USD, JPY Rally on Swine Flu Fears

by Korman Tam

The foreign exchange market reacted to the swine flu pandemic at the start of the week with traders bidding higher the safe-haven currencies. The dollar and yen advanced across the board amid declining global equities, pushing the euro lower to 1.3001 and 125.68, respectively.

The US economic calendar for the coming week will see a barrage of reports including the Case-Shiller home price survey, Richmond Fed survey, Conference Board’s consumer confidence survey, Q1 GDP, personal income, consumption, PCE, Chicago PMI, University of Michigan consumer sentiment, durable goods orders, and ISM manufacturing. Consensus estimates call for Q1 GDP to post a decline of 5.0% versus the previous decline of 6.3%. Meanwhile, consumer confidence is estimated to improve in April to 29.5, versus 26.0 a month earlier.

Euro Slumps

The euro traded lower amid heightened risk aversion as a result of fears over the global economic impact of the swine flu epidemic. However, the key catalyst for euro selling occurred during the New York session, following dovish comments from ECB governing council member Nowotny. He reiterated that Eurozone interest rates will stay low for a long time and that the Bank remains ready to use quantitative easing if necessary. Nowotny said that the ECB would take the necessary measures to stabilize inflation expectations.

Nowotny’s comments add to the uncertain outlook over the likelihood for further rate cuts with several officials having already suggested a bottom in ECB interest rates. Meanwhile, ECB President Trichet tempered Nowotny’s comments by saying the Bank needs to balance the need for quick action with the key obligation to resume sustainable path in the medium-term. Trichet dismissed the argument of lowering policy rates as the most effective response in a downturn as simplistic and suggested that overly activist policies not only risks destabilizing expectations, but is also counterproductive.

The euro retreated sharply from 1.3272 to 1.3001, with further losses to emerge at 1.2975, followed by 1.2940 and 1.29. Subsequent floors will emerge at 1.2880, backed by 1.2840 and 1.28. On the upside, gains will target interim resistance at 1.3050, backed by 1.31 and 1.3140. Additional ceilings are seen at 1.3170, followed by 1.32 and 1.3240.