FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
Investors kept a wary eye on developments in Rome over the weekend but ultimately fears of a disorderly transition in power in Italy proved unfounded. On Saturday evening the Chamber of Deputies passed the 2012 budget law with 380 votes, a comfortable majority, and Prime Minister Berlusconi resigned later in the day. Although a new government is not in place, former EU Commissioner Mario Monti is widely tipped to lead a new technocratic government. Crucially, both the outgoing PdL and opposition have appeared to throw their weight behind Monti. The PdL said it hoped that there would be ‘no politicians’ in the new government and called for it to be formed in the coming days. The result should be a relief to markets – and any improvement in risk appetite would likely be reinforced by a successful Italian 5y auction on Monday.
Italy‘s challenges remain severe however, and investors will be closely watching bond yields to see if they can fall to more affordable levels. ECB Governing Council officials continue to refuse point-blank any calls for them to increase the pace of their bond purchases, though there is still room to move on interest rate cuts, which could yet prove another form of stimulus. Switzerland releases PPI numbers later today, and any hints of strong deflationary pressures could again prompt talk of floor-raising by the SNB. During the Asia session, EURUSD traded 1.3741-1.3815 and USDJPY 77.09-77.29.
EUR
Italian Prime Minister Berlusconi has formally resigned, after the Chamber of Deputies passed the 2012 budget with 380 votes. Mario Monti, former EU Commissioner, is expected to form a technocratic government within days with support from the major parties. Italy‘s President Napolitano has already asked Monti to form a new government, and Monti has already met with ECB President Mario Draghi to discuss Italy‘s situation.
Reports suggest that Mario Monti’s tenure can last up to April 2013, Silvio Berlusconi’s full term. This would also be a source of relief to markets, and contrasts sharply with the situation in Greece where new elections are due early next year. However, we would not rule out Italy accelerating its electoral calendar, especially if Monti’s government lacks support on a sustained basis.
ECB’s Stark said on Friday again that the central bank would not be buying government bonds. However, he said that the ECB has ‘room for maneuver’ on interest rates relative to other major economies. We expect another 25bp cut at the ECB’s December meeting.
ECB’s Weidmann said the EFSF should stick to the SPV/Insurance approach and said he did not favour pooling the Eurozone’s SDR resources, calling it another form of monetary financing.
German Chancellor Merkel said she wanted a change in the EU charter earlier than scheduled – by the end of 2012 rather than mid-2013. Reuters reported a limited amendment to the Treaty was needed to allow ‘greater influence over states that bust budget rules and agreed obligations on stability and consolidation’.
JPY
Japan’s nominal Q3 GDP was in line with consensus expectations at +1.4% q/q.
NZD
Retail sales volumes rose +2.2% q/q in Q3, which was the largest quarterly increase since Q4 2006. Despite the strong result, our analysts note that any move on the OCR is still unlikely this year, and he sticks to his view that the RBNZ will likely next hike in March 2012.
Finance Minister English said the NZD has been kept elevated by US and Chinese economic policies. He said he had hoped the NZD would weaken after New Zealand lost its triple-A rating, but he notes that markets have ignored the ratings downgrade.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BEARISH Outlook remains bearish; Focus is on 1.3406 ahead of 1.3346. Resistance is at 1.3871.
USDJPY NEUTRAL Resistance is at 78.10 ahead of 78.27. Support lies at 77.44 ahead of 76.95.
GBPUSD NEUTRAL Focus is on 1.5877, a break below this level would trigger weakness towards 1.5825. Near-term resistance is at 1.6131.
USDCHF BULLISH Resistance is at 0.9151, a break above which would expose 0.9316. Near-term support lies at 0.8923.
AUDUSD NEUTRAL Break of 1.0102 opens 1.000 and 0.9909. Key resistance is at 1.0300.
USDCAD BULLISH Focus is on 1.0273, a break through which would expose 1.0365. Support lies at 1.0055.
EURCHF BULLISH Key resistance is at 1.2474, a clearance of this level would open 1.2646. Key support lies at 1.2131.
EURGBP BEARISH Support lies at 0.8456, a break below which would open 0.8394. Resistance is at 0.8612.
EURJPY NEUTRAL The cross tested 104.75, a clear break here would open 104.02 ahead of 103.32. Initial resistance is at 107.65 ahead of 108.25.
SCHEDULE
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