FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
Japan’s Finance Minister Azumi spoke but, unlike yesterday, did not mention EURJPY specifically. Intervention was still on his mind though. He said it would be hard for Japan to emulate the Swiss approach and defend a particular line in the sand, noting that the supply of yen in global markets is vast. This is the first time this idea has been so firmly rejected. He warned though that Japan stood ready to take firm steps against speculative FX moves. In Europe, the IIF is expected to resume debt talks with Greece today for a satisfactory conclusion on PSI involvement. The closer to the relevant deadlines the parties involved get, the bigger the risk of a large selloff if talks ultimately fail. Greece has already been talking openly about adopting coercive measures – sentiment echoed by Prime Minister Papademos overnight. Although data globally has managed to continue supporting investors’ general growth expectations, standards are pretty low at this point and we expect risk currencies to remain vulnerable. For example, on Tuesday, the German ZEW was strong, with the economic sentiment index printing 21.6 (vs. expectations of -49.4). Such figures were cheered by the market, notwithstanding the fact that sentiment remains deep in negative territory. A ZEW economist said that ECB liquidity, lower yields and better US data boosted sentiment. Eurozone periphery spreads versus Germany tightened and equity markets finished up across most of Europe. The US Empire State manufacturing index for January was above consensus at 13.5 and the indexes of new orders, shipments, and employment all improved. EURUSD traded 1.2718-1.2788, USDJPY 76.66-76.85 in Asia.
EUR
In an interview with The New York Times, Greek Prime Minister Papademos said that he will consider introducing legislation to force bondholders to take losses if they refuse to participate in the voluntary bond swap agreement, negotiations on which resume today. Earlier, IIF Chief Charles Dallara called upon all sides in the negotiations to work ‘in good faith’ and with a ‘sense of urgency’.
IMF chief Lagarde said the fund’s staff is still exploring ways to ensure ‘adequate fund firepower’. Since Q4 2011 efforts to further boost the fund’s resources, especially via non-Eurozone sources, have not proven fruitful as the rest of the G20 continue to call for Europe to act more to contain the debt crisis.
The EFSF sold EUR1.501 bn of 6-month bills at 0.266%. The bid-to-cover ratio was 3.1x. Demand did not appear to be materially lower following Monday night’s S&P downgrade. The size was not particularly large, but it was in line with its initial targeted amount.
The ECB’s Nowotny said the ECB is looking at alternatives to sovereign bond buying, but is not in a position to stop the SMP at the moment. He added that the need for intervention is widely recognized but within the ECB council, there is still scepticism over bond buying. These comments offer an interesting take on the SMP program and illustrate the tensions inside the bank. In the past, the ECB has bought covered bonds, but we do not think that this means it will switch the SMP program into other assets just yet.
Fitch analyst Edward Parker said that Greece is insolvent and will default. While these are the views of the analyst, they echo those of many commentators. Yesterday, 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.
S&P commented on the prospect of further downgrades for banks, insurers and some government-related entities, following its Eurozone sovereign downgrades on Friday. The ratings agency said that it will decide on ratings for the institutions within 4 weeks.
CHF
The Swiss Economics Minister said EURCHF should be 1.35-1.40, Bloomberg reported. EURCHF rallied slightly on the headlines but we see limited impact from the statement. The Swiss KOF indicator is due on Wednesday.
JPY
Finance Minister Azumi again alluded to Japan extending help to Europe via the IMF. He said both Japan and China need to seek a realistic way of achieving this, but that the attitude of the US would determine the IMF’s role in Europe‘s sovereign debt crisis.
Azumi warned again about Japan‘s own fiscal position, saying that smooth JGB bond sales and low JGB yields are no excuse for complacency, given that bond yields can jump suddenly and sharply.
Dow Jones reported that Japan bought 8% of the EFSF 6m bills auctioned yesterday, citing a Ministry of Finance official. Japan bought 20% of the first bond auctioned a year ago, according to official announcements at that time.
GBP
December CPI came in at +4.2% y/y, in line with consensus. Our UK economist notes that the slowdown is driven by prices of petrol, gas and clothing. Inflation should continue to fall in the months ahead, with CPI expected to end the year below 2%.
CAD
As expected, the Bank of Canada left the overnight rate target unchanged at 1.00%. The bank said the outlook for the global economy has deteriorated and uncertainty has increased”. It also now expects the pace of Canadian growth to be more modest than previously envisaged, largely due to the external environment”.
Government data showed that foreigners bought a net C$15 bn ($14.8 bn) of Canadian securities in November, the most in six months.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BEARISH Initial support lies at 1.2624, a move below which would open the key low at 1.2588. Resistance is at 1.2879.
USDJPY BEARISH Momentum is negative; key near-term support lies at 76.33 while resistance is at 77.13.
GBPUSD BEARISH Decline through 1.5273 would open 1.5235 next. Resistance is at 1.5409.
USDCHF BULLISH Key resistance is at 0.9596; a break above this level would open the way towards 0.9784, the January 2011 high. Key support lies at 0.9407.
AUDUSD BULLISH Next resistances are at 1.0496 and 1.0567. Support lies at 1.0303.
USDCAD NEUTRAL Near-term directional triggers are at 1.0319 and 1.0052.
EURCHF BEARISH Key support lies at 1.2000 while resistance is at 1.2130.
EURGBP BEARISH Support lies at 0.8255 ahead of key low at 0.8222. Resistance comes in at 0.8376.
EURJPY BEARISH Near-term support lies at 97.04, a break below which would open 95.68. Resistance is at 98.80.
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