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FX Morning update - US dollar treads water, while Euro perks up

By Michael Hewson

Date: Thursday 11 Mar 2010

FX Morning update - US dollar treads water, while Euro perks up

Fears about the withdrawal of stimulus measures in China were reinforced today after Chinese inflation hit a 16 month high, industrial production rose and new bank loans came in ahead of forecasts. The inflation figures more than anything else are a concern, with predictions of a rise through 3%, the governments target rate, by next month. These fears about a rise in Chinese rates could well underpin the dollar and pare back risk appetite in the short term.

The cost of these stimulus measures with respect to government expenditure was highlighted starkly last night with the release of figures showing that the US budget deficit for February came in at a whopping $221bn, a record number. The figures go on to show the deficit this year will likely surpass the record $1.4 trillion in the fiscal year that ended in September 2009.
These figures highlight the problems facing world governments and the only reason that the US dollar hasn’t been hurt more by these numbers is that other countries are in even worse shape, while US GDP figures for the last two quarters give some comfort that the US will be able to grow at a rate that will pare these figures down.
President Obama has projected that the US will be running $8.5 trillion in deficits over the next 10 years.
The market will be looking at the this afternoon’s US Trade balance figures which are expected to show a deficit of $41bn, while weekly jobless claims is expected to show a figure of 460k.

Sterling continued to come under pressure yesterday after manufacturing and industrial production came in far worse than expected, testing support against both the Euro and the US dollar, but it has so far managed to hold both levels as the dollar has slipped back.
The announcement of the date of the UK budget on the 24th March could well underpin the pound until then on the basis that Alistair Darling may well steal the Conservative’s clothes, and be more transparent about possible future spending cuts, and fire the starting gun proper for the lead-up to the general election.

The Euro was also buoyed by comments from Romano Prodi, the ex EU President who said in an interview in Shanghai "For Greece, the problem is completely over," which you could argue is a little on the optimistic side, especially given Greek yields are still over 300 points above the equivalent German yields . Prodi went on to say that the rest of the Euro zone is not at risk and the worst of the crisis is past, which is not a view shared by financial markets and certainly not reflected in bond yields for the respective countries.

EURUSD – the Euro continues to trade in a broad range between the key downside support at 1.3485 on a daily close and the recent highs around 1.3700. The trend line resistance from the 1.5145 highs continues to weigh down on the market with the resistance now at 1.3790 which could be difficult to crack.

GBPUSD – The key levels on the cable remain at 1.4850, the 61.8% retracement of the up move from 1.3500 to the highs at 1.7045. A break below here would re-target 1.4400, the 22nd April 2009 lows. Resistance can be found at 1.5020 in the short term.

EURGBP - the November and December 2009 highs at 0.9150 are the key barriers to further Euro upside here. Last week’s rally stalled at this level and remains the key barrier to further sterling losses. Euro dips should find some buyers around 0.8980 and 0.9020.

USDJPY – the yen has pared back some of yesterday’s losses finding resistance at the 90.70/80 area. The key resistance level remains at the 200 day MA at 91.90. The likelihood of higher Chinese rates should temper risk appetite and in turn boost the yen. Some yen repatriation ahead of the financial year end is also likely to cap any upside in the dollar in the short term.
The dollar should find support around 90.20, while also finding support around the 89.30 area which is the bottom of the cloud.

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