FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
The Fed announced Operation Twist yesterday but judging by the reaction in risk, investors were clearly positioned for something more aggressive, even though the size of the purchases was more than markets expected. The Fed announced an intention to purchase $400 bn of long-term debt, funded by selling the same amount of short term paper, by the end of June 2012. The vote was not unanimous, with Kocherlakota, Fisher and Plosser dissenting, again underscoring the level of division at the Fed. It also committed to reinvest principal payments from its holdings of Agency securities into Agency MBS. Our US economists note that the FOMC also repeated language that opens the door to further policy action, again saying that it had discussed a range of policy tools available to promote a stronger recovery “and is prepared to employ its tools as appropriate.”
We retain our view that the USD will continue to rally over the medium term. The situation is very different to when QE2 was announced last year and policy easing will likely come from other central banks. NZ Q2 GDP came in at +0.1% vs expectations of 0.5%. Ahead today PMI figures are out in Europe. World leaders are also gathering in New York for the UN General Assembly, though for markets the IMF meetings later this week are far more important, with bank recapitalisations likely to top the agenda given yesterday’s warnings by the fund. EURUSD traded 1.3529-1.3601 and USDJPY 76.42-76.97.
EUR
The ECB announced that it is reducing the requirements for collateral held at the bank. The ECB is now willing to accept debt that does not trade on a regulated market. Although it is widening the possibilities, it is reducing the amount of such material that can be used. Previously, eligible material from unregulated markets was allowed to make up 10% of the total collateral given to the ECB, that has now changed to 5%. The policy is likely designed to help troubled European banks.
The ECB allotted $500m to one bank in this weeks 7 day dollar tender, That figure is slightly lower than last weeks $575m but significantly below the numbers seen at the height of the crisis in 2008. With EURUSD basis swaps at current levels, increased usage of the USD swap facility is likely. The European Systemic Risk Board sees a considerable increase in risks to the EU’s financial system.,
The IMF described the downside risks for the global economy as ‘growing’. They advised the ECB to cut interest rates if debt tensions persist, and to keep intervening ‘strongly’ in debt markets. The IMF now sees global growth at 4% this year, down from 4.3% in June.
EU Commissioner Michel Barnier said that he could not rule out state support would be needed in the event of recapitalizations, though would prefer to see this happen through the private sector. State funding for banks would again put ratings of many nations into question.
The Greek government has announced it would accelerate budget cuts to ensure funding remains in place. Finance Ministers Venizelos warned that the financial sector and real economy could stop functioning without funding in place.
GBP
As expected the MPC minutes were dovish. The vote split for further asset purchases remained 8-1, with Adam Posen remaining the sole dissenter, but ‘most’ members said their decisions were close. Downside risks to growth and inflation were stressed and any signs of hawkish comments were removed from discussion. The BoE has clearly shifted in its stance. It was interesting to note that the possibility of changing the maturity profile of the Bank’s asset portfolio was discussed. Clearly the ‘operation twist’ in the US has gained support elsewhere.
The BoE’s Spencer Dale said that further stimulus may be needed if the economy weakens further. However, he said the need for stimulus needs to be weighed against continuing high inflation. He added that the outlook for demand has weakened ‘quite materially’ and said that recent data on UK unemployment is ‘worrying’.
CAD
Canadian retail sales are due today, market expecting a -0.3% sequential decline in July.
Canada consumer prices rose faster than expected in August, climbing 0.3% m/m (consensus 0.1%, UBSe 0.0%). This pushed headline inflation to 3.1%. Core prices were also stronger, up 0.4% m/m, resulting in the annual rate of climbing up to 1.9%. As Carney alluded to yesterday however, rates will likely stay low for an extended period.
AUD
The RBA’s Battelino said the bank is keeping an open mind’ on policy. He also dismissed the current rate-cut pricing, saying market priced the same in 2003 but the cuts didn’t transpire. We agree and expect AUD to stay supported versa other risk currencies as a consequence.
NZD
The RBNZ Governor Bollard said the NZD was overvalued and they are in no hurry to hike.
New Zealand Q2 GDP was weaker than expected, increasing by 0.1%q/q in the June 2011 quarter, following an upward revision of 0.9% for the March 2011 quarter. Our economists note that for monetary policy, there is nothing in the GDP data that will cause the RBNZ to want to hike earlier. Conversely, they are not convinced that the data ought to delay the RBNZ either
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BEARISH Break below 1.3587 has opened support at 1.3495 ahead of 1.3428. Resistance is at 1.3787.
USDJPY BEARISH Move below 75.95, the key low, would open the psychological level of 75.00. Resistance is at 77.28.
GBPUSD BEARISH Momentum is negative; sharp fall through 1.5513 has opened the way for further losses towards 1.5407 and 1.5345. Resistance is at 1.5520.
USDCHF BULLISH Clearance of 0.9012 has opened 0.9105 ahead of 0.9200. Near-term support lies at 0.8700.
AUDUSD BEARISH Fall through 1.0126 has opened 0.9928, a move below which would expose 0.9959. Resistance is at 1.0313.
USDCAD BULLISH Rise through 1.0058 has paved the way for further gains towards 1.0179 an 1.0209. Initial support lies at 1.0052.
EURCHF BULLISH The cross has strong resistance at 1.2346/1.2403 area. Break above this would expose 1.2646. Support lies at 1.2051.
EURGBP NEUTRAL Rally through 0.8791 has turned the model neutral; the near-term directional triggers are at 0.8886 and 0.8596.
EURJPY BEARISH Decline through 103.90 has opened 102.02 ahead of psychological level of 100.00. Resistance is at 105.33.
SCHEDULE
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