Daily Market Outlook, March 31, 2021

Asian equity markets are mostly down this morning following small falls on Wall Street yesterday. That is despite generally encouraging data releases and comments from US Federal Reserve policymakers pointing to strong economic growth ahead. Australian building approvals surged 21.6% in February. Meanwhile, in China March PMIs beat expectations as the manufacturing PMI rose to 51.9 from 50.6 in February and the non-manufacturing PMI surged to 56.3 from 51.4.

Today’s updated Q4 UK GDP data showed an unexpected upward revision to quarterly growth to 1.3% from the previous estimate of 1.0%. Consumer spending growth was revised down sharply and now shows a big fall of 1.7% on the quarter but both investment spending and exports were revised up. The report also provided some interesting information about the potential speed of the economy’s rebound. Of particular note was the household savings rate which reached a record high of 16.3% for the whole of 2020 up from 6.8% in 2019. Much of this rise is likely to have been ‘forced’ savings as restrictions curbed spending opportunities and so may be unwound later this year leading to a sharp rebound in consumer spending.

Today’s Eurozone CPI for March is expected to post a sharp increase in annual headline inflation. Already released data for Spain and Germany both saw big gains and for the Eurozone as a whole expect annual inflation to climb to 1.5% from February in March. That would still leave it below the European Central Bank’s target. Moreover, the rise really only reflects the impact of higher energy prices as the ‘core’ rate is expected to be unchanged at 1.1%. Consequently, the ECB will probably regard the move as temporary and so it will have little impact on the outlook for monetary policy.

US President Biden is scheduled to speak about his plans for fiscal policy. The new administration has already steered a fiscal stimulus package though Congress, which is expected to provide a big boost to this year’s economic growth. Now he is turning to the longer run picture with proposals for a very big increase in infrastructure spending partially paid for by rises in taxes on business and higher income individuals. The proposals could further raise US growth expectations but markets may also worry about a risk that this may fuel inflationary pressures.

Today’s March US ADP private sector employment release will as always be seen as a gauge of the official employment data to be released on Friday. A big rise in February was viewed as confirmation that US growth is accelerating and an even bigger increase is expected for March.

CitiFX Quant Month End Flows

We are publishing this unscheduled update of month-end FX hedge rebalancing flows because the signal has changed to a moderate USD sell.

· Based on 24 March asset index closes we had previously estimated roughly balanced USD rebalancing needs. The MSCI US equity index has gained 2.12% since then, out-performing most other major markets. This has tilted the estimated net USD rebalancing flow towards a sell as foreign investors need to hedge gains in US equities. The strength of this month’s signal is below the historical norm, measuring 0.4 standard deviations on average.

· A combination of strong Japanese asset performance and our assumption of low hedge ratios employed by Japanese investors gives a sell-signal for JPY, almost entirely driven by foreigners’ needs to hedge gains in Japanese assets.

· The discrepancy between the JPY sell and buy-signals for other currencies suggests that EURJPY, GBPJPY and other JPY crosses may also move higher ahead of this month-end.

· There are no major data releases scheduled ahead of the month-end fix.

G10 FX Options Expiries for 10AM New York Cut

(Hedging effect can often draw spot toward strikes pre expiry if nearby)

Larger Option Pipeline

EUR/USD: Mar31 $1.1770-75(E1.0bln), $1.1800(E1.2bln), $1.1850(E1.2bln-EUR puts), $1.1900(E1.8bln), $1.1920-25(E1.7bln), $1.1945-56(E1.3bln), $1.2000(E1.0bln); Apr01 $1.1850(E1.1bln-EUR puts)

USD/JPY: Apr01 Y106.80-85($1.6bln-USD puts)

GBP/USD: Mar31 $1.3800(Gbp921mln-GBP puts)

EUR/GBP: Mar31 Gbp0.8515-25(E925mln-EUR puts), Gbp0.8540-50(E1.0bln-EUR puts), Gbp0.8600(E1.26bln)

AUD/USD: Mar30 $0.7960(A$1.1bln); Mar31 $0.7500(A$1.3bln), $0.7680-00(A$1.6bln), $0.7750-60(A$1.8bln), $0.7770-80(A$1.3bln), $0.7790-0.7800(A$1.1bln)

USD/CAD: Apr01 C$1.2450($1.5bln), C$1.2600-10($1.25bln-USD puts), C$1.2660-75($1.2bln)

USD/CNY: Apr02 Cny6.58($1.2bln)

USD/TRY: Apr06 Try6.60($916mln)

Technical & Trade Views

EURUSD Bias: Bullish above 1.1850 bearish below

EURUSD From a technical and trading perspective, the failure to recapture 1.20 on the upside leaves the 1.1830 lows exposed, through here bears will press for a test of the yearly pivot at 1.1720. UPDATE interim downside objective achieved anticipate profit taking to retest of pivotal 1.1760 from below as this contains corrective upside bears will focus on a 1.16 test. A close through 1.18 would be a bullish development

Flow reports suggest light offers through the 1.1800 area with weak stops on a move through the 1.1820 area with limit with light offers then running through the 1.1840-60 area before stronger offers start to appear on a test through the 1.1880 level and stronger through the 1.1900 area. Downside bids into the 1.1740-50 area and then increasing on a dip through the 1.1720-1.1680 level with congestion through to the 1.1600 area.

GBPUSD Bias: Bullish above 1.3750 bearish below

GBPUSD From a technical and trading perspective, the loss of 1.3750 is a significant development opening a move to test a corrective equality objective 1.3550, only a close back through 1.39 would suggest the correction lower is complete.

Flow reports suggest downside congestion around the 1.3660-40 area with stronger bids on any push towards the 1.3600 level and weak stops likely on a dip through opening to a deeper move, Topside offers through light through to the 1.3800 level with congestion through to the 1.3850 area before opening up to light offers and weak stops through the 1.3900 level and then stronger congestion.

USDJPY Bias: Bullish above 107.30 targeting 109.85

USDJPY From a technical and trading perspective, as 108.30 continues to attract demand bulls will target a test of pivotal 109.85 ahead of the yearly R1 pivot at 110. UPDATE...upside objective achieved look for any initial foray through 110 to prompt a profit taking pullback to retest bids to 108.50...UPDATE upside extension through 110.50 may prove exhaustive opening a profit taking pullback to test demand at 110.

Flow reports suggest topside light congestion through to the 111.80 level before stronger offers are likely matching the highs from the beginning of the previous two years at the same period of time, a break of the 112.30 area is likely to see strong stops appearing and the market opening for further push beyond the last couple of years highs. Before running through to the 112.50 area and another set of stronger offers appearing continuing through to the 112.80 level and likely continue seeing strong offers, downside bids light back through the 110 level and likely to continue to 109.80 with weak stops likely through the level and weak through to the 109.00 area

AUDUSD Bias: Bullish above .7560 bullish targeting .8200

AUDUSD From a technical and trading perspective, as .7820 contains upside attempts there is potential for a head & shoulders pattern to develop, a loss of pivotal .7560 would open a move to test trend support at .7400 next

Flow reports suggest stronger offers through to the 0.7840-60 area and then increasing offers onwards through 0.7900, with the offers likely to continue through to the 0.7950 area and likely increasing resistance through to the 0.8000 levels, downside bids into the 76 cents level with strong bids likely through to the 0.7580 area, weak stops are likely to be few and far between with stronger bids likely into the 0.7550 level and likely stronger congestion through to the 0.7500 area

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