Canadian Dollar (CAD) Hit By Drop in Oil, All Eyes on Retail

EUR Sinks to Fresh Lows, Hit From Both Sides
USD: Driven Higher by Comments from FOMC Voter
GBP: Rebounds on Stronger Data
CAD: Hit By Drop in Oil, All Eyes on Retail
AUD: Slips to 4 Month Lows
NZD: Driven Lower By Dollar Strength
JPY: How the Weak Yen is Hurting Japan’s Trade Balance

GBP/USD has edged a little higher yesterday after dipping to a low of 1.5132; UK public finance data was a little better than expected as was CBI trends survey, which has perhaps supported the GBP upside but sterling continues to look vulnerable to the downside. With little on the UK calendar today the 1.5132 low should provide an initial support for GBP/USD, and given the move we’ve seen this week, we could see some consolidation into the weekend which should keep GBP/USD supported.

Weak French and German PMI data for February sent EURUSD plunging to fresh year to date lows as the pair broke through the 1.3200 level in morning European trade. The French PMI Services report hit 42.7 versus 44.5 eyed as it reached a fresh 48 month low. French PMI Manufacturing improved to 43.6 from 42.9 but nevertheless fell short of 43.9 forecast. In Germany the PMI Manufacturing report came in at 50.1 versus 50.4 expected while the PMI Services data declined to 54.1 versus 55.5 eyed. Overall the EZ flash PMI numbers also missed their mark with manufacturing coming in at 47.8 versus 48.4 projected while services plunged to 47.3 from 49.2 expected. Both Manufacturing and Service sectors remain well below the 50 boom/bust line indicating that EZ GDP will continue to contract in Q1 of this year. Some analysts have even predicted that the EZ growth will not turn positive until Q3 of 2013.

The main focus for today comes from Europe. The EU commission publishes its winter forecasts; focus will be on revisions to the French and Spanish budget deficits forecast for 2012 and 2013; current 2013 forecasts are 3.5% and 6.0% (of GDP) respectively, compared to the government estimates of 3% and 4.5%. The ECB also announces the first repayment of the second 3Y LTROs this morning. Latest surveys suggests the market is expecting around EUR130bn, a sizeable repayment would be considered EUR positive however market interest has somewhat reduced compared to the first set of 3Y LTRO repayments, likely as a result of Draghi’s comments at the ECB press conference earlier this month which saw him say excess liquidity will remain well above EUR200bn after the second LTRO repayment. Uncertainty surrounding the Italian elections on the 24th/25th should limit EUR/USD upside. We view the most likely scenario would be a Bersani – Monti alliance, however with a lack of fresh information due to the poll blackout the outcome remains uncertain. The German IFO will also be of interest, while the flash PMIs were weaker than expected they remained firm, and German ZEW economic sentiment was much better than expected surprising on the upside for a second consecutive month.

Canadian Data should see some interest this afternoon. Inflation was much weaker than expected in December; with headline CPI slowing to 0.8% y/y and core CPI to 1.1% y/y. The market is expecting inflationary pressures to slow further in January. If this is the case inflation looks likely to undershoot Bank of Canada’s latest forecasts (Q1 CPI of 0.9% y/y; core CPI of 1.4% y/y), which should further weigh on CAD. Retail sales are also release this afternoon. Manufacturing sales and wholesales sales surprised on the downside.

RBA Governor provided generally upbeat testimony in front of the Australian Parliament spurring a rally in AUD/USD and surprising the currency market which expected him to assume a more dovish stance given the recent slowdown in the economy. “Overall,” Mr. Stevens noted, “there is a good deal of interest rate stimulus in the pipeline. At its meeting earlier this month the board judged that it was sensible to allow it time to do its work.”

In relation to China Mr. Stevens also sounded relatively sanguine. “The medium-term outlook for China is for a less hectic pace of growth than we saw on average over the past decade,” he said, but added that because the Chinese economy is now so much bigger, even less rapid growth is of global significance and important to Australia.

Many market analysts however have questioned the assumption that future Chinese growth may not necessarily translate into additional demand for Australian products if China rebalances it economy away from investment and production and more towards consumption and services. Under such conditions, the Australian economy with its high exchange rate may prove uncompetitive creating further problems in growth.

The contents of this report are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The author(s) cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

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