FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
EURUSD dropped 80 pips during the Asia session following a barrage of euro-negative newspaper commentary. Some articles expressed concern about European bank exposure to troubled sovereigns, but the majority were of a more general nature, criticising the response of European authorities to date, and raising doubts about the euro’s very survival. EURUSD traded in a range of 1.4052-1.4168 and USDJPY 78.96-79.30. EURCHF and USDCHF made new record lows. The stress test results themselves passed largely without incident on Friday, although European markets were closed at the time, raising the risk of a delayed reaction as Europe walks in on Monday. Only 8 of the 90 banks were deemed to have failed, and a capital shortfall of only €2.5 bn was identified. Although European equities closed in the red, the S&P 500 managed to climb +0.56%. As expected, US core CPI rose to +1.6% y/y (prev. 1.5%), which reinforces the view of our US economists that further QE is unlikely. University of Michigan consumer sentiment fell sharply to 63.8 (cons. 72.2). Our economists believe the deterioration is at least partly due to the debt ceiling impasse and, consequently, a resolution would go a long way toward improving confidence.
EUR
A date has finally been set for the upcoming EU summit, putting an end to days of speculation about whether it would be held at all. It is due to take place on Thursday July 21. The two items on the agenda are “the financial stability of the Euro area as a whole and the future financing of the Greek programme”. Germany’s Chancellor Merkel said she will only travel to the summit if an agreement on Greece is to be reached. Merkel added she is “not working towards” a solution that involves a restructuring of Greek debt.
European bank stress test results were released at 1600 GMT on Friday. Eight of the 90 banks tested were deemed to have failed the tests although the total capital shortfall was found to be only ?2.5 bn. By contrast, our bank analysts think the European banking system needs somewhere in the region of ?150 bn in additional capital before it can be considered to be adequately capitalised. Five Spanish banks, two Greek banks and one Austrian bank did not pass. The European Banking Authority which carried out the tests said that of all the Greek sovereign debt held by banks, 67% of it is held by Greek banks, while German and French banks hold 9% and 8% respectively.
Both houses of the Italian parliament have now approved a ?48 bn package of austerity measures, after a final vote on Friday evening. Earlier on Friday, sovereign debt markets continued to show signs of strain with Spanish and Italian yields rising still further.
Bundesbank President Weidmann said that a haircut on Greek debt “will not really improve anything” while the public finances continue to show “high deficits”.
EU Commissioner Rehn again called for the lowering of interest rates Ireland pays on rescue funds, as well as an extension of loan maturities.
Reuters cited a French government source as saying that Germany and Italy are likely to oppose a second IEA oil stock release later this week. Any release of further oil reserves beyond the 60m barrels originally planned would likely be euro-negative as the market would anticipate a further decline in Eurozone inflationary pressures.
TECHNICAL OUTLOOK
USDCAD 0.9513 support
EURUSD BEARISH Focus is on initial support at 1.3951, a break of which would favor extension of bear trend and open 1.3837. Initial resistance is at 1.4200.
USDJPY BEARISH The pair targets support at 78.44 Fibonacci level; a break of which would open 76.25, a key low. Resistance is at 79.61.
GBPUSD NEUTRAL Initial resistance is at 1.6254, while support lies at 1.5906.
USDCHF BEARISH Sharp sell-off through 0.8083 has paved the way for losses towards 0.8016 ahead of 0.7836. Resistance is at 0.8276, a
previous low.
AUDUSD NEUTRAL Near-term directional triggers are at 1.0746 and 1.0526.
USDCAD BEARISH Key support lies at 0.9513, a clearance of which would expose 0.9446. Near-term resistance is at 0.9624.
EURCHF BEARISH Decline through 1.1458 has signalled further weakness towards 1.1374 ahead of 1.1056. Resistance is at 1.1650.
EURGBP BEARISH Potential for further downside towards 0.8722, a key low from June 16; next support comes in at 0.8657. Initial resistance is at 0.8847.
EURJPY BEARISH Focus is on initial support at 109.58, a break of which would expose 107.99. Resistance is at 112.95.
SCHEDULE
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