German IFO Surprises To The Upside

The news flow out of Europe for the last few weeks has been decidedly positive. Despite the fact that inflation itself has not improved, we suspect that the developing recovery story will keep CPI from slipping into deflationary territory. For this reason we don’t believe the ECB will conduct further quantitative easing (possibly aimed at weakening the Euro), although additional rate cuts are still possible or even an injection of liquidity through a directed LTRO. Yesterday Eurozone flash Composite PMI climbed to a 35-month high in April hitting 54.0. This indicates that the Eurozone recovery remains well on track, with upside risk to general Q1 2014 GDP forecasts. The peripheral performed well yet France was again the key weak spot although PMI data was above the 50 level at 51.8. German composite PMI jumped 2 points to 56.3 vs. 54.3, while IFO expectations rose to 107.3 vs. dip to 105.8. Surprisingly what we see as the primary political risk, employment, is starting to show signs of improvement which is good news for impending May European parliamentary elections.. In a report published Tuesday, Moody's stated that Spain's economy is on an improving trend. The rating agency went on to say that public finances are fragile with chronically high budget deficits and increasing public debt, while exports and domestic demand continue to contribute to growth. Yesterday even France got into the spirit by divulged the government's ambitious and un-French strategy for slashing the public deficit and stimulating long-term growth. And to top off the exuberance Portugal went back to the capital markets for the first time since 2011 bailout issuing €750m of 10-year bonds at 3.57% (while an oversubscribed Spanish auction of 10-year bonds 3.059% near an all-time low). In the short term, optimism over Europe and decreased expectations for the ECB to enact easing should keep EUR supported.

As was universally expected due to the RBNZ candid communication, the cash rate was raised 25bp to 3.00% for the second consecutive month. The focus then became the accompanying statement which was not as dovish as expected. The RBNZ slightly ungraded its economic forecast for annual GDP growth in Q1 from 3.3% to 3.5%. In regards to the NZD, the central bank still believe its overvalued but less than previously thought. They still believe that inflation will head higher despite the recent drop in CPI which will keep policy heading toward a more ‘neutral’ level which we estimate around 4-4.50%. The RBNZ suggested that the pace of the hike will depend not only on the rate of growth and inflation pressure but also the role of exchange rates in keeping inflation in check. The statement does leave room for the RBNZ to pause, should NZD continue to rise, and stifle inflation, we think the current data trajectory will keep tightening on track.

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EUR/USD bounced yesterday near the support at 1.3780. However, bullish rally is weak. An hourly support is at 1.3785 (22/04/2014 low, see also the low of the rising channel). The next resistance is at 1.3906 (11/04/2014 high). The short-term technical configuration remains positive as long as the support at 1.3730 holds In the longer term, EUR/USD is still in a dominate uptrend, suggesting additional upside can be anticipated. A significant resistance now lies at 1.3876 (24/03/2014 high).

GBP/USD has breached the fibo level at 1.6823. A solid break above would validated a short-term bullish trend reversal formation. The next resistance can be found at 1.7043 (11/11/2011). The short-term bullish momentum is intact as long as the hourly support at 1.6684 (previous resistance) holds. In the longer term, prices continue to move in a rising channel. As a result, a bullish bias remains favoured as long as the support at 1.6460 holds. A major resistance stands at 1.7043 (05/08/2009 high).

USD/JPY failed to break above short-term high at 102.34 (22/04/2014 high) yesterday. Despite a possible pullback, a move towards resistances are at 102.83 (21/04/2014 high) then a distant 104.21 (04/04/2014 high) is still favored. A long-term bullish bias is favoured as long as the key support area given by the 200 day moving average (around 100.90) and 101.40 (see also the rising trendline from the 93.79 low (13/06/2013)) holds. A major resistance stands at 110.66 (15/08/2008 high).

USD/CHF declined sharply during yesterday's session, breaking hourly support at 0.8820 (21/04/2014 low). Even though it rose back to close at its daily close price, the hourly succession of lower highs and lower lows favors further short-term weakness. Monitor the test of the intra-day support at 0.8805. From a longer term perspective, the structure present since 0.9972 (24/07/2012) is seen as a large corrective phase. The recent technical improvements suggest weakening selling pressures and a potential base formation. A decisive break of the key resistance at 0.8930 would open the way for further medium-term strength.