FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
The focus remains squarely onGreece, leaving risk assets at the mercy of headlines. The Greek press reported that Prime Minister Papandreou refused to back down on his plans at an emergency cabinet meeting Tuesday evening, and still intends to hold a confidence vote in the government Friday. Similarly, a referendum on the proposed second rescue ofGreeceis still on the cards – although we note that this is not likely to happen until December at the earliest. Several government party members expressed strong reservations about the referendum throughout Tuesday, and this had a detrimental effect on investor confidence. One even resigned, reducing the government’s majority to 152/300.
However, we note that those who oppose the referendum could still express their confidence in the government at Friday’s vote, saving their dissent for the day when the question of a referendum is eventually put to the vote. Papandreou’s government last faced a confidence motion on June 21, and all PASOK party members voted in favour, and it was only when austerity measures were voted on a week later that dissent emerged. Also, one opposition parliamentarian today said he may vote confidence in the government on Friday to prevent the political crisis that might ensue should the government fall. EURUSD traded in a range of 1.3609-1.3871 and USDJPY traded 77.95-78.99. On Wednesday, G20 leaders are due to begin arriving inFrance for the summit on Nov. 3-4. We would not be surprised to see some speculation on the newswires about what the final communique will contain, which may provide a temporary boost to sentiment. Fed Chairman Bernanke is also due to host his third post-FOMC press conference,. No policy changes are expected, but investors will be listening for any shift on his stance on QE3.
EUR
Apart fromGreece, the series of European PMIs added to the broad risk-off tone.Swedenwas above consensus at 49.8 but still signalling contraction.Norwaywas significantly below expectations at 50.8 and earlier prints were also revised down. Swiss PMI was out at 46.9 vs 47.7 consensus. The sources of the weaknesses in general are region specific but the overall trend remains downward, particularly in the forward looking components.
The spread between Italian and German 10y government bond yields hit a euro-lifetime high.
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 ifGreece does not carry out reforms”.
JPY
Unofficial estimates place the size of intervention at JPY 10 trn, over $130bn. However, BoJ money market data suggests Monday’s intervention totalled about JPY 7.7 trn. Either way, the number surpasses the previous record from August 4.
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.
Our analysts note that another cut in December 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. They continue to expect a 25bp cut in Q1 next year and this should be the last move.
GBP
The manufacturing PMI for October came in at 47.4, lower than expectations for a reading of 50.0, the lowest in 2 years. The forward-looking new orders balance fell to 44.1 from 50.3, the lowest since March 2009.
UK Nationwide house price rose to 0.4% m/m vs market expectations of 0.0% Our UK economist notes that as monthly data is volatile, it’s perhaps better to look at the underlying 3m/3m rate, which stands at -0.2%. Housing prices have been stable for the past few months, but looking ahead, prices should drop as the economy stalls and employment creeps lower.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD NEUTRAL Key support is at 1.3567; a break below this level would be a bearish development and open 1.3500. Resistance is at 1.3871 ahead of 1.4000.
USDJPY NEUTRAL Resistance is at 78.99 ahead of 79.53. Support lies at 77.43 ahead of 76.94.
GBPUSD BULLISH Initial resistance is at 1.6097, a break above this level would expose 1.6167. Support lies at 1.5825.
USDCHF NEUTRAL The recovery needs to break above 0.9083 to develop bullish conditions and expose 0.9316. A pull back through 0.8568 would resume weakness.
AUDUSD BULLISH Resistance is at 1.0567; a break above this level would reinforce the bull trend and open 1.0765, the Sept 1. key high. Support lies at 1.0203 ahead of 1.0102.
USDCAD BEARISH Support lies at 0.9975 ahead of 0.9892, a key low from Oct. 27. Key resistance is at 1.0273.
EURCHF BEARISH Key support is at 1.2123; a move below this level would expose 1.2012. Resistance is at 1.2288.
EURGBP BEARISH Focus on key support at 0.8530, a break below which would signal scope for extension of losses towards 0.8456. Resistance is at 0.8623 ahead of 0.8670.
EURJPY BULLISH Resistance is at 109.24 ahead of 111.94, key high from Aug 29. Near-term support lies at 105.68 ahead of 104.75.
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