FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
The euro remained hostage to headlines regarding the Eurozone sovereign debt crisis during the US session, and it seems several more days of this headline sensitivity lies ahead. Eurozone officials have called a second summit for Wednesday Oct. 26, although the original one on Sunday Oct 23 is also due to go ahead as planned. We see this as an acknowledgement of the highly complex issues that policymakers must now grapple with, and a recognition that more effort and more time will be needed to thrash out the details of a solution. Bloomberg reported, without citing sources, that a plan to combine the firepower of the EFSF and the proposed ESM to provide a EUR940 bn lending capacity is under consideration. The troika’s report on Greece was published. Sensationally, the troika concluded that Greece‘s debt dynamics are not sustainable, but recommended that the sixth quarterly tranche should be paid out regardless. The Greek parliament passed the latest Bill on austerity measures. There was one dissenter among the ranks of Prime Minister Papandreou’s parliamentary party, and the deputy was promptly expelled from the party, effectively reducing the governing party’s majority to only three seats. EURUSD traded 1.3656-1.3843 and USDJPY 76.68-77.09.
EUR
The euro rallied a big figure after a document regarding the implementation of the new EFSF powers announced in July hit the wires. The document stated that the EFSF will be able to repo bonds with commercial banks, a more subtle form of leverage. Nonetheless, differences of opinion on how to implement EFSF leveraging still exist and will be a key hurdle to overcome.
The Troika will present its analysis on Greek debt sustainability at the Eurogroup meeting over weekend. However, a draft of the report was leaked to the wires. It added that Greek government debt dynamics remain extremely worrying and its debt sustainability has effectively deteriorated. On a more positive note, the troika said that it recommends paying the sixth Greek aid tranche ‘as soon as possible’.
Eurozone Finance Ministers said that they aim to finalise the treaty on a permanent bailout mechanism by the end of November, according to a draft Eurozone summit statement.
According to a Bloomberg report, a draft paper of the EFSF bank recapitalization plans envisages focusing on financial sector repair. Banks taking aid will have to restructure, and only distressed banks with systemic risk are eligible. These terms appear to be more stringent than what is currently being discussed, but they are based on the initial July 21st agreements.
According to Handelsblatt, citing members of the German panel of European affairs, German Finance said that he will no longer rule out a default when talking to banks about a haircut on Greece‘s debt. Talks are ongoing regarding the PSI which could feature a 50% haircut on Greek debt..
GBP
UK retail sales were significantly above consensus, rising 0.6% m/m. The gains were led by the electronics sector, particularly from sales of laptops. It is worth noting however that the previous y/y measure was revised down to -0.8% leaving the new y/y number in line with expectations at +0.6%.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BULLISH Resistance is at 1.3914/37 area, a break above which would signal scope for gains towards 1.4013. Key support lies at 1.3566.
USDJPY NEUTRAL Resistance is at 77.49, while support lies at 76.31.
GBPUSD BULLISH Focus is on resistance at 1.5853, a break here would expose 1.5945. Support lies at 1.5632.
USDCHF NEUTRAL Break below 0.8881 would be a key bearish development and open up 0.8786. Resistance is at 0.9083 ahead of 0.9123.
AUDUSD BULLISH Bullish conditions remain intact; while support at 1.0102 holds, expect a move towards resistance at 1.0399 and then 1.0434.
USDCAD NEUTRAL Resistance is at 1.0273 and 1.0339. Support lies at 1.0085 ahead of 1.0044.
EURCHF BULLISH Break above 1.2495 would signal scope for extension of gains towards 1.2646. Support lies at 1.2218 ahead of 1.2123.
EURGBP BULLISH Initial resistance is at 0.8797, a clearance of which would expose 0.8842. Support lies at 0.8688.
EURJPY BULLISH Rise through 106.54 would open the way for gains towards 107.68. Key support lies at 104.02.
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