FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
The Japanese Finance Ministry authorized intervention in FX markets for the 3rd time this year, pushing USDJPY back to above 79.25 after the pair had touched a new post-war low of 75.35. The action itself is not surprising, but the timing is as many investors had expected the MoF to act after the FOMC decision this week, as there remains residual risk of fresh balance sheet expansion by the Fed, which would have exerted further downside pressure on USDJPY.
The Japanese authorities appear to have limited their intervention to an initial spurt at the market open and so far price action has been limited, though we do not anticipate any form of ‘policy floor’ in USDJPY to be adopted along the lines of the SNB, as Japan’s economic exposures are far more different and authorities have more tools at their disposal. Otherwise, weekend commentary was relatively quiet. Italian Prime Minister Berlusconi said the euro is a “strange” currency that “hasn’t convinced anyone”. IIF Managing Director Dallara said he expects a high take-up of the 50% haircut deal for holders of Greek debt, at least from amongst the banking community. He was less optimistic about the intentions of other institutional holders. German Finance Minister Schaeuble said that whileEurope preferred to take the voluntary haircut route regarding Greek debt, he said “a less consensual path was not excluded”. ECB President Trichet steps down today. On the data front, Eurozone CPI is out and several activity indicators are out from theUS. USDJPY traded 75.35-79.53 and EURUSD 1.3975-1.4141..
EUR
During theUSsession on Friday, Italian Prime Minister Berlusconi said the euro is a “strange” currency that “hasn’t convinced anyone”. He added that austerity measures will not work without growth, and thatItalyis the “most solid” EU country afterGermany. Italian 10y yields had earlier closed above 6%, after another day of spread-widening over bunds.
Moody’s, S&P, and Fitch affirmed triple-A ratings on the EFSF. Significantly, the ratings do not take account of Thursday’s summit decisions to ‘leverage’ the EFSF. As such, this is a verdict only on changes made to the EFSF which flow directly fromSlovakia’s parliamentary ratification. These changes take the EFSF’s effective lending capacity up to EUR 440 bn, give it the authority to intervene in primary and secondary sovereign bond markets, and authorize it to help finance the recapitalization of banks by lending to governments specifically for this purpose.
EFSF CEO Regling has completed his visit toChina, but Chinese officials have so far been publicly non-committal about their intentions regarding the provision of financial assistance to the EFSF. Vice Finance Minister Zhu said he was awaiting further details. Meanwhile, Regling hinted that the EFSF might eventually be willing to issue bonds denominated in CNY, but only withChina’s approval.
German Finance Minister Schaeuble said that whileEurope preferred to take the voluntary haircut route regarding Greek debt, he said “a less consensual path was not excluded”. IIF Managing Director Dallara, said he expects that “more than 90% of banks” will volunteer for the 50% haircut deal announced on Thursday. However, he conceded that the intentions of other market participants such as insurers and funds are less clear, and that “some persuasion is still needed there”.
Speaking toGermany’s Bild am Sonntag ECB President Trichet said Eurozone inflation over the next 10 years “will most probably stay very low; current expectations are for around 1.8 percent”.
JPY
The Bank of Japan intervened in FX markets for the third time this year overnight. The action was confirmed by Finance Minister Azumi, citing the need to ‘take firm steps against speculative action’ and said the intervention was solo, though there has been communication with other countries.
The action putsJapan in an awkward position ahead of the upcoming G20 summit as consistent intervention is not considered a part of the global G20 governance framework the bloc is moving towards. However, given the funds may be redirected towards the Eurozone rescue, andEurope has been very open about attracting Asian interest in an expanded EFSF, criticism may be somewhat muted in the immediate future.
SCHEDULE
Please visit GCI’s Economic Calendar for a schedule of market news and events.
