Brave New World

Morning FX Report 10/03/2009

GBPUSD- Weaker below 1.3900. Targeting 1.3750, then 1.3500

EURUSD- Higher above 1.2700. Targeting 1.2760. Reversal on poor fundamental news, poor equity markets

UK– Economic data from the UK released today reported- you guessed it- a further deterioration in the economic climate. Housing data from the UK continues to break new records. The Royal Institute of Chartered Surveyors (RICS) released this morning showed that monthly price balance had fallen to -78.3  from -76.6. Average sales completed per surveyor sank to 9.5 for the three months to February from 9.8 in the previous survey, the lowest since the RICS started the series in 1978. Retail sales, according to the BRC monitor in February fell 1.8% y/y (compared to a 1.1% rise in January). The Office for National Statistics says that  industrial  production in January fell  2.6% m/m and 11.4% y/y. Industrial output in the three months to January fell by 7.1% when compared with the previous three months, the biggest  fall since March 1974. Commentary- given this latest reminder to the market about the seriousness of the downturn in the UK economy it is perhaps surprising that there was not a consequent sell-off in Sterling. Having seen a 400 pip sell-off yesterday against the USD, Cable found support around the 1.3750 level, rising to a high earlier today of 1.3886. Technically, a rebound was expected at some point. GBPUSD should resume its trend downwards, testing the new support before targeting the 1.3500 level. Interestingly though, some respected FX strategist are predicting that GBP could rise as a result of any positive results of quantitative easing- given that the BOE is ahead of other banks in implementing this measure.

EUR– European economic data showed the worsening business climate in the region. Highlights from the Eurozone include the German trade balance – which rose a weaker than expected 8.5B from 7.3B – and French industrial production – which collapsed -3.1% in Jan to a new record low -13.8% annual rate and considerably weaker than the market expectationm of -1.0% m/m. EURUSD shed about -25 pips in the session thus far and was sitting near 1.2680/90 ahead of the NY open. The relative lack of movement of the Euro from the movement markets, particularly given that is was much worse than expected perhaps says much about market cynicism towards European leaders, who are being wrecklessly overcautious. Chairman of the Eurozone Finance Ministers Junker has demonstrated how behind the curve some policy makers are in the region. Responding to calls from the US- as well as leading economists and a strongly worded piece in yesterday’s FT, courtesy of Martin Wolf, he said, “the 16 finance ministers agreed that recent American appeals insisting Europeans make an added budgetary effort were not to our liking.” In separate comments German Finance Minister Steinbruek said, “We are not debating any additional measures.” However, other policy makers have commented on the need for preemptive and decisive action. ECB Executive Board member Lorenzo Bini Smaghi is quoted as saying in Boersen-Zeitung: “If the (economic) situation worsens, the ECB is ready to reduce rates further, even to zero. That is above all the case if the economy was really threatened by sustained deflation. And in such a situation, the best approach would be to act sooner rather than later.” Like yesterday, EURUSD should follow world equity markets closely. Follow the Dow..