Brave New World

Foreign Exchange Outlook 07/04/2009

EURUSD: Bearish. Current spot (1503BST): 1.3261. Targeting 1.3160 (100 day SMA)

• Heightened risk aversion
• Worsening economic outlook in Europe
• Lack of policy response from European policy makers

GBPUSD: Mildly bullish. Current spot (1503BST): 1.4710. Targeting 1.4960 (yesterday’s high)

• Better than expected data
• Limited downside risk from Thursday’s BoE announcement
• Technicals indicate a higher move in Cable

USDJPY: Mildly bearish. Current spot (1503BST): 100.322. Targeting 100

• Heightened risk aversion may see break back through psychologically important level

Comment– Given the market surge at the end of last week on the back of G20, news of a relaxation of the mark-to-market rule for financial services firms, and relief that the US NFP figures showed that less than 700k jobs(!) were lost in March, it is unsurprising that the market has taken time to take stock. Risk appetite has diminished this week, with equity markets displaying nervousness. Reports that the IMF are about to announce that the toxic asset problem is much larger than originally thought have served to refocus minds on the origins of this crisis and the lack of progress made on its resolution. However, we are not quite back to the doom and gloom of six weeks ago.

The AUD is consolidating gains made against the USD, with the RBA effectively announcing earlier this morning that the rate cut cycle is over, following one last cut of 25bps to 3%, a strong current account surplus (unlike Japan, both exports and imports increased). China is showing some renewed signs of confidence, in some of its latest data- although the optimism in official figures should be discounted the data is moving in the right direction.

GBP– The UK economy, while still unofficially the toxic man of Europe, is showing signs that a flattening of the downturn is taking place. Last week’s Nationwide survey showed a surprise rise in house prices, although Halifax showed a drop. Industrial production data out today showed a further fall of 1.0% in February, better than the market expectation and better than January’s fall of 2.7%. Manufacturing output dropped  0.9% in February, following a revised fall of 3.0% in January- making it the smallest monthly fall since August 2008. Authorities in Europe’s second largest economy have been proactive, using every available tool at their disposal. In this context, sterling should be reasonably well supported, although any strong return to risk aversion will bear down on GBPUSD. .

The EUR has benefitted from a return to risk appetite, and a boost to IMF finance from G20 meeting, which reduced the region’s exposure to Eastern European economic implosion reaching a high just short of 1.3590 at the start of the week. Risk aversion, policy inaction and appalling data from the region have served to undermine the single currency this week and with little prospect of those three bearish elements changing EURUSD looks vulnerable for the remainder of the week.

USDJPY has traded in a 60 pip range since the start of European trading, with the BoJ’s announcement or keeping rates on hold at 0.1% having no impact on the market. The accompanying statement highlighted worries about possible deflation, and the dependency the Japanese economy has on global demand. The break of USDJPY over the psychologically important 100 mark has been well supported, but continuing risk aversion will weigh heavily on the pair.