Daily Report: Portugal Seeks Bailout, BoJ Offers Post-Quake Loan, Aussie Jumps, ECB & BoE Next

Euro pares some gain ahead of ECB rate decision as Portugal was finally forced to seek a bailout after Ireland and Greece as borrowing costs jumped to record highs. Prime Minister Jose Socrates confirmed yesterday that the "government decided to make the European Commission a request for financial aid". Bond yields jumped sharply after Socrates offered to resign last month following rejection of the new austerity measures by parliament. 10 year yield jumped to new record of 8.8% yesterday and 7% is already the level where markets perceived as unsustainable. Socrates didn't reveal any detail on the bailout request but it's believed that Portugal is aiming for a package that's around EUR 75b to EUR 80b. Euro's retreat is mild though, as the bailout should have been mostly priced in. Focus will turn to ECB rate decision today.

As signaled by President Trichet and other governing council members, the ECB will hike interest rates at the meeting today. While the main refinancing rate will be lifted to 1.25% from a record low of 1%, the corridor (marginal lending rate minus marginal deposit rate) will be widened back to 200 bps. In an interview with a Russian TV channel, executive board member Lorenzo Bini Smaghi indicated there will a series on rate hikes rather than just one. The central bank will be raising interest rates 'in a gradual way, first… Maintaining interest rates where they are now would mean basically becoming more and more expansionary, which is not appropriate'. Since the March ECB meeting policymakers have guided the market to expect a rate hike in April. Uncertainties caused by Japan's earthquake and sovereign debt problems in the European periphery are unlikely to delay the tightening step. Another issue worth attention is the potential new financing facility for bank restructuring.

BoJ left rates unchanged at 0-0.1% as widely expected. The bank also introduced a special post-quake lending facility today for making funds available for reconstruction. BoJ noted that "Japan's economy is under strong downward pressure, mainly on the production side, due to the effects of the earthquake disaster." JPY 1T is planned to be offered at 0.1% to financial firms with branches in areas affected by the March natural disaster. In addition, the bank will also consider to broaden the range of eligible collateral for the money market operations.

Australian dollar jumps to new record high today following stronger than expected employment data. The job market in Australia expanded 37.8k in March while unemployment rate dipped to 0.1%. Looking ahead, BoE rate decision will also be watched but since the bank is expected to stand pat and issue a brief statement, it could be a non-event. Germany industrial production, Canada building permits and US jobless claims will also be released.

AUD/JPY's strong rise from 74.48 extends further this week and the strong break of 88.04 resistance confirms medium term term up trend resumption. We'll stay near term bullish in the cross as long as 86.68 support holds and expect further rally ahead. As noted before, rise from 74.48 is resuming the whole rise from 2008 low of 55.11 and should now be targeting 61.8% projection of 55.11 to 88.04 from 74.48 at 94.83 and above.