FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
The euro gave back most of yesterday’s gains during an otherwise quiet Asia session. EURUSD traded 1.2729-1.2793 and USDJPY 76.80-76.94. The recent barrage of Fed commentary continues. On Tuesday, officials sounded cautious on their overall views on the US economy, though there seemed to be diverging opinions on just how to proceed in the immediate future. Cleveland Fed President Pianalto said that inflation was going to dip below 2% in H1 2012 and stay there, but the US still ‘needed to get its fiscal house in order’. San Francisco Fed President Williams however warned that there was a case for further bond buys if inflation ebbs, and held a somewhat more aggressive view on the US’ long-run jobless rate, which he said needed to be between 5% and 5.5%. Given the considerable distance between the current numbers and this figure, it can be assumed that the Fed’s growth mandate is still far from being attained, which would warrant a continuation of low rates into the distant future. Whether this should also translate into further accommodation remains to be seen. Chicago Fed President Evans has already made up his mind on the issue though – he has consistently been the most dovish FOMC member, and dissented in favour of additional easing at the Dec. 13 FOMC meeting. We expect to hear further calls for action when he speaks later today. Given that his views are well known, that he is no longer a voting member, and that the focus remains on events in Europe, we very much doubt his views will hurt the dollar. German GDP is also due.
EUR
On Tuesday, a Fitch analyst said that Austria’s AAA rating is not in immediate danger and Fitch does not expect to downgrade France in 2012. However, the analyst went on to say that the French rating is at risk from banks and EFSF liabilities. Fitch has kept Spain, Slovenia, Italy, Ireland and Cyprus ratings under active review and has previously said that it expects to complete the review by the end of January 2012. With reference to Greece, the analyst said that exit from the Eurozone is a “potential option”. While the initial comments regarding France and Austria are encouraging, S&P still has France on negative watch, so any relief from these remarks is likely to be short-lived.
Greek banks had borrowed a total of EUR116.2 bn from the Eurosystem of central banks as at the end of November – another record high for Greece, and EUR5.7 bn more than the month before. Of this, EUR73.41 bn came from the ECB, while the Bank of Greece supplied a further EUR42.8 bn through its emergency liquidity assistance program. The numbers suggest an increasing dependency on central bank funding, as well as an even greater shortage of ECB-eligible collateral.
ECB overnight deposits hit an all-time high of EUR481.9 bn on Monday night, just slightly less than the EUR489.2 bn drawn down at December’s 3y LTRO. It would appear that little if any of the cash was ploughed back into sovereign bond markets, despite hopes that the banks would use the ECB cash to alleviate sovereign funding pressures.
We remain short EURUSD as a fundamental trade recommendation from 1.2755 with stop at 1.3050, targeting 1.2250. The ECB is due to meet on Thursday and our European economists expect another 25bp rate cut. Fears over Greece’s PSI are also likely to weigh on the euro heading towards March. Meanwhile, US data continues to outperform European data, making it increasingly unlikely the Fed will undertake a third round of QE.
Italy announced that it would sell EUR2-3 bn worth of November 2014 BTPs on Friday, in addition to EUR1- 1.75 bn of non-benchmark 2014 and 2018 BTPs.
NOK
Norway underlying CPI was in line with expectations at 1.0% y/y.
The SEK came under pressure after November industrial orders dropped 8.4% y/y and 4.8% m/m. in Sweden. The data is poor, but it’s a very volatile time series.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BEARISH Momentum is negative; support lies at 1.2666, a move below which would open the key support of 1.2588. Resistance is at 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 Momentum is positive; focus is on 1.0387, a break here would open 1.0447 next. Support is at 1.0229.
USDCAD NEUTRAL Resistance is at 1.0241 ahead of 1.0319 whereas support lies at 1.0121 ahead of key downside trigger of 1.0052.
EURCHF BEARISH Next supports are at 1.2051 and 1.2000. Initial resistance is at 1.2199.
EURGBP BEARISH Focus is on 0.8222, a drop below which would open 0.8202, the September 2010 low. Resistance is at 0.8289.
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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