UK CPI, Aussie Dynamics, USD & EUR

<p>Keep informed with the expert opinion of City Index’s Chief Global Strategist, Ashraf Laidi. Gain access to his in depth knowledge of the FX markets, […]</p>

Keep informed with the expert opinion of City Index’s Chief Global Strategist, Ashraf Laidi. Gain access to his in depth knowledge of the FX markets, macro economics and central bank policies. This blog page will be updated multiple times throughout the week.

If the prior two weeks were about the improved US jobs picture (jobless claims at four-year lows & NFP showing three straight months of +200K), this week could be all about stabilising the US housing market. Today’s February release of US housing starts slipped 1.1% to 698K, but the January figure was revised to a four-year high. Building permits rose 5.1% to 717K- the highest monthly rise since November’s 5.6%.

If the Fed’s current asset purchase programme is not renewed beyond June, then share-supporting actions from corporate America may do the trick for market confidence. These would be necessary in the event that the macro-rebound cools off this summer as was the case during the end of Q2 2010 and 2011. The aforementioned stock-friendly headlines and continued improvement on the US macro front may be creating the perfect storm for improved technicals in equities and risk currencies (commodity currencies, GBP & EUR at the expense of USD and JPY).

These actions are further boosting equities, lifting NASDAQ by 18% YTD, more than double the DJIA’s 8.5%. S&P500 is up 12% YTD.

Such stock-specific news (rather than macro data) may provide a positive response to concerns from the bearish camp pointing to the lack of outright QE3 from the Fed and slowing earnings in growth in next month’s earnings season.

UK February CPI hit 15-month lows in February at 3.4% year-on-year from January’s 3.6%, while core CPI declined to 2.4% from 2.6%-its lowest since November 2009. Although the figures were higher than consensus, the declining trend is in line with the BoE’s 2% forecast for year-end, which paves the way for further easing ahead, especially as GBP strength helps absorb inflationary pressures. As the BoE’s third round of asset purchases is deployed, mortgage approvals could remain on the rise (partly due to soon-to-expire home-buying schemes and on lower mortgage rates).

Aussie is hit after BHP’s China warning appeared in two separate stories; the first of which bearing it would reassign capex plans in light of uncertainty about China; the second of which, stating that Chinese steel growth has flattened owing to an anticipated pause in China’s large infrastructure build. Aussie, the worst performing G10 currency of the day, is extending its losses for the month, falling against all G10 FX, with the exception of NOK & JPY. We re-affirm CAD as our preferred commodity currency against AUD on the oil bullish story and US recovery dynamics. AUD/USD drops 3.5% from its year highs and nears the all important trendline support of 1.0420, holding since October. AUD/CAD is down 3.6% from its Feb highs to 1.04, and vulnerable to test parity.

Euro struggles to garner fresh gains after yesterday’s breach above its key 100-DMA. $1.3320-30 remains a key barrier for EUR/USD. The ascent is part of a head-&-shoulder formation, whose right shoulder (resistance) stands near $1.3320s. A daily or weekly close above $1.3330 would invalidate this typically bearish formation and may qualify to retesting the next vital resistance—1.3520, which is the 100-WMA. As long as EUR/USD is unable to regain 1.3520s, it remains pessimistically similar to the three patterns seen over the last two years, thereby, suggesting $1.25.

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