Weekly Review and Outlook: Extended Recovery in Risk Appetite Sent AUD/USD to New Record High, Euro Firm on Rate Expectations

Weekly Review and Outlook: Extended Recovery in Risk Appetite Sent AUD/USD to New Record High, Euro Firm on Rate Expectations

Risk appetite was strong last week in spite of continuous negative news out of Eurozone. The strength was clearly reflected in extended rebound in global equities as well as rally in commodities. In the foreign exchange market, risk sentiment was manifested in the clear strength in Aussie and Kiwi and the weakness in swiss franc as well as dollar. Among European majors, euro was the biggest winner as rate expectations remained firm. Meanwhile, support to Sterling faded after markets cooled down from overshoot rate expectations. In summary, S&P 500 close 1313.80 last week, 5.1% above post Japan earthquake spike low of 1249.05. CRB commodity index closed at 359.97, 6.7% above equivalent low of 337.44. Gold made new record high of 1448.6 while crude oil is back pressing 106.95 near term high. Dollar index dipped to as low as 75.52 before recovering while AUD/USD made new record high just shy of 1.03 level. Near term sentiments would likely continue to support Aussie and Euro, but the greenback could have a chance to rebound against Swissy, Sterling and possibly the Canadian dollar too.

Eurozone debt crisis was a major focus last week as worry on Japan nuclear crisis eased while situation in MENA took a back seat. Fitch downgraded Portugal's rating from AA- to A+ and that was followed by S&P's downgrade of Portugal from A- to BBB. Portuguese prime minister Socrates resigned after the new austerity plan was rejected by the parliament. The highly anticipated EU summit produced nothing solid. Domestic political considerations in Finland and Germany delayed the finalization of the details of a plan to boost the lending capacity of the EFSF to June. Nevertheless, as noted before, Euro was firmly supported by expectation of rate hike from ECB in April and such expectation was firmly affirmed by rhetoric from central bankers last week. The common currency should remain supported ahead of April 7's ECB meeting but there could be risk of a near term reversal after expectation becomes fact.

Sterling lagged behind Euro even though inflation data beat market expectations and jumped to 4.4% yoy in February. BoE minutes was a disappointment to sterling bulls as they showed no change in the voting. Three members favored increasing interest rates during the meeting with Andrew Sentance maintaining his call for an increase the policy rate to 1% while Martin Weale and Spencer Dale voting for a move to 0.75%. The minutes cooled down speculation for a Q2 hike from BoE even tough a Q3 high is still priced in.

Near term outlook of the greenback is a bit mixed for the moment. Dollar should maintain weakness against Aussie and Euro. But technically, some further rebound would possibly be seen against Sterling and Swissy. Canadian dollar also found it difficult to sustain momentum against dollar. On important development to note is that we have possibly seen the pull back in US 10 year yield finished earlier in the month and stronger rise in yield ahead would help the greenback extends rebound against other major currencies, except versus Aussie and Euro. Meanwhile, Japanese yen continued to stay in range last week. The broader bearish outlook in yen crosses remained unchanged as key resistance levels still hold after G7 intervention triggered rebound.

Technical Highlights

S&P 500 was firmed supported by the medium term rising channel in spite of the post Japan disaster selloff. Current development indicates that the larger up trend is resuming for a new high above 1377.04. 

Similarly, the CRB commodity index was also firmly supported by medium term rising channel after Japan's disaster triggered selloff. And the recent up trend is likely resuming for a new high above 366.71. 

Dollar index recovered from 75.25 but there is no change in the bearish outlook. We'd expect upside of the current recovery to be limited by 76.88 support turned resistance and bring another fall through 75.25 temporary lot o 74.19 support next.  

The Week Ahead

Developments in Portugal and Eurozone will remain a major focus but might continue to have muted impact on Euro's up trend. Main focus would indeed be on CPI estimate which could alter speculation on ECB rates beyond the April hike. UK manufacturing PMI will be another major focus as BoE rate expectation will continue to flip flop. A number of US data will be released today, including personal income and spending, ISM and NFP.

• Monday: US personal income and spending, pending home sales; New Zealand trade balance; Japan household spending, unemployment, retail sales
• Tuesday: German Gfk consumer sentiment; UK current account, GDP final; US S&P house price, consumer confidence
• Wednesday: Japan industrial production; Swiss KOF; US ADP employment
• Thursday: Australia retail sales, building approvals; RBNZ business confidence; German unemployment; Eurozone CPI flash; Canada GDP; US jobless claims, Chicago PMI, factory orders
• Friday: Japanese Tankan; China PMI manufacturing; Swiss retail sales, SVME PMI; UK PMI manufacturing; Eurozone unemployment; US non-farm payroll, ISM manufacturing