FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
USDJPY continued to march higher during the Asia session despite domestic Japanese exporters selling into the rally. The move got underway during the US session yesterday, likely in anticipation of a significantly less-dovish Fed. Data confirming that Japan‘s trade balance slipped into deficit territory for 2011 for the first time since 1980 also probably supported the pair at the margin. However, we note that the current account still remains in surplus due to coupon-related inflows from overseas investments so USDJPY should remain heavy in the Asia timezone despite the end of the trade surplus.
The true test for USDJPY will be today’s FOMC meeting where the Fed will unveil a new set of rate forecasts for the first time. There are three events to watch: the policy statement will first be released, followed later by the new projections for how for policy rate will evolve over the coming years. Fed Chairman Bernanke’s post-meeting press conference will then start 15 minutes later. We expect journalists to quiz him extensively on the possibility of further QE, and we doubt he will rule it out entirely, especially given uncertainty over how the Eurozone sovereign debt crisis will evolve. Stronger core Australian CPI gave AUD a substantial boost overnight while EURUSD traded in a range of 1.3014-1.3047 and USDJPY 77.62-76.98. BoE minutes and UK Q4 GDP data are also due.
EUR
Greek Finance Minister Venizelos said he expects to conclude a PSI deal in the next few days and has a green light from the Eurogroup to do so. Dow Jones reported EU Commissioner Rehn as saying that the ‘building blocks are in place’ for a Greek PSI agreement, and that it would be preferable to reach agreement in January rather than February.
S&P sovereign ratings head Chambers said Greece will likely be downgraded to ‘selective default’. This is unlikely to trigger CDS in our view – indeed, the practical consequences would be almost nil, as even the ECB has been persuaded to continue to accept Greek debt that is rated default.
Flash PMIs in the Eurozone were strong. The January composite PMI rose to 50.4 (cons. 48.5, prev 48.3). Our European economists note that there is good news also from sub-components. Manufacturing output was up to 50.0 (from 47.1), and this points to further stabilization. There was the same from service business expectations, which rose to 56.0 (from 53.6). Employment also seems to be holding up at 50.5 (up from 49.9).
JPY
USDJPY broke above a key resistance level during the US session despite no change in stance at the BoJ’s policy meeting yesterday. It appears the market has started to price in a less dovish Fed at tonight’s FOMC meeting on the back of strengthening US economic data. We have our doubts however, and our US economists expect Bernanke to stick to his dovish tone. Having said that, the newly minted projections for the evolution of the policy rate have the potential to trigger significant changes on the US Treasury yield curve so we would not be surprised to see an increase in USDJPY volatility.
GBP
The BoE minutes are due today and although we expect them to reveal a unanimous decision to leave both rates and the asset purchase program unchanged, there may be some subtle hints regarding future QE from the BoE. The current program is due to finish in February and we expect further purchases to be announced in due course. On Tuesday BoE Governor King, speaking from Brighton, held out the possibility of more asset purchases ‘if needed’.
AUD
Although the headline Q4 CPI was weaker than expected, core CPIs were slightly higher and AUD eventually rose 50 pips on the numbers. Specifically, the trimmed mean core reading climbed 0.6% in Q4 (cons. +0.5%) and the Q3 number was revised up to 0.4% (prev. 0.3%). Our Australian economists note that this puts the annualized rate back in the middle of the RBA’s 2-3% target band, making the February policy decision a close call. Nevertheless, they continue to expect a 25bp cut to the cash rate in February.
CHF
EURCHF got a modest boost after SNB Board Member Danthine showed no change in stance. He still expects Swiss franc depreciation ‘in the future’, and said the SNB stands ready to buy ‘unlimited’ foreign currencies.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD NEUTRAL Key upside trigger is at 1.3077 and support lies at 1.2839.
USDJPY BULLISH Focus is on 78.29, a rally through this level would open the way for further gains towards 79.53. Support lies at 77.62.
GBPUSD NEUTRAL Resistance is at 1.5670 ahead of the bull trigger at 1.5780. Support lies at 1.5517 ahead of 1.5451.
USDCHF NEUTRAL Pair is testing 0.9244, a clear break below this level would trigger a bear trend and open 0.9176 next. Resistance is at 0.9413 ahead of 0.9498.
AUDUSD BULLISH Momentum is positive; initial resistance is at 1.0573, a move above this level would open the key high of 1.0753. Support lies at 1.0428.
USDCAD NEUTRAL Key downside trigger lies at 1.0052, a decline through this level would expose 0.9975. Resistance is at 1.0189 ahead of 1.0254.
EURCHF BEARISH Initial support lies at 1.2058 ahead of 1.2000. Resistance is at 1.2133.
EURGBP BEARISH Near-term support lies at 0.8273 ahead of 0.8255. Key resistance is at 0.8422.
EURJPY BULLISH Resistance is at 102.54, the Dec. 21 key high, a break above which would open the way for 104.32. Support lies at 100.03.
SCHEDULE
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