FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
Markets mostly trod water during the Asia session as the absence of news headlines and G10 economic data releases provided no incentive to participate. It was Japan‘s first day back after the holiday season, but activity is still well below typical daily levels. The FOMC minutes from the December meeting confirmed that several members are still uncomfortable with the current pledge to keep rates unchanged until mid-2013. This should not come as any surprise given three dissenting votes were cast when the policy language was first adopted. Of greater interest were plans to change the Fed’s communication strategy. This strategy has been in flux for over a year now and, as a result, the Fed Chairman now gives post-meeting press conferences four times per year.
The December minutes revealed yet another innovation – at the January meeting the Fed will provide projections on how policymakers think the Fed Funds target will move in the future, and these forecasts will be updated quarterly along with the wider set of quarterly economic forecasts already provided. This would be a first for the Fed, but is (somewhat) similar to the approach already used by the Riksbank where a view on the future path of the repo rate is given. This latest Fed initiative did not come out of the blue – it had been flagged weeks ago in the Wall Street Journal.
The new approach is likely to provide greater clarity and granularity on the Fed’s policy intentions. It is also likely to offer the Fed greater flexibility in tweaking its guidance, rather than relying entirely on the written word. We doubt the dollar will be negatively impacted by the new approach alone unless the rate forecasts suggest an inert Fed beyond mid-2013. This is a risk we are watching. Still with the US, the economy has maintained its upward momentum as ISM manufacturing surprised to the upside at 53.9 (cons. 53.5), and construction spending was also firm. EURUSD traded in a range of 1.3049-1.3077 and USDJPY 76.62-76.82.
EUR
The EFSF plans to issue a new EUR3 bn 3-year bond “in the near future, subject to market conditions”. The bond is intended to fund the rescue programmes for Ireland and Portugal. This would be the fifth bond issued in support of these two programmes, and would take outstanding EFSF issuance to EUR19 bn. We note that the EFSF has a triple-A issuance capacity of EUR440 bn, although a possible downgrade of France could lower this ceiling considerably.
Bundesbank President Weidmann stuck to his stance that it would be wrong for the ECB to become a lender of last resort to governments.
A Greek government spokesman said the country must finalise the financial rescue agreement which was reached with the EU in October, or “we will be out of the markets, out of the euro”.
German unemployment fell by 22k, larger than the 10k decline expected by consensus. The jobless rate edged down to 6.8% from 6.9%, hitting yet another euro-lifetime low.
According to newswire sources, the IIF said it must have a Greek debt deal done in the ‘days ahead’ on the basis of the Oct. 26/27 agreement. We still see a strong risk of coercive (as opposed to voluntary) restructuring by Greece this year, accompanied by a triggering of CDS contracts. We very much doubt the risk is fully reflected in the price of the euro, and would look for further euro downside if headlines suggested a coercive restructuring was being pursued.
French government sources said the country has still not been notified of any change to its AAA rating by S&P. France was put on negative watch on Dec. 5 (along with 14 other Eurozone nations) largely pending the outcome of the Dec. 9 EU summit.
CHF
December PMI was surprisingly strong at 50.7 vs consensus of 45.6. Our Swiss economist notes that the two most important sub-indices, production (56.1) and to a lesser degree order backlog (53.5) managed to move back into expansionary territory at the end of 2011. This very good print supports the argument that the SNB’s floor under EURCHF is having a stabilising effect on Switzerland‘s production sector, as is the somewhat improved business sentiment across Europe.
This week, we went long EURCHF at 1.2155 targeting a move up to 1.2500, with a stop at 1.1990.
GBP
Sterling caught a bid after UK December manufacturing PMI rose to 49.6, vs consensus of 47.4. Export orders rose at the fastest pace since April. This is still weak on a quarterly comparison, but is showing signs of some improvement from earlier in the quarter.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BEARISH Momentum is negative; initial support lies at 1.2904 ahead of key low at 1.2858. Resistance is at 1.3119.
USDJPY BEARISH Support lies at 76.33, a move below which would open key low of 75.35. Near-term resistance is at 77.17.
GBPUSD BEARISH Break below 1.5469 would open 1.5402 next. Resistance is at 1.5692 ahead of the upside trigger at 1.5728.
USDCHF BULLISH Resistance is at 0.9470, a clearance of which would expose the key high of 0.9548. Key support lies at 0.9244.
AUDUSD BULLISH Pair tested the key resistance of 1.0380, a clear break above this level would open the way for 1.0447 and 1.0496. Support is at 1.0233.
USDCAD BEARISH Key support lies at 1.0052, a break below which would open 0.9975. Resistance is at 1.0220.
EURCHF BEARISH Initial support lies at 1.2126 ahead of key low at 1.2012. Resistance is at 1.2254.
EURGBP BEARISH Focus is on 0.8303, a push below which would expose 0.8285, January 2010 low. Resistance is at 0.8426.
EURJPY BEARISH Near-term support lies at 99.42 ahead of key low 98.66. Resistance is at 100.93.
SCHEDULE
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