FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
The euro experienced a double-dose of upside during the Asia session. First, Japan‘s Finance Minister Azumi raised the possibility of intervention in EURJPY, but said he has not yet made a decision on the matter. We see the immediate intervention risk as remote, but investors were in no mood to take chances. China‘s Q4 GDP growth then came in stronger than expected, boosting the euro and taking AUDUSD briefly through 1.04. EURUSD traded 1.2649-1.2737, USDJPY 76.67-76.88. Earlier, a senior official at S&P ratings said in an interview with Bloomberg TV that he expected Greece to default soon. The EFSF was also downgraded one notch to AA+. With troika officials descending upon Athens this week, it is clear the stakes are being raised and there may be some need for contingency planning ahead.
We continue to envisage coercive action by Greece, and while reports suggest that retroactive collective action clauses will be put into use, with the troika’s blessing, the Eurozone authorities would want to ensure such action remains a one-off. Otherwise, the market managed to absorb the ratings news with relative ease, as France launched a successful bill auction where the one-year yield actually fell. However, Portugal may prove to be a bigger worry in the short term, as it now holds junk status with all three major ratings agencies, which may have caused the country’s paper to drop out of bond indices. The forced liquidation of real money holdings has led to a sharp rise in yields, though in the past few weeks the European authorities and IMF have continued to view the country’s programme as on track. CPI figures are due in the UK and Eurozone, and the German ZEW is also out. We have revised our short-term FX forecasts and continue to target a stronger dollar – our 3m EURUSD view is now at 1.15.
EUR
The EFSF has been downgraded to AA+ by S&P. This came in the wake of the agency’s downgrades of France and Austria. The facility’s CEO, Klaus Regling, said in response that the EFSF’s investor base was well-diversified and noted that it still possessed AAA ratings from two other agencies. However, ECB President Draghi warned that such a move would have ‘consequences’.
Moody’s said it would keep France‘s AAA rating but that its stable outlook was under pressure. It said it would update the market during the first quarter of this year as part of its broader Eurozone assessment.
Germany swiftly rejected any chance of raising its guarantees for the EFSF. Chancellor Merkel’s spokesperson said that current funding was adequate, and the Finance Ministry also said that it saw no need to act on the ESM.
S&P Managing Director of Sovereign Ratings Moritz Kraemer said he believed Greece ‘would default soon’. He also suggested that policymakers were working to avoid a ‘disorderly default’ as such a development would have consequences for other countries.
It is clear that talks between the Greek government and the IIF on the PSI have reached an impasse, with the institute’s head Dallara warning that a deal was needed ‘urgently’, but he also said current interest rates being offered by Greece were ‘completely unreasonable’.
Earlier on Monday Greek PM Papademos again stressed that ‘leaving the euro is not an option for Greece‘ and said talks with creditors would continue..
CHF
Switzerland’s combined producer and import price index for December came in higher than consensus estimates, increasing by +0.3% m/m. The y/y reading was still a -2.3% fall. Our Swiss economist notes that print is above all the result of higher producer prices. These increased by +0.2% on the month, resulting in a decline of -2.2% y/y. On the margin the data is EURCHF-negative, although the cross will be driven by external forces in the near term.
JPY
Japan’s Finance Minister Azumi referred to EURJPY overnight, becoming the second Japanese finance official to do so in as many days. The rhetorical intensity increased a notch too, and Azumi referred directly to the possibility of intervention in the cross. He said he first wanted to examine current FX moves before making his decision. Both EURJPY and EURUSD turned bid on the headlines.
We see no imminent risk of intervention in the cross, and expect Japan to maintain its historical focus on USDJPY instead. We note that Japan last bought EURJPY in May 2003, when the cross was trading at about 130, but the amounts were small, infrequent, and largely symbolic.
Yesterday, Senior Vice Finance Minister Igarashi warned that EURJPY moves were a bit ‘rapid’ and that his ministry would monitor these moves closely.
Azumi added that S&P’s decision to downgrade the EFSF one notch to AA+ will not immediately change Japan’s policy of purchasing EFSF bonds.
GBP
UK CPI is out on Friday. The market is looking for a 4.2% headline print but we doubt this will affect the BoE’s broader outlook, as the likelihood of QE extension remains high in the coming months.
Given the UK‘s ratings status remains solid compared to most of the Eurozone, and the Gilt market continues to provide the necessary liquidity, we continue to see EURGBP trading lower and move our 3m target to 0.80, in line with our year-end forecasts.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BEARISH Initial support lies at 1.2588 ahead of 1.2500. Resistance is at 1.2879.
USDJPY BEARISH Intraday momentum is negative; Key near-term support lies at 76.33. Resistance is at 77.34.
GBPUSD BEARISH Decline through 1.5273 would open 1.5235 next. Resistance is at 1.5409.
USDCHF BULLISH Recovery through 0.9596 would open up the way towards 0.9784, the January 2011 high. Key near-term support lies at 0.9407.
AUDUSD BULLISH Clearance of 1.0387 has opened the way for gains towards 1.0447 and then 1.0496. Initial support lies at 1.0229.
USDCAD NEUTRAL Near-term directional triggers are at 1.0319 and 1.0052.
EURCHF BEARISH Support lies at 1.2000, while resistance is at 1.2148.
EURGBP BEARISH Outlook is bearish; a move below 0.8222 would expose 0.8205. Resistance comes in at 0.8376.
EURJPY BEARISH Support lies at 95.90 ahead of the psychological level of 95.00. Resistance is at 98.80.
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