FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
Risk appetite held steady during the Asia session, helped in part by stronger than expected Chinese economic data. EURUSD traded 1.3951-1.4054 and USDJPY traded 78.50-79.58. However, in another sign that the currency union’s woes are only beginning, Moody’s has downgraded Ireland to Ba1, or junk status, citing concerns that there could be further pressure on the sovereign from a disorderly default, or if the Irish government were unable to meet its targeted fiscal consolidation goals. Given that the ECB had waived collateral rules for Irish debt in Q1, the impact was not as significant as that on Portugal, but we expect headlines to remain negative for the euro in general. There is particular concern over whether the European Union is in fact going to meet later this week to discuss the crisis as different sources continue to contradict each other.
In the US, the FOMC minutes from the June meeting were released with limited fanfare. The Fed cited concerns over the debt ceiling and Eurozone problems as risks to the US economy, but there was less consensus on domestic growth. Some FOMC members warned that further stimulus may be warranted should conditions deteriorate further, giving hope to the handful of investors still on the lookout for QE3, but we still note that the bar for fresh action is prohibitively high at this stage. Fed Chairman Bernanke is set to deliver his semi-annual testimony on policy on Wednesday.
EUR
Moody’s downgraded Ireland by one notch to Ba1, “junk” status, citing fears that the government would not be able to meet its fiscal consolidation targets and further assistance may be needed. Disruption from Greece and other sources have also been cited as potential pressure points. This met with a rebuke from Irish and Eurozone authorities, both of whom stressed that Ireland is on track within its current program and the move was not justified.
The Italian centre-left opposition called for approval of government austerity measures in the Senate by Thursday, and by the lower house by Sunday.
Belgium PM Leterme says Belgium’s 2011 budget deficit is to be 3.3% of GDP instead of 3.6% of GDP. This was a reassuring figure after the OECD also warned that Belgium’s fiscal path risked becoming unsustainable.
Separate Eurozone authorities continue to dispute whether an emergency session would be called on Friday. The German Chancellor’s office said no plans were being made at this time, though other sources noted that a meeting had been confirmed.
Eurozone industrial production is due on Wednesday; the market is looking for a 4.8% y/y gain (0.4% m/m).
GBP
UK CPI came in softer than expectations at 4.2% y/y. The surprise decline was driven by weaker consumer sales as the UK retail sector feels the fiscal austerity squeeze. Sterling remains under pressure as the focus for the BoE switches towards growth prospects and potential spillover of Eurozone problems.
UK Chancellor George Osborne called upon Eurozone governments to act decisively on current risks, and warned that the UK was not immune to any financial storm led by the Eurozone.
On Wednesday labour market data will be the key focus. The claimant count rate is expected to show a rise to 4.7% as jobless claims continue to rise (cons. 15k). The ILO unemployment rate is expected to remain unchanged at 7.7%.
JPY
Finance Minister Noda described the overnight move in USDJPY as a little one-sided, but did not indicate that FX intervention is imminent.
CAD
Canada’s merchandise trade deficit shrunk slightly to $0.8 bn in May (consensus -$0.9 bn, UBSe -$0.5 bn) from -$0.9 bn in April. Our analysts note the export gain was largely due to higher volumes in machinery and equipment, while imports advanced as well.
TECHNICAL OUTLOOK
USDJPY 78.44 support
EURUSD BEARISH A break below 1.3837 would open 1.3752 and 1.3659. Resistance holds at 1.4295 for now.
USDJPY BEARISH The pair found support ahead of 78.44 Fibonacci level. A break here would open 76.25 key low. Near-term resistance is at 80.38.
GBPUSD BEARISH Focus is on 1.5752, a break below which would expose 1.5676. 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 1.0790 and 1.0391 mark the near-term directional triggers.
USDCAD BEARISH Initial support is at 0.9566 ahead of 0.9513. Resistance is at 0.9779, yesterday’s high.
EURCHF BEARISH Initial support is at 1.1500, a decline through which would expose 1.1458. Resistance is at 1.1806.
EURGBP BEARISH Sell-off targets 0.8722; a break here is required to confirm the bear trend and expose 0.8667. Resistance is at 0.8839.
EURJPY BEARISH Currently holds support at 109.58; a move below the level would open 107.99 and 106.61 next. Near-term resistance is at 112.95.
SCHEDULE
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