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Bullish week open in USD, PBOC cut rates, RBA on the wire

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The week starts with stronger USD across the board amid better-than-expected US GDP in 4Q second reading released on Friday. According to data, the US economy grew 2.2% q/q (vs. 2.2% exp. & 2.6% last), while the core PCE remained stable at 1.1% q/q in line with market expectations. The week ahead will likely see limited sell-off in USD as trader will be in wait-and-see mode before February labor data. The nonfarm payrolls are expected at 235K (verse the strong 257K reading a month ago) and the unemployment rate is seen improved at 5.6% (vs. 5.7% prev.). The progress in earning data will be under close watch to judge how fast the slack in US jobs market is collapsing, an important input in speculations for the timing of the first Fed rate hike expected by the second half of the year. WSJ reports twice higher rate expectations based on futures market pricings.

In China, the PBOC cut the 1-year deposit and lending rates by 25 basis points to 2.50% and 5.35% respectively, the deposit rate ceiling has been stretched from 1.2 to 1.3 times, perceived as PBOC’s will toward a more market-oriented approach. Measures aim to boost economic activity, as the State Information State said to expect the growth to slowdown to 7% in Q1. USDCNY advanced to 6.2779, the building CNY-negative pressures will likely continue pushing the pair toward 6.30, last seen on Q4, 2012. Option bids trail above 6.25 for today expiry.

AUD/USD crossed below its 21-dma (0.7794) support on expectations that the RBA will also lower its cash rate target by 25 basis points to 3% at policy meeting tomorrow. Data showed the commodity prices continue sliding lower (-20.6% on year to February), reinforcing the bearish weekly start on the Aussie complex. Selling pressures should dominate pre-RBA.

USD/JPY opened the week better bid as capital spending slowed significantly to 2.8% y/y in 4Q (vs. 4.0% exp. & 5.5% last), therefore reviving speculations that BoJ may proceed with additional monetary stimulus in close future. The 21-dma is now ready to break above 50-dma, technically pushing USDJPY toward short-term bull bias. Large vanilla bids are placed at above 119.00/50 area, while barriers at 120+ should be cleared for sustainable advance to February’s double top at 120.47/48. EURJPY trade in tight range of 133.65/134.00.

EUR/USD consolidated weakness at 1.1160/92 at week open. Failure to break above Fibonacci 23.6% (1.1445) on Dec’14 –Feb’15 drop weighs on EUR-bull appetite. The MACD (12, 26) will step in the red zone for a daily close below 1.1175 (MACD pivot). The key support stands at 1.1098 (Jan 26th low), if broken should see a quick advance toward 1.10 psychological support. Option barriers trail down from 1.12, while stops are presumed below 1.10. Besides February final manufacturing PMI across the Euro area, the aggregate Euro-zone February CPI estimate is key EUR-data today. The headline inflation is seen at -0.5% y/y, with core CPI stable at 0.6% y/y.

Peter Rosenstreich – Head of Market Strategy:

“Swiss Feb manufacturing PMI fell to 47.3 (in-line with expectations) from 48.2 in Jan. Output and quantity of purchases slowed considerably, with finished good stocks rising. Clearly the environment post SNB abandoning the minimum exchanged rate remain challenging for companies. As companies develop strategies to manage the stronger CHF we should see economic conditions in Switzerland continue to decelerate. CHF was marginally weaker on the release and should continue in its a bearish trend verse EUR and USD. “

Luc Luyet, CIIA – Senior Market Analyst:

“Today’s US PCE inflation is expected to show the same behavior as the US CPI releases on 26 February: core inflation is likely to edge higher thanks to slowly improving wage pressures while headline inflation will remain weak, although the big negative month over month effects of the oil decline should disappear going forward. Overall, with US inflation expectations rising back towards 2%, the inflation outlook is likely good enough to warrant a rate hike from the Fed in summer. Further improvements in US job data on 6 March would strengthen the odds of our June rate hike scenario.”

Today’s economic calendar: February PMI Manufacturing data from Sweden, Norway, Spain, Switzerland, Italy, France, Germany, Euro-zone, UK, US and Canada, Swedish December Wages Non-Manual Workers y/y, Italian January (Prelim) & 4Q Unemployment Rate, UK January Consumer Credit, Net Lending Sec. on Dwellings, Mortgage Approvals and M4 Money Supply, Euro-zone January Unemployment Rate, Euro-zone February CPI Estimate & (Prelim) Core CPI y/y, Italian 2014 GDP Annual y/y and Deficit to GDP, Canadian 4Q Current Account Balance, US January Personal Income & Spending, PCE Deflator and Core m/m & y/y, US January Construction Spending, US Feb ISM Manufacturing and Prices Paid and Italian February New Car Registrations y/y and Budget Balance ytd.

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