund that has been increased in size to EUR 800bln generating a good deal of attention. Once again, on the surface the news sounds rather positive, but upon further glance, there is a good deal of speculation and doubt over whether the ESM can in fact secure the necessary amount by mid-2013. Furthermore, we must also be reminded that the need for additional bailout is a sign that the economy requires more stimulus to help rescue it from the depths of a major crisis. For today, we will continue to keep a close eye on price action in EUR/USD for clearer directional insight. As a side note, one other cross rate worth watching this week is EUR/CHF, with the market dangerously close to testing the highly touted SNB 1.2000 floor. A break below this barrier could spark some fresh volatility in the cross.
ECONOMIC CALENDAR
TECHNICAL OUTLOOK
EUR/USD: The recent break and close back above 1.3300 now likely opens the door for additional upside over the coming days towards, and eventually through, the current 2012 highs just shy of 1.3500. While our core outlook still favors substantial weakness ahead, current strength could very well extend into the 1.3600’s by the 200-Day SMA before consideration is to be given for underlying bear trend resumption off of the record highs from 2008.
USD/JPY: Has been locked in some consolidation since the market broken to fresh 2012 highs beyond 84.00 with technical studies unwinding from overbought levels before consideration is to be given for the next major upside extension. The key levels to watch above and below come in at 84.20 and 81.80 and a break on either end will be required for clearer short term directional bias. However, given the bullish breakout in 2012, all signs point to a major structural shift which favors additional upside beyond 84.20 and into the 85.00-90.00 area further up. Ultimately, only back under 80.00 would give reason for concern.
GBP/USD: The market has recently broken to fresh 2012 highs beyond 1.6000 and this now likely opens additional upside back towards the October 2011 peak by 1.6170 further up. While our core bias remains bearish, we will stand aside and look for opportunities to sell into rallies towards 1.6200 in anticipation of an eventual bearish resumption. A break and close back below 1.5945 now required to alleviate immediate topside pressures.
USD/CHF: While our core bias remains constructive with eventual gains seen back above parity over the coming months, the market remains under pressure over the shorter-term. From here, there are risks for additional declines back below recent lows at 0.8930, but ultimately we see the 200-Day SMA by 0.8850 supporting. Ultimately, only a daily close below 0.8850 would give reason for concern.
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