Sterling gains

* The dollar rose against most major currencies on Tuesday as US stocks consolidated Monday’s rally. Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben S. Bernanke, in testimony to a House Financial Services Committee hearing today in Washington, seek new power to wind down failing financial companies after the government’s rescue of American International Group Inc. Despite increased risk aversion and declining US stocks, the yen was pressured by the deepening recession and increased deflation risk. Lack of domestic investment alternatives will likely induce Japanese households to start investments abroad again. The euro fell to the 1.35-area support after European Central Bank members said the ECB could consider quantitative easing as a last resort. The Australian and Canadian dollars declined modestly, unable to push through technical levels as commodity prices consolidated recent gains.

* The GBP/USD rose on stronger-than-expected UK consumer-price inflation and Bank of England Governor Mervyn King’s comments that sterling’s recent decline had not been engineered and he saw no reason why the pound should go any lower. King also expects disinflation to resume despite the unexpected February CPI pickup of 0.9% m/m and 3.2% y/y. Rising inflation and better outlook for the financial sector will dampen BOE’s enthusiasm for more aggressive quantitative easing measures; consequently, that should support the pound. The pair broke out of its downward sloping trading channel and reached the highest level since February 2 as the outlook for global banks has improved and risk appetite has increased. The RSI at 65 indicates the pair is getting overbought; however, a test of the 1.50 resistance is possible. The GBP/USD could be more overbought if this is a bottom. There is support in the 1.45-area. The GBP/JPY broke resistance today after forming a long-term bottom, indicating further gains.



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Financial and Economic News and Comments

US & Canada

* US house prices unexpectedly increased 1.7% m/m in January after a downwardly revised 0.2% m/m decline in December, according to the Federal Housing Finance Agency. January house prices fell 6.3% y/y.

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* Manufacturing activity in the central Atlantic region shrank at a less pronounced rate in March, according to the Federal Reserve Bank of Richmond. The Richmond Fed manufacturing index unexpectedly increased to -20 in March from -51 in February. Among the index’s components, shipments improved to -15 from -56, new orders rose to -20 from -54, and the employment index increased to -28 from -41. Price growth posted a sizeable decline in March. Assessments of business prospects for the next six months remained on par with February, the Richmond Fed said.

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Europe

* Manufacturing and service industries in the eurozone contracted for a 10th month in March, according to eurozone PMI data by Markit Economics. The manufacturing PMI increased to 34.0 in March from 33.5 in February, while the services PMI unexpectedly improved to 40.1 from 39.2. The composite PMI was at 37.6 after February’s record low of 36.2.

* Germany’s manufacturing and service industries continued to contract in March, but the pace of contraction unexpectedly eased, German PMI data by Markit Economics showed. The manufacturing PMI increased to 32.4 in March from 32.1 in February, while the services PMI improved to 41.7 from 41.3. The composite PMI rose to a 2-month high of 37.7 from February’s 36.3.

* The working day and seasonally adjusted eurozone current account recorded a deficit of ?12.7 billion in January (corresponding to a deficit of ?18.2 billion in non-adjusted terms), following a revised deficit of ?7.6 billion in December (corresponding to a revised surplus of ?0.7 billion in non-adjusted terms), the European Central Bank reported.

* The UK consumer-price inflation rate in February unexpectedly accelerated at 3.2% y/y, following January’s 3.0% y/y, the Office for National Statistics said. The UK retail price index was unchanged y/y in February, the weakest reading since March 1960, after a 0.1% y/y increase in January.

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Asia-Pacific

* The Japanese government, particularly the Finance Ministry, asked the Bank of Japan to channel more funds into the economy to relieve the Japanese “severe” recession, according to minutes of the February 18-19 meeting released today in Tokyo. The minutes read: “The government would like the Bank to support the economy from the financial side by providing funds more actively. The government would also like the Bank to take particular care in its communication in order to further enhance the effects of the Bank's various measures. Regarding outright purchases of corporate bonds, the government would like the Bank to consider expanding the scope of the measure.”

FX Strategy Update



©2004-2008 Globicus International, Inc. and Capital Market Services, L.L.C.

Source: Hans Nilsson

24.03.2009