Forex - RBA Holds Rates Steady at 3.25%

Forex News and Events: The equity markets took another thumping yesterday, with S&P down -4.66%, the lowest level since 1996. Declines were driven by losses in the financial and energy sectors as further capital injections into major US financial services firms (AIG and HSBC) and declining crude oil prices took their toll. Asian equity markets didn’t fair much better, with the Hang Seng down -2.30%. The USD was on a back footing in Asia, specifically against local currencies, as additional details on President Obama's bank bailout plan stimulated risk a bout of risk appetite. In a surprise decision, the RBA held rates unchanged at 3.25% versus expectations for a cut of at least 25bp, with some even anticipating 50bp. The central Bank cited that Australia had not witnessed a significant contraction as other economies, while the financial system was still showing effectiveness in lower interest rates for housing and business loans. The RBA also noted that low interest rates and the recent fiscal stimulus packages will provide major support to the economy. However, the Central Bank clearly left room for further easing stating "On this basis, notwithstanding evident economic weakness at present, the Board judged that the stance of monetary policy was appropriate for the moment. The Board will consider the position again at its next meeting". And on the economic data front retail sales and exports both came in better than expected ( 0.2% vs. -0.5%exp,-6499m vs.. -7350m exp. respectively). We expect the RBA to continue to lower rates in April down to 2.50%, especially if the weakness in the labor markets continues. Markets pushed AUD higher with AUDUSD trending to 0.6450. However, we expect the currency to converge back with commodity prices and USD strength in the near term. The highlight of the trading day, especially after the RBA surprise decision, will be the Bank of Canada’s interest rate announcement. The market is expecting a 50bp cut. However, we are leaning towards 25bp to 0.75%. Recently, the Bank officials have emphasized that they expect fiscal and monetary stimulus policy will begin working later in the year. Whatever the absolute size, as rates move towards the zero bound, the accompanying statement will be closely analyzed for any signal that the BoC is ready to implement a Fed type of quantitative easing. While the banking sector is in better shape and labor markets firmer, the economy is still heading into a severe recession and eventually Canada will need to follow other central banks in QE. In Switzerland , Q4 GDP beat the analysts forecast printing at -0.3% q/q vs -0.8% exp. Given huge write-downs by Switzerland ’s largest banks, financial services output, which account for a relatively high share of GDP, this suggests that the economy is facing up to global crisis surprisingly well.

Today's Key Issues (time in GMT): 09:28 GBP Construction PMI, index Feb 34.5 prior 10:00 EUR PPI, % m/m Jan -0.2 (0.6 y/y) exp, -1.3 (1.8 y/y) prior 14:00 CAD BoC interest rate announcement, % Mar 0.50% exp, 1.00% prior 14:00 USD Bernanke testifies to Senate Budget Committee 15:00 USD Pending home sales, % m/m Jan -3.0 (-1.3 y/y) exp , 6.3 (2.1 y/y) prior 00:00 USD Total vehicle sales, mn (saar) Feb 9.6 exp, 10.2 prior

The Risk Today: EurUsd The Euro was able to rally from 1.2540 to 1.2626, however, sentiment still shows market is prepared for additional EUR weakness. Pair is currently looking to test 1.2514 Feb lows. Intraday momentum indicators are pointing to slightly oversold conditions however consolidation below 1.2750 points further weakness. A break of 1.2514 will place the focus on 1.2424 then 1.2330 (oct 08 lows). GbpUsd Yesterdays call for a correction due to bullish divergance was on the mark but short-term bull rally doesnt have momentum. Expect a test of horizontal support at 1.3958 (mar 2nd lows) then down to 1.3500. Upside breakout of 1.4170 will target 1.4250. UsdJpy Short term correction of bull trend is seen as a buying opportunity. Weekly momentum indictors are bullish. Anticipate a test of 98.71 resistance. Intraday support stands at 96.36 (minor support 96.85). UsdChf Consolidation continues. 5 day MA creating intraday support at 1.1692. Steady bullish trend since 1.1463 key reversal low (feb 23rd) looks to target 1.1885 reversal high. 1.1808 stands intraday resistance (Fib 76% 1.2252 to 1.0372)

Resistance and Support: EURUSD GBPUSD USDJPY USDCHF 1.2810 M 1.4515 S 100.00 S 1.1885 S 1.2750 K 1.4425 K 98.71 K 1.1808 S 1.2700 K 1.4385 M 98.25 M 1.1797 T 1.2640 1.4098 97.78 1.1734 1.2514 M 1.3958 T 96.85 M 1.1692 M 1.2424 S 1.3850 S 96.36 T 1.1615 K 1.2330 K 1.3500 S 94.95 M 1.1400 S S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot