FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
The euro managed to stage a minor recovery overnight as markets digested the Moody’s downgrade of Portugal, which jolted an otherwise sleepy US session. The four-notch move, with hints of more to go, served as a reminder that even though Greece has passed its near-term tests, problems within other economies persist, not to mention contagion risk. As the ECB meets and growth momentum starts to wobble, the sustainability of current plans will be further scrutinised. Nevertheless Asian equities are taking the news in their stride. On Tuesday the S&P 500 closed down -0.13% on a mixed day for global equities. US President Obama said a deal on raising the debt limit must be reached in the next 2 weeks, but that he is opposed to any deal that would only provide a short-term increase. There were no US data releases on Tuesday, but the non-manufacturing ISM is likely to be the centre of attention today ahead of payrolls on Friday.
EUR
Moody’s cut Portugal’s sovereign rating by 4 notches to Ba2, becoming the first agency to take the sovereign into non-investment grade territory (S&P and Fitch still rate Portugal two notches higher at BBB-). By way of rationale, Moody’s cited the “growing risk that Portugal will require a second round of official financing” and, significantly, the “increasing possibility that private sector creditor participation will be required as a pre-condition”. Moody’s also had additional concerns that Portugal’s deficit reduction and debt stabilisation targets may not be met. Eurozone bond markets had closed before the news broke, suggesting there is scope for renewed euro downside at the European open on Wednesday.
Moody’s outlook on Portugal’s rating is still “negative”, but this does not mean another downgrade is inevitable – indeed the euro partially recovered later when Moody’s confirmed this, saying the outlook would most likely be revised to “stable”.
The Financial Times reported that the ECB may still continue to accept Greek debt as collateral provided at least one out of the three ratings agencies does not judge any bond rollover to amount to ‘selective default’.
According to newswires, the Greek and German finance ministers are going to have a working dinner on July 6.
On the data front, composite PMI in Eurozone surprised to the downside at 53.3, while services PMI dropped to 53.7 (cons. 54.2). Eurozone retail sales weakened by 1.1% in May, more than expected. Clearly the economy is showing more signs of a soft patch and the ECB may choose to factor this in ahead of the policy decision on Thursday.
GBP
The BRC Shop Price Index came in better than expected at 2.9%, though concerns over the retail sector remain. Ahead today more housing numbers are out but market attention will shift to the BoE decision.
Sterling managed a small rally as the services PMI unexpectedly rose slightly to 53.9 (cons. 53.5). We would fade the move as the details of the survey were far less robust, warning of below trend activity expansion and job creation.
We continue to target weakness in GBP, the BoE decision this week is not expected to yield any changes though some investors still believe a fresh round of QE is possible.
AUD
The RBA kept rates on hold at 4.75% yesterday. The result was in line with expectations though our economists note the overall tone of the decision release was less certain on growth. Nevertheless, their medium-term forecast of trend growth was intact.
On inflation the RBA noted loose global policy settings were leading to global inflation and the high AUD was seen as having a ‘noticeable dampening effect’, suggesting conditions are tightening.
In other data, the trade surplus was much higher at $2.3bn (cons. 1.9bn), the best since October 2010 as export values rebounded.
We continue to expect an RBA move in October as inflation pressures compel the central bank to act.
TECHNICAL OUTLOOK
EURJPY focus on 117.90
EURUSD BULLISH While support at 1.4333 holds, focus on initial resistance at 1.4578; a break here would expose 1.4653 and 1.4697, the key high from June 7.
USDJPY BULLISH A move above 81.27 would open up the way towards 81.77 and 82.23. Support lies at 80.27.
GBPUSD BEARISH Decline through 1.5970 would favor extension of losses towards 1.5911. Resistance is at 1.6154.
USDCHF NEUTRAL Key resistance is at 0.8551, while support lies at 0.8306 ahead of 0.8276, the key low.
AUDUSD BULLISH Clearance of 1.0790 would signal scope for further gains towards 1.0889. Initial support lies at 1.0520.
USDCAD BEARISH A push through 0.9580 would expose key support at 0.9513. Resistance is at 0.9705.
EURCHF NEUTRAL Sharp fall below 1.2186 has turned the model to neutral; resistance is at 1.2346 and support lies at 1.2030.
EURGBP BULLISH As long as 0.8903 holds, expect a recovery towards 0.9049 and 0.9095, the Fibonacci resistance.
EURJPY BULLISH Focus is on 117.90 break of which would be an important bullish development to expose 118.38 next. Support holds at 115.91.
SCHEDULE
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