FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
Price action overnight suggests the market is still holding on to hopes that a half-satisfactory plan for a comprehensive solution to the Eurozone debt crisis can be found, but final results will need to wait until the Wednesday summit. This meeting will now be held between all 27 members of the European Union rather than the Eurozone alone, much to French displeasure according to French reports. German Chancellor Merkel’s priority over the next 48 hours is to secure constitutional and parliamentary guarantees domestically over potential agreements over the expanded EFSF.
The only concrete progress over the weekend appear to be that the details of the bank recapitalization plan are now virtually agreed, with the Financial Times suggesting a capital shortfall of EUR 108 bn has been identified – slightly larger than market expectations. The French delegation also appear to have completely abandoned calls to employ the ECB as a leveraging agent for the EFSF – both French President Sarkozy and Finance Minister Baroin have indicated that this avenue is no longer being explored. However, EU President Van Rompuy said that completely ruling out ECB participation was also not advised, as many options are being explored still. Finally it would seem that Italy has come under significant peer pressure to demonstrate a renewed commitment to austerity measures and structural reform, and additional measures on this front could be forthcoming as part of a wider agreement.
Overnight, EURUSD traded in a range of 1.3831-1.3907 and USDJPY in a range of 76.18-76.46, having rebounded from record lows last Friday Ahead today, German and Eurozone activity indicators are out but investors will continue to monitor Eurozone headlines ahead of Wednesday’s summit. Flash China PMI rebounded to 51.1 overnight, a positive result for markets fearful of a hard landing in emerging markets..
EUR
French President Sarkozy said that his “wish is that on Wednesday, an accord will be found that will alleviate the financial crisis”. German Chancellor Merkel also pointed to Wednesday as a key date – remarking on progress she said “we are in a good situation to make progress so that we can finalise our work on Wednesday”. Finland‘s Prime Minister Katainen reinforced the message saying “one should not expect decisions from the euro (leaders’) group today but rather on Wednesday. I want to emphasise that so as to make clear what to expect.”
Merkel said that EU finance ministers have by-and-large agreed to the details of the bank recapitalization plan.
The German and Austrian contingents have revealed that EFSF leveraging options have been narrowed down to two possibilities, neither of which involves the ECB, although they did not elaborate further. No details have leaked out about how large the losses of holders of Greek bonds will be, although an NPV reduction of 50-60% has been floated.
EU Council President von Rompuy said that Europeans are calling for an immediate effort from Italy and that the Italian authorities are willing to comply. He also confirmed that two options for the EFSF were being explored, one involved an insurance fund and the other involved establishing a SWF-like entity with outside participation to invest in the bonds of at-risk countries, though the EFSF would bear the first losses.
German Economy Minister and FDP Chief Roesler said giving the EFSF a banking license was ‘out of the question’ and called for the EFSF to be expanded to stem contagion only.
Irish Finance Minister Kenny said that “the prevention of contagion and the construction of firewalls is of critical importance.”
JPY
On Friday, USDJPY briefly dipped to a new post-1945 low. Bloomberg put it at 75.82, while our traders saw the low at 75.78. A run of stop losses was to blame. The move triggered a quick response from Japan‘s Finance Minister Azumi who again pledged to take decisive action on excessive speculative moves.
AUD
Q3 PPI came in below expectations overnight at 0.60%q/q (cons. 0.80%). Core PPI was higher at 0.7%q/q, but the annualized rate moderated to 2.3%.
Our analysts note that Overall, today’s PPI data was a little lower than expected, with the y/y pace now at its historical average of 2.7% (and its lowest in 3 quarters). Across the ‘underlying measures’ there is also some evidence of moderating upstream price pressures.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BULLISH Pressure is on 1.3914/37 area; a break through which would expose 1.4013. Initial support lies at 1.3653.
USDJPY BEARISH Pair defined a new low at 75.82, a break below which would open 75.00, a psychological level. Resistance is at 77.09.
GBPUSD BULLISH Near-term resistance is at 1.5991, a move above this level would expose 1.6104. Near-term support lies at 1.5754.
USDCHF NEUTRAL Resistance is at 0.8952 ahead of 0.9083. Support lies at 0.8786 and then 0.8647.
AUDUSD BULLISH A clear break above 1.0399 would expose 1.0434 ahead of 1.0478. Support lies at 1.0203.
USDCAD BEARISH Pressure is on 1.0044, a break of which would signal scope for extension of losses towards 1.0000 and 0.9885. Resistance is at 1.0188.
EURCHF NEUTRAL Support lies at 1.2123, while resistance is at 1.2474.
EURGBP NEUTRAL Near-term resistance is at 0.8767, a rise through which would open 0.8797. Support lies at 0.8632 ahead of 0.8583.
EURJPY BULLISH Clearance of 106.54 would open the way for gains towards 107.68. Key support lies at 104.78.
SCHEDULE
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