FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
China‘s central bank governor Zhou said China would continue to invest in Eurozone sovereign bonds and would play a bigger role in solving Europe‘s crisis via both the IMF and the EFSF. As usual, the comments were short on specifics, but they helped the euro recover from yesterday’s selloff, and carried AUD and NZD higher too. Zhou also expressed his wish that the euro will become a bigger and more important reserve currency. USDJPY held onto yesterday’s gains but couldn’t make much further headway despite closing above the 200-day moving average for the first time in 10 months. EURUSD traded 1.3080-1.3185 and USDJPY 77.36-78.66 since Tuesday’s European close. There was no further news on yesterday’s developments in Europe which had triggered concern over whether a second Greek rescue would ever happen.
The face-to-face meeting of Eurozone finance ministers which was planned for today (but which was cancelled yesterday) has not been reinstated, and the plan is still to hold a teleconference instead. Important decisions on Greek funding have been made via teleconference before, but it seems more likely that any decision to go ahead with a second Greek rescue will be deferred until Monday’s regular monthly meeting of Eurozone finance ministers. The Wall Street Journal reported that a tentative agreement has been struck between US congressional negotiators on extending the payroll tax cuts and unemployment benefits through to the end of 2012 – both measures are due to expire on Feb. 29 unless extended. Ahead on Wednesday, headlines around the Eurogroup conference call are the key focus but macro releases are also due, including German and Eurozone GDP, the UK employment reports and the BoE Inflation Report, as well as the FOMC minutes.
EUR
ECB Governing Council Coene said the ECB has agreed it does not wish to make a profit from its transactions in Greek bonds. He said the plan is to return profits to national governments (who are shareholders in the ECB) and then “when the profit from past years is distributed, each government will determine what proportion is due to Greece“. It is not clear if Coene is referring only to SMP portfolio profits, or whether a larger redistribution of profits made from other ECB operations and holdings is also being considered.
China‘s central bank governor Zhou said BRIC countries are waiting for the right time to help Europe. He said China has not cut its reserves exposure to euro-denominated assets as a result of the crisis.
On Tuesday afternoon, the Eurogroup meeting originally scheduled for Wednesday was called off, to be replaced by a conference call. Eurozone sources noted that a debt sustainability analysis was not complete, and there were fears the commitments from Greek leaders were ‘not firm enough’, according to Reuters. Eurogroup Chair Juncker later confirmed the news, noting that the political pledges were not yet received and further technical work with the Troika was needed in ‘a number of areas’.
Very late during the US session, Greek New Democracy Party sources reported that their leader would give a written pledge on Wednesday to continue the reforms agreed with the Troika. The PASOK party is expected to do the same. Dow Jones also reported government officials as saying Greece has resolved ‘outstanding issues’ with the Eurogroup, but the decisions on the bailout are only expected next week.
German Finance Minister Schaeuble said he ‘wanted to do everything to help Greece‘ but refused to rule out the worst-case scenario, noting that ‘if everything fails’, the Eurozone is much better prepared than two years ago. This is further confirmation that a Greek exit is now being considered as an option, but only under extreme circumstances.
Spanish banks borrowed EUR161.4 bn from the ECB in January, compared with EUR132.4 bn in December. The large increase in demand for ECB cash came after the December LTRO, indicating that either bank funding pressures are rising in Spain or they’re heavily playing the sovereign carry trade. The latter effect would fit with the strong demand seen at the January auctions where Spain sold around 20% of its total planned 2012 issuance. If this argument holds, it provides further evidence of the ECB helping support the bond markets and signals a large take-up at the upcoming LTRO.
JPY
USDJPY held onto yesterday’s gains but couldn’t make any further headway despite closing above the 200-day moving average for the first time in 10 months. Japanese JGB yields fell to 11bp overnight for the first time in over a year on the back of the BoJ’s fresh round of easing. However, given the effective floor on yields is 10bp, the BoJ’s ability to induce further yen weakness through conventional means is starting to reach its limits. For USDJPY to continue higher in a sustainable way we will need to see US yields climb materially, which they have so far refused to do.
GBP
January CPI fell in line with consensus estimates at -0.5% m/m, +3.6% y/y. Our UK economist notes that UK inflation is now very solidly in a downtrend. The annual rate will continue to fall through this year, with the CPI expected to touch 2% by year-end.
The Bank of England is due to release its quarterly inflation report on Wednesday. The inflation guidance may give a better understanding of policy direction in the coming months, while markets will also take note of the growth forecasts. Our UK economist expects the MPC will acknowledge that conditions have improved since the November report, but also that it stands ready to expand the QE programme should the outlook deteriorate again.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BULLISH Resistance is at 1.3291 ahead of 1.3322. Key near-term support lies at 1.3028.
USDJPY BULLISH Clearance of 78.29 had opened 78.76 ahead of 78.98. Support is at 78.29.
GBPUSD NEUTRAL Supports are at 1.5642 and 1.5582. Resistance is at 1.5771 ahead of 1.5849.
USDCHF NEUTRAL Key support lies at 0.9066; a decline through which would expose 0.8961. Resistance is at 0.9263 ahead of 0.9339.
AUDUSD BULLISH Near-term resistance is at 1.0791 ahead of 1.0845. Support lies at 1.0629.
USDCAD BEARISH Momentum conditions are bearish; two key supports to watch are at 0.9926 and 0.9892. Resistance is at 1.0052, a prior low.
EURCHF NEUTRAL Key near-term resistance is at 1.2133 ahead of 1.2149. Support lies at 1.2054 ahead of key low at 1.2032.
EURGBP BEARISH Initial support lies at 0.8330 ahead of 0.8283. Key resistance is at 0.8422.
EURJPY BULLISH Break above 103.29 has opened the way for 103.98 and then 104.32. Support is at 101.66.
SCHEDULE
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