FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
The euro has started the week sharply lower as there was a clear lack of initiative at the weekend meetings in Washington. The IMF communiqu? noted the global economy has entered “a dangerous phase, calling for exceptional vigilance”, but offered no new initiatives to address the problem. Commentary from officials suggests that boosting the effective capacity of the EFSF through some form of leverage is being seriously looked at, although planning appears to be at a very preliminary stage, and the immediate focus remains on ratifying the July 21 agreement on the EFSF as a first step toward something perhaps more spectacular. However, other contingencies are probably being planned, as German Chancellor Merkel said overnight a sovereign default was possible within the Eurozone. German Deputy Finance Minister Asmussen said that Greece getting the next tranche of aid was not a given, and warned markets not to expect a quick decision at the next Eurogroup meeting on Oct 3. Although reports suggest some new plans are under discussion behind the scenes, not only to ringfence Greece but recapitalise the banks, time is running out and the Eurozone’s internal divisions remain a key worry for markets.
EUR
German Chancellor Merkel said on Sunday that it was possible to see a sovereign insolvency within the Eurozone. She acknowledged that the situation in the Eurozone was ‘serious’ but stressed that there were no easy solutions. Her comments come amid talks between the Trokia and Greece in Washington over the weekend to discuss the terms of the next aid tranche. The Troika is expected to return to Greece next week and other agreements will likely be finalized at the Oct. 3rd Eurogroup meetings.
Merkel said that she was confident her party would get a majority in the upcoming vote on the EFSF in the German parliament. Even though she has shifted her rhetoric somewhat on a Greek default, she also warned that such a step would ‘destroy confidence’ in Europe. The opposition has called for EU citizens to have a direct say in such affairs, though they have also pledged to support the EFSF package and we do not expect the German vote to be a major risk event. However, there are delays in other countries.
A local Greek paper reported that Germany is now pushing a plan to restructure Greece’s debt that would include up to a 50% loss to bond holders and new draconian budget measures imposed on the Greek government. Dow Jones reported that the plan would be involuntary, though Eurozone countries would also need to contribute by helping recapitalize Greek banks.
On Sunday, Greece’s Finance Minister Venizelos described as “very encouraging” the response from international banks to the long-standing request for private sector participation in a second Greek rescue. However, he did not say whether the indicative 90% participation level had yet been reached. Venizelos stressed that “Greece is and will always be an EU and a euro area member state” adding that Greece is too small to create a pan-European domino effect. He also acknowledged for the first time that year-end targets for the privatization of Greek public sector assets would be missed. Venizelos met IMF Managing Director Lagarde on Sunday, and the IMF afterwards announced that the troika would return to Athens “most likely this coming week”.
Reuters, citing an unnamed Greek official, said the next tranche of the Greek rescue is expected to be approved by Oct. 2.
Newswire reports suggest that behind-the-scenes discussions are continuing about how to leverage the EFSF’s available lending capacity. However, discussions appear to be at a preliminary stage, and the immediate focus remains on ensuring that all Eurozone parliaments first ratify the July 21 agreement on extending the powers of the EFSF to empower it to purchase Eurozone government bonds in the secondary market.
On Sunday, EFSF CEO Regling said it would be “very unlikely” for the ECB to be involved in leveraging the EFSF’s firepower – this appears to undermine recent press commentary suggesting that the ECB might be directly involved. Regling said that Eurobonds would take at least a decade to be introduced.
Bank of France Governor Noyer said French banks are “very solid”. He denied reports that plans are afoot to recapitalize the French banking system saying: “there is no plan, and we don’t need one”.
Over the weekend, ECB Governing Council member Nowotny raised the possibility that ECB growth forecasts for the Eurozone could be lowered further. We note that these forecasts were last cut at the ECB’s September policy meeting, when ECB President Trichet also acknowledged that risks to the forecasts lay to the downside.
On Saturday, ECB Executive Board member Stark said that Eurozone growth for the second-half of the year is likely to be below expectations. He sounded particularly concerned about latest events and latest data flow, but added that it was too early to say if a double-dip was on the cards.
CAD
BoC Governor Carney struck a cautious note. He implied that although the economy did not currently need any additional monetary policy support he noted “we still have an interest rate tool”.
We remain long a 3m USDCAD call spread with strikes at 1.0317 and 1.0969, for 1.8636% notional with spot at 1.0330. The US dollar’s safe-haven appeal remains, and given widespread market risk aversion, the dollar rally is likely to continue. We look for further CAD downside with the BoC cautious and Canada heavily exposed to the US.
CHF
SNB Chairman Hildebrand said on Saturday that “We will enforce the exchange rate cap with all consequences,”. These comments come amid speculation that the SNB may raise the EURCHF floor from its current 1.20 level. The SNB has in the past noted the current floor remains too low and the SNB quarterly report warned that activity may come to a halt in the second half the year in Switzerland.
JPY
Japanese Finance Minister Jun Azumi said Japan is ready to offer further support to the Eurozone, such as buying EFSF bonds, on condition that Europe makes efforts on its own first. He also stressed that a sharp rise in the yen would damage Japan’s economy though refused to comment on intervention..
TECHNICAL OUTLOOK
EURCHF 1.2346 resistance.
EURUSD BEARISH Break below 1.3356, a Fibonacci level, would expose 1.3245. Near-term resistance is at 1.3601.
USDJPY BEARISH Focus is on 75.95; a break below which would expose the psychological level of 75.00. Resistance is at 77.00..
GBPUSD BEARISH Fall below 1.5297 would expose 1.5192, a Fibonacci level. Resistance is at 1.5520 ahead of 1.5632..
USDCHF BULLISH Clearance of 0.9183 would open 0.9340. Near-term support lies at 0.8928.
AUDUSD BEARISH Decline through 0.9574/37 area would signal extension of losses towards 0.9442. Resistance is at 0.9928.
USDCAD BULLISH Rise through 1.0380 would open the way for 1.0512. Support lies at 1.0225.
EURCHF BULLISH Key resistance is at 1.2346/1.2403 area. Break above this would expose 1.2646. Support lies at 1.2051..
EURGBP BEARISH Drop below 0.8671 has turned the model bearish; next supports are at 0.8639 and 0.8596. Resistance is at 0.8772.
EURJPY BEARISH Pressure is on 102.22/02 area, a break below which would open the way towards 100.00, psychological level. Resistance is at 104.38.
Please visit GCI’s Economic Calendar for a schedule of market news and events.
