» European Morning Update 3rd March 2008

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European Morning Update 3rd March 2008

Dollar starts the week on a weak note…

There have been no further releases.

The following economic releases are due today:

January
Italian PPI                        (MoM)    +0.5%
Italian PPI                        (MoM)    +5.1%
U.S. Construction Spending (MoM)    - 0.7%

February
Swiss SVME PMI
Italian Manufacturing PMI                  50.2
French Manufacturing PMI                  53.4
German Manufacturing PMI               54.0
Euro-zone Manufacturing PMI            52.3
U.K. Manufacturing PMI                     51.0
Euro-zone CPI (E)              (YoY)    +3.2%
U.S. ISM Manufacturing                     48.5

The week starts with the Dollar under pressure from the open.

Last week’s long list of negative economic releases and Bernanke’s rather blunt admission that the economy was deteriorating faster than expected has pushed the Greenback to new lows, most aggressively against the Yen and Swiss Franc.

However, the next FOMC meeting is not for 2 weeks and this will keep the market anticipating further interest rate cuts from the Fed. Most look for 50bp but some players are looking for a more aggressive 75bp.

However, there is a limit to what interest rates can achieve. Japan had a zero-interest rate policy for years but this still didn’t jump-start the economy. It was the boost in exports generated from globalization that finally pulled them out of the slump.

The mortgage relief plan and fiscal stimulus are slow out of the traps and this is compounding the problem as consumers look on with angst as jobs steadily disappear and prices keep rising along with oil which topped $102 today.

There is little on the economic calendar from the States this week except the ISM and non-farm payroll numbers and these could risk unsettling the market further. The downside will always be the risk but it is becoming a little overdone in the short term.

Europe will be releasing the month manufacturing and service PMI numbers with German factory orders and industrial production numbers to be watched for later in the week.

The ECB and BOE are also due to announce rate decisions but both have made it reasonably clear that there will be no change this week. The European economies are still holding up in the face of the credit crunch but are very vulnerable to any shock.

Thus for today we should see a little more downward pressure but the limits appear to be around 101.80 Dollar-Yen, 1.5268-1.5322 Euro and 1.0216-40 Swissie.

This should then see the market settle into corrective range trading through to Thursday’s European rate decisions and Friday’s non-farm payroll.

Note important support and resistance areas:

         USDJPY        EURUSD       USDCHF       GBPUSD
Res: 104.18-55    1.5322-50    1.0486-25    1.9971-06
Res: 103.30-52    1.5238-68    1.0373-02    1.9891-24

Spt: 102.41-60 1.5142-68 1.0300-07 1.9761-83
Spt: 101.67-82 1.5070-80 1.0216-40 1.9606-56

European Morning Update 3rd March 2008

Dollar stabilizing following the early sell-off vs the Swiss Franc & Japanese yen

Releases from Australia:

Australia – February                                Prior    Current
AIG Performance of Manufacturing Index    49.2      51.4
TD Securities Inflation                 (MoM)  +0.3%    +0.3%
TD Securities Inflation                 (YoY)  +3.9%    +4.0%

Following a rather shocking 8.4 point decline The AIG Performance of Manufacturing Index recorded a solid rise of 2.2 points to bring the headline index back above the 50 boom/bust level.

The group reported, “The manufacturing sector has seen more subdued activity over recent months, in part, reflecting the effects of shutdowns over the summer holiday period. However, it is clear that concerns over global economic prospects, especially in the United States, higher Australian interest rates and rising input costs have had an ongoing negative impact on the sector.”

Almost predictably there was no good news concerning inflation which ticked higher to the highest annual level in 6 years to +4.0%. Rents, vegetable prices and the cost of financial services all contributed to the rise.

TD reported, “The inflation gauge continues to show inflation on a strong upward trend. This indicates that price pressures are more broadly based than just food and petrol. Furthermore, the monthly increase pushed yearly inflation to 4.0 percent, which is well above the top of the RBA’s inflation target band.”

It is timely that the RBA are meeting tomorrow and are expected to hike rates for the second month in a row by a further 25bp to 7.25% but the market expects at least one further hike later.

The following economic releases are due today:

January
Italian PPI                        (MoM)    +0.5%
Italian PPI                       (MoM)    +5.1%
U.S. Construction Spending (MoM)   - 0.7%

February
Swiss SVME PMI
Italian Manufacturing PMI                   50.2
French Manufacturing PMI                  53.4
German Manufacturing PMI                 54.0
Euro-zone Manufacturing PMI            52.3
U.K. Manufacturing PMI                      51.0
Euro-zone CPI (E)              (YoY)     +3.2%
U.S. ISM Manufacturing                       48.5

Friday’s trading following through into this morning has been rather strange. While the idea that we were close to a high in the Euro, probably already seen against the Pound have played through the weakness in the Dollar against the Swissie and Yen has been much stronger than anticipated.

I do have to say though that I feel the moves in the Swissie and Dollar-Yen are probably over for now and this tends to suggest we shall see that deeper pullback begin today. It should be fairly sizeable and given the current negative sentiment against the Dollar it is unlikely to be a straight line so expect there to be a good deal of choppy trading again.

The exception here may be the Pound which should be beginning the continuation of the larger downtrend. It appears to be in a small triangle right now – so wait for breach but when it does the follow-through could be quite strong.

Another currency pair that broke the mould was the Aussie which did see a large pullback and indeed to the deepest I would expect. This morning’s low at 0.9274 really needs to hold to maintain a new high.

Note important support and resistance areas:

         USDJPY        EURUSD       USDCHF       GBPUSD
Res: 105.06-49    1.5322-50    1.0486-25    1.9971-06
Res: 103.80-18    1.5238-68    1.0373-02    1.9891-24

Spt: 102.60-96 1.5142-68 1.0300-20 1.9761-83
Spt: 101.82-13 1.5070-80 1.0216-40 1.9606-56