FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
Investors took no chances overnight as a combination of event risk and growth fears put risk aversion back in the driving seat. The RBA cut rates to 4.50%, but this was of little relief as events in Athens once again put the Eurozone’s ability to resolve current problems in doubt. Greek Prime Minister Papandreou called a confidence motion in the Greek government, due to be held in parliament this week, and a referendum on the proposed second rescue package for Greece in the coming months. Both votes raise the risk of a political crisis in Greece, which is unlikely to help in the implementation of fiscal austerity measures. Even if the votes are carried, political uncertainty is likely to rise and that alone will likely keep investors cautious. Already European partners are warning that this vote could prove existential to Greece‘s position in the Eurozone.
Returning to Australia, our economists note that the cut was largely as expected but a follow-up move in December is not a done deal, as the RBA deemed lower inflation outcomes and external conditions have given them room to nudge the currently ‘mildly restrictive’ policy setting back to neutral. The official Chinese manufacturing PMI came in at 50.4 overnight, disappointing expectations. With the FOMC and ECB both meeting this week, investors may be looking to central banks to provide a backstop as sentiment threatens to deteriorate again. Finally, there was a lack of action on the yen front overnight, even though the MoF/BoJ intervened well into the New York session on Monday and estimates suggests that Japan is probably set to break the record for not only single-day, but single-month intervention/reserve accumulation size. EURUSD traded 1.3792-1.3871 and USDJPY 78.02-78.99 overnight.
EUR
Greek TV has indicated that a parliamentary confidence motion in the Greek government is likely to take place late on Friday night in Athens.
The Finnish Minister of European Affairs, Alexander Stubb, warned on the Greek referendum that “the situation is so tight that basically it would be a vote over their euro membership” and that “no Greek bailout package will be deployed if Greece carries out reforms”.
According to the agenda of the upcoming G20 summit, China‘s President Hu and France‘s President Sarkozy are due to hold a bilateral working dinner. Investors are likely to see this as a chance to seal a deal on China offering financial assistance to Europe, perhaps via the EFSF.
Eurozone headline CPI was slightly higher than expectations at 3.0%. Beforehand, only 7 out of 54 surveyed economists were calling for a cut on Thursday. With this print, expectations for an ECB rate cut may fall further.
Recognising that the outcome of last week’s EU summit has the potential to buy European policymakers several more weeks of relative calm, we raise our 1m EURUSD forecasts to 1.40 (prev. 1.30) and our 3m to 1.35 (prev. 1.20). Nevertheless, we retain our bearish view on the euro. Ahead today PMIs are due across Europe.
JPY
Unofficial estimates place the size of intervention at JPY10tln, over $130bn. Given the action was completed in October, Japan‘s reserve accumulation for the month has easily surpassed China‘s previous records for single-month gains post intervention.
Monday’s FX intervention puts Japan 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, and Europe has been very open about attracting Asian interest in an expanded EFSF, criticism may be somewhat muted.
Echoing the words of ECB President Trichet at his Aug. 4 press conference, BoJ Governor Shirakawa said the ECB is in principle against unilateral intervention. However, ECB Governing Council member Paramo said that Japan is free to intervene as it sees fit.
AUD
The RBA cut rates by 25bp as expected. The RBA cited slowing Chinese growth, weaker commodity prices, volatile external and financial conditions and a high AUD as reasons to ease. The AUD has fallen over 1% since the decision but some of this was probably due to general market risk aversion, as the cut itself had been expected.
Fortunately for AUD, even after a 25bp cut, the RBA’s policy rate would still stand head and shoulders above its G10 peers. Yields would still be generous enough to attract inflows. True, the currency’s defences would be weakened, but the cost of carry would still be high enough to discourage excessive selling over strategic timescales. For this reason, we doubt that a 25bp cut alone will dramatically turn the tide against AUD.
We raise our 1m AUDUSD forecasts to 1.04 (prev. 0.95) , and the 3m forecast to 0.97 (prev. 0.90). Again this recognizes the positive, though temporary, impact on risk sentiment of last week’s EU summit decisions.
Our analysts note that a December move is not a done deal, especially with some recent improvement in the global data flow and the Eurozone agreements, though much of this remains volatile. We continue to target a 25bp cut in Q1 next year and this should be the last move.
CHF
The SNB published details on their currency holdings at the end of September. When FX swaps are excluded, FX investments total CHF305.3bn. The largest increase came from USD holdings – up to CHF103.0bn from CHF48.9bn previously.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BULLISH Resistance is at 1.4171, a break here would open 1.4215, the former trendline support. Initial support is at 1.3704.
USDJPY BULLISH Resistance is at intraday high of 78.99 ahead of 79.53. Support lies at 77.43.
GBPUSD BULLISH Initial resistance is at 1.6167, a break above this level would expose 1.6203. Support lies at 1.5955.
USDCHF BEARISH Support is at 0.8568, a move below which would open 0.8514, the 50% retrace of the 0.7712-to-0.9316 rally. Resistance is at 0.8825/78 area.
AUDUSD BULLISH Near-term resistance is at 1.0567, intraday high, ahead of 1.0765, a key high from Sept 1. Support lies at 1.0313.
USDCAD BEARISH A break below 0.9892 would expose 0.9766. Resistance is at 1.0073.
EURCHF BEARISH Focus is on 1.2123, a break below which would confirm the bear trend and expose 1.2012. Resistance is at 1.2288.
EURGBP BEARISH Break below 0.8583 would expose the key low of 0.8530. Resistance is at 0.8784.
EURJPY BULLISH Resistance is at 109.24, intraday high, ahead of 111.94, key high from Aug 29. Near-term support is at 106.55.
SCHEDULE
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