FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
The euro continued to sell off during the Asia session as Monday’s meeting of Eurozone finance ministers failed to produce any concrete proposals to address the latest bout of market nervousness. EURUSD traded 1.3932-1.4062 and USDJPY 80.06-80.38. Italy’s debt auctions on Thursday are likely to be the next major risk event for the euro, and are already fast becoming the focus of market attention. Yesterday, Spanish 10y yields climbed above 6% for the first time since the launch of the euro. Italian 10y yields pushed 42 bp higher on the day, while German bunds saw safe haven demand. EURCHF made new record lows overnight, dipping below 1.1700 again. European stocks fell sharply, and the S&P 500 followed closing -1.81% lower. FOMC minutes are due, but events inside the Eurozone are likely to remain the principal driver of EURUSD for the foreseeable future.
EUR
No new policy initiatives were announced at Monday’s meeting of Eurozone finance ministers despite yesterday’s broad-based selloff in euro-denominated assets. The post-meeting statement made no direct reference to Italy or Spain. Given these countries are the source of the latest bout of market nervousness, this omission is unlikely to soothe market concerns. Although Eurogroup Chairman Juncker did say he was aware that Italy is currently the focus of market attention, he conceded the meeting did not discuss developments in Italy in specific detail.
Ministers said they “stand ready to adopt further measures” to improve the Eurozone’s capacity “to resist contagion risk”. But the details were disappointingly vague. The possibility of “enhancing the flexibility and the scope of the EFSF” was mentioned, but proposals on this have yet to be even presented to ministers. Some progress on this is expected “shortly”, but no specific timeframe was mentioned.
The most interesting development was that ministers have dropped their ambition to find a solution that avoids a ‘selective default’ rating for Greece. This is likely a tacit admission that a default rating will be almost impossible to avoid. That in itself is a worrying development for the euro given the uncertainties around how the ECB and national regulators may react.
ECB Executive Board member Bini-Smaghi said that inflation expectations in the Eurozone are stable for now. On the sovereign debt issue, he stuck to his previous view claiming that allowing a country to default would be “madness’. He described the correlation between sovereign risk and banking sector risk as ‘explosive’, but insisted that Italy will never default because it is a rich country and is clearly able to repay its debt. However, he recommended that Italian banks should accelerate their plans to raise capital.
German Chancellor Merkel said that Italy must send an urgent signal about its commitment to fiscal reform.
German Finance Minister Schaeuble said that speculation about doubling the size of Europe’s rescue facility has no basis in fact.
The PBoC’s Deputy Governor said that he has confidence in the euro, and that Europe will remain a primary investment target for China. He added he is prepared to explore cooperation with the EU, although did not elaborate.
EU Financial Services Commissioner Barnier said he would ask the G20 to consider global rules on ratings agencies.
JPY
The BoJ kept the policy rate unchanged, and made no adjustments to any of its unconventional policy measures.
TECHNICAL OUTLOOK
EURUSD breaks 1.3970
EURUSD BEARISH Decline through 1.3970 has confirmed the bearish conditions and exposed support at 1.3903 ahead of 1.3855. Near-term resistance is at 1.4298.
USDJPY BEARISH Break below 80.27 has opened the way towards 79.70 and 79.57. Initial resistance is at 80.83.
GBPUSD BEARISH Clearance of 1.5881 has put focus on 1.5822 ahead of 1.5752. Resistance is at 1.6056.
USDCHF BEARISH Key support is at 0.8276, a move below the level would open 0.8165. Resistance is at 0.8551.
AUDUSD NEUTRAL Pull back through 1.0591 has exposed support at 1.0520. Key resistance is at 1.0790.
USDCAD BEARISH Initial support is at 0.9600, a break of which would expose 0.9556. A recovery through 0.9740 would offset the losses and open 0.9780.
EURCHF BEARISH Scope for further weakness towards 1.1600 and 1.1458. Resistance is at 1.1984.
EURGBP NEUTRAL Downside trigger is at 0.8722, while resistance is at 0.8906.
EURJPY BEARISH Sell-off through 112.00 has paved the way for weakness towards 110.54 ahead of 110.00. Resistance is at 113.42.
SCHEDULE
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