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Canada: watch the budget release
On March 30, Thursday, finance minister Jim Flaherty is expected to deliver the annual budget.
RBC Capital Markets: The finance minister will report a deficit of between C$20 billion ($20.1 billion) and C$25 billion for the fiscal year, compared with an earlier forecast of C$31 billion, and will forecast bringing the country back to budget balance by the end of the 2015-16 fiscal year, a year ahead of schedule.
Although Flaherty promised earlier this month the 2012 budget will focus on “bolstering growth in a bid to sustain the country’s recovery, rather than spending cut”, he is expected to reduce governmental spending significantly by cutting public-sector jobs across the country. At the same time, Canada’s labor market has already been going through hard times in the past five months (7,400 job cuts a month since October), regardless of the U.S. economy rebound.
Today also watch for the Raw Material Price Index release (leading Canada’s indicator of consumer inflation is expected to grow 0.4% in Feb. versus 0.1% in Jan.). Tomorrow the monthly Canadian GDP will be published (0.1% growth is forecasted in Jan. versus 0.4% in Dec.)
The pair USD/CAD has been trading sideways since the end of January in range between 0.9840 and 1.0050. Analysts at Bank of Nova Scotia note that the greenback has broken above the 50-day MA at 99.70 cents, but the pair is still not that far from the center of the 2-month range. There is strong resistance at the parity level and higher, at 1.0006 (200-day MA) and $1.0033 (March 23 maximum).
Standard Chartered: economic outlook for Asia
Analysts at Standard Chartered claim that the economic outlook for Asia for the rest of 2012 is mixed.
Among the positive factors the specialists cite data from the US, reduced tail risks from a European sovereign or banking crisis, and the turnaround in the electronics cycle. As for the negative ones, they are the ongoing correction in China's property market, moderating export growth across Asia, and growth and inflation threats from higher energy costs.
The bank expects loosening in Asia to slow going into the summer as policy makers try to balance growth and inflation concerns. As the same time, Standard Chartered makes it clear that the risks to Asian growth are to the downside this year, so the region’s authorities will likely come up with more easing.
OECD: UK is facing “double-dip” recession
The Organization for Economic Cooperation and Development said today that United Kingdom is poised for a so-called “double-dip” recession. Recession is defined as 2 quarters of negative growth in a row.
British GBP shrank by 0.3% (q/q) in the final quarter of 2011 after sliding by 0.2% in the previous 3 months. The OECD economists think that in Q1 2012 UK economy contracted by 0.4%.
Analysts’ comments ahead of Eurogroup summit
European governments are preparing to increase the ceiling on rescue aid to 940 billion euro ($1.25 trillion) for 1 year at Eurogroup meeting in Copenhagen on March 30-31 in order to constrain the debt crisis. Under the proposal, the overall capacity would return to 500 billion in July 2013, when the EFSF expires.
National Australia Bank: “We do believe the approval for the rescue package will go ahead tomorrow, and this may create more support for the euro in the interim.”
Citi: The agreement to let the EFSF and ESM run in parallel would be “mildly positive because it could have been worse or not have happened at all. Everybody knows it is not going to be big enough. But less inadequate is a good thing."
ING: “That looks like the most plausible option, although it’s still going to be hard to sell to the German parliament. It would clearly do the job as long as it was followed up by some action by the IMF and G20.” (The IMF will meet in Washington on April 20-22 and is expected to agree to increase its own crisis-fighting resources as long as Europe has taken significant action first).
WSJ: “Officials tell us that a consensus will likely be reached in Copenhagen to pay in two extra tranches in 2013 and one in 2014. Despite this, officials say, unless paid-in capital is further accelerated, the funds’ actual combined size won’t top 700 billion euro at any stage. That’s because by the time the ESM lending capacity ramps up to roughly 400 billion euro by the middle of 2013, the EFSF will have been phased out.”
Hermes: “We don't see the euro zone crisis fading in the next few years even when the ESM is operating.”
Comments about declining Aussie
During March Australian dollar has been trading within downtrend versus the greenback. The main thing that’s driving Aussie lower is concerns about Chinese economic slowdown which will surely affect Australian exports.
Westpac: bearish view on Aussie in the next 1-3 months.
ANZ: “AUD is likely to continue to underperform on most crosses.”
Wells Fargo: “We would consider establishing long Canadian and NZ dollar positions against the Australian dollar.”
Scotia bank: “AUD/USD will continue to trade on broader market sentiment ahead of the RBA meeting on April 3, where policymakers are expected to maintain policy at 4.25%.”
Do not miss China’s March Manufacturing PMI release on April 1 (forecast 50.6).
Market’s concerned about Spanish budget
The majority of the experts believe that EUR/USD will keep trading in the $1.3000/$1.3500 area. However, with Spain's budget release on Friday, March 30, the pair may be vulnerable to the downside.
Spanish 10-year yield jumped today by 11 percentage points to 5.43%. The nation’s major trade unions called a one-day strike in protest of additional austerity measures.
If the budget delivers any negative surprises or is not considered sufficiently tough enough to reign in Spain's budget deficit, the demand for Spanish debt will decline even more.
Commerzbank: “Given the fact that we are below $1.33 this is certainly a psychologically important mark which may be the beginning of a more sustained down move.” The specialists think that even if European authorities agree to enlarge the rescue package, it will calm down the market, but the risk premium on peripheral countries' yields will remain quite high.
Credit Agricole: “We have a few political key events coming up, with the euro finance ministers meeting, Spain’s fiscal update and Italy’s labor market reforms. There’s still some uncertainty with regards to what happens over the next few days.”
Euro is widely chosen as a funding currency
Before the European debt crisis the common currency has always been classified as risky: euro always declined when the economic situation anywhere in the world became worrisome. However, today China is gradually slipping into recession, but the euro stands steady above the $1.32 level.
Analysts believe euro’s position on the market has changed due to the Greek debt crisis. European Central bank injected cheap liquidity into the financial system, while the ECB interest rates remain extremely low (1% since Dec. 2011). As a result, euro became a funding currency in carry trade operations.
Baring Asset Management: US dollar and yen will continue to play their part in funding trades but euro is definitely joining the club.
Sometimes the further movement of the liquidity cannot be easily traced, but specialists record large amounts heading into the Australian and New Zealand dollars, Mexican peso, Korean won. According to the International Monetary Fund, the emerging economies as a bloc are expected to expand by 5.4% this year (compared to 1.2% expected in advanced economies including the U.S., Japan, the U.K. and the euro zone).
However, some market players prefer to get rid of the risky assets in favor of the euro on the back of the rising uncertainty about emerging economies.
Pacific Investment Management Co: We still like euro as a funding currency but we are cautious on risk in general. So we haven't been very active lately investing in emerging market currencies against the euro.
Credit Suisse: There's little near-term risk of the European Central Bank tightening policy or withdrawing liquidity from the market. This means the euro is likely to remain a good funding vehicle.
Canada's budget released
Today Canada’s finance minister Jim Flaherty delivered the annual budget, which focuses on deficit elimination and requires a $5.2-billion cut to federal spending over three years.
In order to achieve the objective the government plans to rise the retirement age to 67 years and to cut 19,200 public-sector jobs. According to Flaherty, the reform will allow people to work longer and cut the budget deficit, because the government spends around $6,000 on each retiree. The national unemployment rate is expected to rise to 7.5 percent this year from 7.4 percent in 2011.
However, Flaherty promised to boost job growth and investment with $3 billion over two years for research and job subsidies.
Moreover, today watch the monthly Canadian GDP release (0.1% growth is forecasted in Jan. versus 0.4% in Dec.)
This Friday, USD/CAD is trading in the C$0.9981 area. Yesterday, the USD/CAD has tested again parity and the 200-day moving average.
Mixed data coming from Japan
According to the today's data release, business environment in Japan has improved in recent months, regardless of the negative industrual production figures.
Manufacturing PMI increased to 51.1 against 50.5 in February. Unemployment rate eased slightly to 4.5% in February versus forecasted 4.6%. Household spending rose 2.3% year on year, beating expectations for a 0.2% fall.
The core consumer price index rose 0.1% from a year earlier, or 0.2% from the previous month, Internal Affairs Ministry reported, marking the first such gain in prices in five months. However, the rise in the core CPI was due mainly to higher electricity and transportation-related costs, according to the data.
Credit Agricole: Japan's fight against deflation is far from over. Although persistently elevated levels of crude oil prices would result in a positive core CPI inflation rate going forward, we maintain our view that there is a persistent underlying deflationary pressure in the economy.
However, Japan's factory output fell unexpectedly in February, confirming the pace of recovery is still sluggish. The 1.2% decline in industrial production surprised specialists who had forecasted a 1.3% gain. Japan's factories posted a 1.9% output increase in January and 3.8% in December.
Nomura: Japan’s recovery will continue to pick up in the first half of this year. Growth in production for March and April will absorb a decline in February.
The Japanese yen keeps strengthening versus both the greenback and the euro (EUR/JPY is currently trading at 109.63 level; USD/JPY – at 82.08).
EU finance ministers expand the firewall to 800 billion euros
On a meeting held in Copenhagen the euro zone finance ministers agreed to expand the overall size of the firewall to 800 billion euros ($666 billion), including the 300 billion euros already committed to Greece, Ireland and Portugal. According to Austria’s finance minister Maria Fekter, permanent ESM and temporary EFSF will function together until mid-2013.
The bail-out firewall expansion became possible after this week officials in Berlin agreed to combine funds to prevent the spread of debt contagion across the euro region and calm down tensions in financial markets.
The common currency is heading towards posting weekly gains versus the U.S. dollar, which slipped after Bernanke's disappointing comments that concluded that the pace of recovery might not continue in U.S. without further easing and in result indicating at another round of quantitative easing.
The EUR/USD pair is trading in the moment around $1.3350, compared with the opening level of $1.3301. The pair recorded so far the highest at $1.3376 and the lowest at $1.3293.
Later today an important Spanish budget release is expected.