Daily Forex Analysis by Finexo.com 03/03/2010

Market gears up for a very busy end to the week: ECB minimum bid rate and BoE official bank rate out tomorrow, followed by US Non-Farm Payrolls on Friday.

Past Events:

• CAD Overnight Rate out at 0.25%, versus expected 0.25%, prior 0.25%
• AUD Cash Rate out at 4.00%, versus expected 4.0%, prior 3.75%
• AUD GDP q/q out at 0.9% versus expected 0.9%, prior 0.2%
• GBP Construction PMI out at 48.5, versus expected 48.9, prior 48.6
• GBP Nationwide Consumer Confidence out at 80 versus expected 71, prior 73
• EUR German Retail Sales m/m out at 0.0% versus expected -0.5%, prior 0.9%

Upcoming Events:

• GBP Halifax HPI m/m (march 3rd-5th)
• GBP Services (0930GMT)
• EUR Retail Sales m/m (1000GMT)
• USD ADP Non-Farm Employment Change (1315GMT)
• USD ISM Non-Manufacturing PMI (1500GMT)
• AUD Trade Balance (tomorrow 0030GMT)

• GBP Official Bank Rate (tomorrow 1200GMT)
• EUR Minimum Bid Rate (tomorrow 1245GMT)
• USD Non-Farm Employment Change (Friday 1330GMT)

Market Commentary:

Unlike the Royal Bank of Australia, who opted for a rate hike of 0.25bps, the Bank of Canada chose, as predicted, to maintain its target overnight rate at its current record low level of 0.25%. The Canadian dollar rose for a third day against its major currency counterparts after the BOC announced their decision to maintain the key interest rate at its historically low level and said that inflation as well as economic output have been higher than policy makers have expected.

While the Canadian central bank reiterated its commitment to hold rates steady until the middle of this year, the bank acknowledged that the recovery for the northern nation appears to be proceeding at much better and faster rate than it had previously anticipated. Following the release if the overnight rate statement, the Loonie gained 0.8% against its American counterpart as the USD/CAD fell from the previous day’s closing price of 1.0414 to 1.0335- making it the biggest intraday gain for the Canadian dollar since February 11th.

Across the Atlantic, investors are eagerly awaiting the rate announcements from both the European Central Bank and the Bank of England (scheduled to be released within 45 minutes of each other tomorrow).

The Euro closed yesterday at $1.36069, up 0.29% from the day’s open as investors bought the Euro back following news that the Greek Prime Minister had called a cabinet meeting for today, in order to make decisions about the economy. The Greek announcement comes as Prime Minister George Papandreou prepares to meet the German Chancellor Angela Merkel this coming Friday, and as a direct reaction to European Union Monetary Affairs Commissioner Olli Rehn’s early statement that Greece must reveal new measures ‘in the coming days’ to allay officials’ concerns that the current austerity plan falls short.

Chancellor Merkel, along with other EU leaders, believes that Greece should do more in order to justify any EU aid package. Many taxpayers and political opponents strongly feel that Greece shouldn’t be bailed out after living beyond its means. Failure to satisfy Rehn’s demand before the Berlin talks may shatter hopes of a German-led rescue plan, potentially provoking investors to reverse a rally in Greek bonds. After falling as much as 0.9% to $1.3436, its lowest level against the greenback since last May, the euro gained 0.1%, to hit a session high of to $1.3548 (at 9:58 a.m. yesterday in New York).
Yesterday morning the Euro Zone released its yearly CPI Flash Estimate. It showed that inflation within the 16-country zone has slowed throughout February as rising unemployment and a weakening economic recovery pushed households to scale back spending. While analysts had anticipated a rise of 1.0%, consumer prices within the Euro Zone rose a disappointing 0.9%, from a year earlier.

Early this morning, Germany released its monthly retail sales report. Despite a predicted drop of 0.5%, retail sales were unexpectedly stable for January, while December gains were revised upwards modestly- fueling hopes that consumer supported recovery may emerge within the coming months. This will be followed by the publication of the entire Euro Zone’s monthly retail sales for January, predicted to show a decrease of 0.3% from the previous month. With no other important news coming out for the rest of the day, investors will turn their attention to tomorrow’s impeding ECB rate announcement. Once again, Jean-Claude Trichet, president of the ECB, is expected to maintain the minimum bid rate at its current record low level of 1.0%.

The ECB’s rate decision will be preceded the Bank of England’s announcement of its overnight rate. The BoE is expected to keep its key lending rate at its current record low level, despite signs that Britain is emerging from the recession at a faster pace than previously anticipated. While the country’s GDP may have grown 0.3% (revised) for the fourth quarter of last year, analysts predict that it is highly unlikely that the central bank will opt to exit its “easy” monetary policy so quickly.

Yesterday, the Sterling plunged to a new 10 month low against the greenback as speculation continued to increase that neither the Labor nor the Conservative party would win an outright majority in Parliament in the coming June election- obstructing efforts to cut the country’s historically high budget deficit. After slipping 1.045% on Monday (at one point diving a record 3% to a $1.4784, its lowest level since April 2009), the GBP continued to fall against its American counterpart yesterday – deprecating an additional 0.2314%, to close at $1.49607.

Despite increasing chances of a “hung” parliament in addition to a plummeting currency, U.K consumer confidence jumped in February to a two-year high. The index of consumer sentiment increased 6 points from the previous month, to a new level of 80.

Yesterday, the U.K released its construction PMI, showing a fall from its previous level of 48.6 to 48.5 (a number greater than 50.0 indicates expansion, while number below shows contraction). Early this morning (930GMT), the U.K will release its Service PMI- while this report is the last PMI for the week, it is the most important. The service sector, which includes the financial sector, was improving up until last month. After falling to 54.5, analysts predict a slight increase of 0.5 points this month, to a new level of 55.0.

The U.S dollar weakened across the board, falling against 15 of its 16 major currency counterparts, following the release of the Bank of Dallas Fed Chairman’s statement that borrowing costs should continue to remain low until the economy picks up- which according to him “won’t happen for some time”.

Later today (1315GMT), the U.S will release its ADP Non-Farm Employment Change. While generally considered a predictive index for Friday’s highly anticipated Change in Non-Farm Payrolls, the ADP is expected to show a drop of 15K. With Payrolls have declined in 24 out of the past 25 months and economists are predicting another decline of 40,000 in February.

Written by Finexo.com