FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
Risk sentiment was mixed in Asia as investors weighed yesterday’s positive close in US stock markets against uncertainty about policymakers’ ability to solve the European debt crisis. At the time of writing the Nikkei is down by 0.82% and S&P futures are broadly flat. Despite the mixed performance of Asian equity markets, sentiment does appear to have stabilised. EURUSD traded 1.3260-1.3358 and USDJPY 76.61-76.95. In Australia, retail sales rose more than expected, suggesting that consumers are proving resilient to uncertain growth prospects.
Moody’s downgraded Italy, mainly on the back of weak growth prospects and increased financing costs and funding risks. The rating agency had warned in June that a downgrade was increasingly likely, so the impact on markets was rather limited, especially as S&P had already downgraded Italy several weeks ago. Moody’s also noted that future policy action within the Eurozone could stabilize funding markets again. Separately, press reports suggest that European politicians may have finally accepted the need to recapitalise the banking system.
In the US, Fed Chairman Bernanke said yesterday that the economy is faltering and the Fed is ready to take further action if needed. With inflation expectations falling again, such comments, even if a repetition, are gaining importance and helped USmarkets close on a positive note yesterday. Ahead of tomorrow’s ECB meeting, investors will stay focused on headlines regarding the Eurozone periphery. The US ISM non-manufacturing index will also be closely watched as a gauge of the services sector and hence the standing of the consumer.
EUR
Moody’s cut Italy‘s sovereign rating three notches to A2, outlook negative. This brings Moody’s into line with S&P, while Fitch still rates Italy two notches higher. By way of justification Moody’s cited implementation risks to Italy’s fiscal consolidation program, downside risks to Italian growth, and general funding risks for sovereigns with high levels of debt. The rating agency has already warned in June that a downgrade was increasingly likely. As such impact on markets was rather limited, in particular as S&P already acted several weeks ago. With risk sentiment stabilizing once again and dollar positioning extreme we would advise against shorting the euro ahead of tomorrow’s ECB meeting, especially as the risk for disappointing expectations for a rate cut of more than 25bn appears to be high. With risk sentiment appearing to stabilize again and speculative long US dollar positioning extreme, we would advise against shorting the euro ahead of tomorrow’s ECB meeting, especially as there is a high risk that expectations of a bigger rate cut may not be borne out.
The Financial Times reported that EU finance ministers have finally accepted the need for bank recapitalizations, and are working on a plan to co-ordinate this effort. This fits with comments by Austrian Finance Minister Fekter who said Eurozone countries now want to evaluate the capital position of their banks. This should be considered a euro positive as it would help banks withstand the impact of a Greek default.
ECB President Trichet said that banking system liquidity is ample, and that liquidity hoarding on precautionary grounds may have already begun. He added that denying the gravity of the situation would be the worst possible mistake.
German Finance Minister Schaeuble said that his ‘great worry’ is that a banking crisis may develop, and hinted that government-sponsored bank recapitalizations might be used if the crisis escalates.
German Chancellor Merkel said that Germany offering solidarity in Europe is cheaper than for Germany to march on alone.
The Belgian and French finance ministries released a joint statement to the effect that they will guarantee a troubled bank’s financing. They said the respective central banks will take all necessary measures to safeguard the bank’s account holders and creditors..
GBP
UK September construction PMI was revised lower to 50.1 vs 51.6 consensus. Construction is a minor sector in the UK however, and Wednesday’s services PMI will be of greater interest to the BoE.
AUD
Retail sales in August rose by 0.6%, above an expected increase of 0.2%. This suggests that still favourable labour market conditions and hence stable income growth are keeping consumers resilient to uncertain economic growth prospects.
Although the latest data has no impact on the RBA’s neutral monetary policy stance, it may help sentiment for the AUD, especially if risk sentiment stabilises again.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BEARISH Initial support lies at 1.3089 ahead of 1.2867, a key low from Jan. 10. Near-term resistance is at 1.3601.
USDJPY NEUTRAL Near-term directional triggers are at 77.86 and 75.95.
GBPUSD BEARISH Key support is at 1.5328; a move below this level would expose 1.5251 ahead of 1.5192. Resistance is at 1.5597.
USDCHF BULLISH Rise through 0.9340 would expose 0.9506. Support lies at 0.9078.
AUDUSD BEARISH Break below 0.9331 would open the way for 0.9218. Initial resistance is at 0.9701.
USDCAD BULLISH Initial resistance is at 1.0680, a break above which would open the way for 1.0745. Support lies at 1.0432.
EURCHF BULLISH Key resistance is at 1.2346/1.2403 area. Next resistance is at 1.2646. Support lies at 1.2051.
EURGBP BEARISH Initial support is at 0.8530, a key low from Sep. 12, ahead of 0.8456. Resistance is at 0.8711.
EURJPY BEARISH Decline through 100.76 would open 100.00, the psychological level. Resistance is at 104.48.
SCHEDULE
Please visit GCI’s Economic Calendar for a schedule of market news and events.
