Overall strategy: The favourable run of economic data has boosted underlying confidence in the US economy and yield support will remain firmer in the short term. There will be continuing expectations that the US economy will out-perform much of Europe and there will also be further concerns surrounding the Chinese outlook on concerns over a potential hard landing. In this environment, there will be the potential for a sharp deterioration in risk appetite if there is any evidence of deterioration in the US outlook with no major areas able to provide strong support.
Key events for the forthcoming week
Date
|
Time (GMT)
|
Data release/event
|
Tuesday March 20th
|
12.30
|
US housing starts
|
Wednesday March 21st
|
09.30
|
Bank of England MPC minutes
|
Wednesday March 21st
|
12.30
|
UK annual budget
|
Dollar:
There will be further short-term confidence in the US economic outlook following the run of generally favourable data releases, especially after the stronger than expected payroll report. The US currency will gain support from the decision not to consider further quantitative easing at this stage, although the Fed will still maintain a very loose monetary policy. The dollar will also gain support on a downgrading of expectations surrounding other major economies with additional backing realistic if risk appetite deteriorates.
The dollar gained support following the stronger than expected US employment last week and maintained a firm tone over the week as a whole, although there was some slowdown in the gains as key resistance levels were approached. The Euro retreated to lows close to 1.30 as the US yield advantage was sustained.
As expected, the Federal Reserve left interest rates on hold below 0.25% following the latest FOMC meeting. There was a more optimistic stance on the economy with expectations of moderate growth and there was greater confidence in the labour market while financial-market tensions had eased. There was no mention of further quantitative easing, but there was still an expectation that interest rates would remain at exceptionally low levels through 2014.
Regional Fed President Lacker dissented against the interest rate pledge and the lack of quantitative easing references helped boost the dollar. US 10-year yields rose to a 15-week high which helped underpin the dollar.
US jobless claims fell to 351,000 in the latest reporting week from 365,000 previously maintaining a run of generally favourable labour-market data. There were robust readings for the regional PMI indices as the New York Empire index rose to 20.2 from 19.5 the previous month, although there was a dip in the orders component. There was a similar pattern in the Philadelphia Fed index as a rise to 12.5 from 10.2 masked a weaker reading for orders which may trigger some unease over the second-half growth outlook.
There was a stronger than expected reading for long-term capital inflows with a rise to US$101bn for January from US$19.1bn previously. There will be relief that there was a rise in inflows, especially with concerns that China had been shifting funds out of US Treasuries and should provide some fundamental dollar support.
The US currency maintained its yield advantage which helped limit pressure for profit taking and the Euro stalled in the 1.31 with some choppy trading conditions following the reports that some of the Strategic Petroleum Reserve would be released. |