FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
Risk appetite nudged higher in Asia after China’s December trade surplus came in well above consensus. AUD and NZD advanced throughout the session and even the euro staged a modest comeback. Surprisingly, AUD was not held back by the very weak China import numbers which were the root cause of the wider trade surplus. We shall be closely watching the geographical breakdown of imports when the more detailed trade data is released later this month. Any sign that Chinese demand for Australian coal and iron ore is in decline would be a potentially worrying development for AUD. Otherwise, newswires were silent during the Asia session. USDJPY was confined to a 14-pip range, trading between 76.78 and 76.92. EURUSD traded 1.2737-1.2795, and EURCHF continued to slip after the resignation of the chairman of the SNB. The first mini-summit of 2012 – between French President Sarkozy and German Chancellor Angela Merkel – did not result in any major market-moving events. A basic timeline for the launch of the fiscal compact was announced, but most investors were focusing on headlines out of Greece. In particular, Dow Jones wires reported that Greece is prepared to introduce legislation to enact retroactive collective action clauses to bonds. It was also reported that although the legislation will be available, it may not be applied. Our fixed income strategy team notes that official and market discussion of CACs and other steps will likely intensify, leading to coercive restructuring around the March 20 bond redemptions. This will trigger CDS. However, it may be perceived as an incentive for current hold-outs on the Greek PSI to sign up to a deal as quickly as possible, or possibly face more punitive terms ahead. Elsewhere the earnings season kicks off today and investors will be keen to see if the US corporate sector can continue robust earnings growth amid a more challenging macro environment. Several Fed officials are also due to speak.
EUR
French President Sarkozy and German Chancellor Merkel met ahead of further Eurozone-related meetings between key stakeholders this week. Merkel stressed that ‘no country must leave the euro’ but also noted that Greece is a ‘special case’, especially in the context of private sector initiatives.
Dow Jones reported that Greece is to introduce retroactive collective action clauses, citing a troika source. The report noted that existing bonds will be ‘retrofit’ with CACs to ‘gain leverage’ but may not necessarily be used. This is an understandable tactic as the deadline for the PSI looms, and the troika source said that the measures had support from Greece’s official creditors.
There were conflicting messages on the Greek PSI’s actual haircut level. Reports initially suggested a haircut of up to 60% was in the pipeline, but late during the US session the EU’s Rehn said the level of the haircut would be ‘in line with October agreements’.
ECB funding to Italian banks rose to EUR209.995 bn in December (up from EUR153.203 bn in November). This is a sizeable jump and provides evidence that some banks are taking advantage of the new ECB rules on collateral. Overnight ECB deposits hit an all-time high of EUR463.5 bn.
Sarkozy reiterated his call for a financial transaction tax on Monday, noting that ‘if we don’t show the example, it will not be done’. He also said the intergovernmental treaty is expected to be signed on March 1.
German trade data was very strong, in figures released on Monday. Exports increased by 2.5% (cons. 0.5%) and imports fell, resulting in a large trade balance of EUR16.2 bn (cons. EUR12 bn) and a wide current account surplus of EUR14.3 bn. However, industrial production fell by 0.6% m/m, more than expected.
CHF
The Swiss unemployment rate for December rose to 3.3% (3.2% expected), although it remains at 3.1% on a seasonally adjusted basis. Retail sales were stronger than expectations, at +1.8% y/y.
The chairman of the Swiss National Bank has resigned. Governing Board Member Thomas Jordan will assume the post temporarily, and the SNB Council has pledged to fill the vacancy on the board with haste. The franc strengthened on the back of the news.
We closed our long EURCHF spot trade for a slight loss and converted it to a 1.30 strike EUR call / CHF put with Dec 17, 2012 expiry (NY cut). The cost is 0.85% of face. This low-delta option reflects our view that any future moves in the EURCHF floor would happen only if the Swiss deflation outlook is severe enough to warrant a material move. In line with UBS’s weaker-than-consensus view on European growth, it is quite possible the SNB will downgrade the Swiss growth outlook and raise the deflation probability over the course of the coming year. We see less chance at this juncture of micro-changes in the floor that warrant a simple long spot view. This trade also exploits the fact that risk-reversal skews in the one-year tenor remain heavily bid for EUR puts at around -5 vols for 25-delta options.
NOK
The November credit indicator fell slightly to 6.6% y/y vs 6.8% in October. While this a slight drop on the month, levels remain quite elevated, which will be a concern for Norges Bank.
On Tuesday CPI figures will be released in Norway, the market is looking for a drop in the headline rate to 0.5% but the underlying rate is expected to remain stable at 1.0%. Swedish industrial production are also due on Tuesday.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BEARISH Key support area is at 1.2604/1.2588, today’s intersection of the bottom of the trend channel drawn off Nov. 14 high and the August 2010 low. Resistance is at 1.2813 ahead of 1.2858.
USDJPY BEARISH Support lies at 76.61, a break here would expose 76.33. Resistance is at 77.34.
GBPUSD BEARISH Key supports to watch are at 1.5362 and 1.5272. Resistance is at 1.5526.
USDCHF BULLISH Resistance is at 0.9596, a clearance of which would open the way towards 0.9784. Support lies at 0.9413.
AUDUSD BULLISH Tough resistance is at 1.0387, a break here would open 1.0447 next. Support is at 1.0229.
EURCHF BEARISH Next supports are at 1.2051 and 1.2000. Initial resistance is at 1.2199.
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 Focus is on 0.8202, the September 2010 low, a break here would open the way towards 0.8142. Resistance is at 0.8285, a prior low.
EURJPY BEARISH Initial support lies at 97.28, a break below which would expose 96.43. Resistance is at 98.85.
SCHEDULE
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