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FOREX: Yen Hits 5-Month Low on Fed Outlook, Euro Eyes Portugal Bond Sale

By , Currency Strategist
06 April 2011 07:29 GMT

Overnight Headlines

  • Japanese Yen Sold After Fed Minutes on Firming Interest Rate Outlook
  • Australian Home Loans Drop for Second Month, Underpin Neutral RBA Bets
  • UK Retail Inflation Drops Most in Nine Months Ahead of BoE Rate Decision

Critical Levels

CCY

SUPPORT

RESISTANCE

EURUSD

1.4183

1.4298

GBPUSD

1.6169

1.6500

The Euro and the British Pound advanced in overnight trade, adding as much as 0.4 and 0.3 percent respectively against the US Dollar. We remain short AUDUSD.

Asia Session: What Happened

GMT

CCY

EVENT

ACT

EXP

PREV

23:01

GBP

BRC Shop Price Index (YoY) (MAR)

2.4%

-

2.7%

1:30

AUD

Home Loans (FEB)

-5.6%

-2.0%

-6.3% (R-)

1:30

AUD

Owner-Occupied Home Loans (FEB)

-4.8%

-

-5.1% (R-)

1:30

AUD

Investment Lending (FEB)

-2.3%

-

-6.9% (R-)

2:30

CNY

China HSBC Services PMI (MAR)

51.7

-

51.9

5:00

JPY

Coincident Index (FEB P)

106.3

106.3

105.9

5:00

JPY

Leading Index (FEB P)

104.2

104.2

101.5

The Japanese Yen fell for the tenth consecutive day overnight, down as much as 0.9 percent against its major counterparts. The selloff came after the Federal Reserve released minutes from the March meeting of the rate-setting FOMC, which revealed an increasing number of policymakers have started to lean towards unwinding stimulus measures. With the heretofore aggressively dovish Fed now signaling that tightening is around the corner, the Dollar is increasingly less attractive as a vehicle to borrow funds cheaply for carry trades, encouraging investors to unwind short-USD positions and reallocate their yield-seeking portfolios toward short-Yen bets. The US-Japan 2-year bond yield spread jumped to 61.3 basis points, putting it just shy of the 8-month high set in February.

On the data front, Australian Home Loans dropped for the second consecutive month in February, down 5.6 percent. The reading reinforces expectations that the Reserve Bank of Australia will hold off on raising interest rates for the time being after policymakers held them at 4.75 percent following yesterday’s policy meeting. Meanwhile, UK retail inflation slowed as the BRC Shop Price Index added 2.4 percent in the year through March, marking the largest pullback in nine months. The slowdown comes just ahead of tomorrow’s Bank of England rate decision, reinforcing expectations that Mervyn King and company will shy away from a rate hike.

Euro Session: What to Expect

GMT

CCY

EVENT

EXP

PREV

IMPACT

7:00

GBP

Halifax House Price (3MoY) (MAR)

-2.8%

-2.8%

Low

7:00

GBP

Halifax Plc House Prices s.a. (MoM) (MAR)

0.2%

-0.9%

Low

7:00

CHF

Foreign Currency Reserves (MAR)

-

205.7B

Low

7:15

CHF

Consumer Price Index (MoM) (MAR)

0.2%

0.4%

Medium

7:15

CHF

Consumer Price Index (YoY) (MAR)

0.5%

0.5%

Medium

7:15

CHF

CPI - EU Harmonised (MoM) (MAR)

-

0.3%

Low

7:15

CHF

CPI - EU Harmonised (YoY) (MAR)

-

0.5%

Low

8:30

GBP

Manufacturing Production (MoM) (FEB)

0.6%

1.0%

Medium

8:30

GBP

Manufacturing Production (YoY) (FEB)

5.8%

6.8%

Medium

8:30

GBP

Industrial Production (MoM) (FEB)

0.4%

0.5%

Medium

8:30

GBP

Industrial Production (YoY) (FEB)

4.3%

4.4%

Medium

9:00

EUR

Euro-Zone Gross Domestic Product s.a. (QoQ) (4Q F)

0.3%

0.3%

High

9:00

EUR

Euro-Zone Gross Domestic Product s.a. (YoY) (4Q F)

2.0%

2.0%

High

9:00

EUR

Euro-Zone Household Consumption (QoQ) (4Q F)

0.4%

0.4%

Medium

9:00

EUR

Euro-Zone Government Expenditure (QoQ) (4Q F)

0.1%

0.1%

Low

9:00

EUR

Euro-Zone Gross Fixed Capital (QoQ) (4Q F)

-0.6%

-0.6%

Low

10:00

EUR

German Factory Orders s.a. (MoM) (FEB)

0.5%

2.9%

Medium

10:00

EUR

German Factory Orders n.s.a. (YoY) (FEB)

17.4%

16.0%

Low

The final revision of fourth-quarter Euro Zone Gross Domestic Product figures is set to confirm the regional bloc’s economy added 0.3 percent in the three months through December, with no revisions being expected in the key underlying components behind the headline figure. On balance, the report may not garner much attention considering its limited implication for tomorrow’s ECB interest rate decision, where traders have priced the probability of a rate hike at 100 percent for some weeks.

With that in mind, the spotlight may fall on Portugal as it auctions off up to 1 billion euro in short-term debt (9:30 GMT). While the result may not have an immediate impact on the Euro as traders wait to commit to a strong directional bias so closely ahead of the monetary policy announcement, it warrants attention nonetheless considering it will surely color how markets digest tomorrow’s Spanish debt sale. EURUSD is tracking the 5-year Spanish CDSa measure of the perceived likelihood of a sovereign default beyond the scope of the EFSF bailout fund – meaning the auctions could prove far more significant to Euro price action beyond the very near term than anything the ECB announces.

Elsewhere, UK Industrial Production is expected to add 0.4 percent in February while the annual growth rate slows a bit to 4.3 percent. The shallow pullback may not produce fireworks considering the timelier Manufacturing PMI report has telegraphed a slowdown in the sector through March. Finally, Swiss Consumer Price Index figures are set to put the annual inflation rate unchanged at 0.5 percent in March, which may put the Franc on the defensive as the hawkish turn at the US Fed makes the SNB look increasingly like a laggard (along with the BOJ) on post-crisis tightening.

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06 April 2011 07:29 GMT