FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
The euro got a boost during the Asia session after news reports that French President Sarkozy and German Chancellor Merkel had agreed on a joint position regarding a second financial rescue of Greece. In our view, this raises the chances of a determined policy initiative emerging from today’s summit. Based on details released by ‘Eurozone government sources’ so far, the EU is considering extending the powers of the EFSF to include buying back bonds in the secondary market, establishing precautionary credit lines with vulnerable sovereigns, and funding bank recapitalisations. The stakes are high and the commentary from various Eurozone officials suggests that they grasp the gravity of the situation. In the US, further meetings were being held behind the scenes and investors are hoping the “Gang of 6″ plan can start finding traction as time is running short for the debt-ceiling impasse to be resolved. On the data side, existing home sales disappointed to the downside and equities ended the session slightly down. EURUSD traded 1.4199-1.4274 and USDJPY traded 78.62-79.03.
EUR
French President Sarkozy and German Chancellor Merkel have reportedly agreed a common position on a second financial rescue of Greece. No further details were released after their bilateral meeting last night, but we see the agreement as a euro-positive development given that it improves the chances of a policy response emerging from today’s summit.
The Financial Times reported that final proposals are being put forward regarding private sector involvement in a second Greek rescue. One involves a debt swap while France is also proposing a EUR50 bn tax on Eurozone banks, and the money raised would be used to buy back outstanding Greek debt. These measures are being proposed in addition to the expansion of the EFSF’s powers. Further shifts can be expected ahead of Thursday’s final decisions. Reuters cited banking sources as saying that the bank levy is wrong and would likely prompt lawsuits if it was implemented.
Belgian Finance Minister Reynders said the overall idea of a bond rollover remains valid. He said the Eurozone is to ask the private sector to reinvest in new bonds with longer maturity. ed.
The Eurozone leaders are expected to arrive in Brussels late morning local time and the market can expect headlines to start hitting wires at this time, and continue throughout the day.
CHF
EURCHF is likely to come under pressure again over the coming days if the Eurozone fails to deliver the comprehensive solution sought by markets. We continue to target a higher cross based on economic fundamentals, but it will likely remain volatile in the near term.
On the domestic front, the trade balance is due on Thursday and markets will be looking for further signs of export erosion due to a strong franc. Money supply, real estate and the ZEW survey are also due.
CAD
The Bank of Canada released its Monetary Policy Report on Wednesday. The details were broadly in line with the tone of this week’s policy meeting. The BoC raised its inflation forecast for the coming three quarters, but the trajectory remains to the downside, as inflation is expected to fall to below the 2% operational guidance next year. The report noted that inflation risks were broadly balanced. Household spending was expected to rise but exports to stay weak.
Governor Carney noted that the central bank was not focused on the currency but rather on the inflation target. However, headwinds will persist, one of which included the strength of the currency. On the hawkish side though, he warned that one couldn’t assume ‘neutral’ rates with the economy currently operating at capacity.
GBP
As expected, the BoE July minutes revealed that the vote split was unchanged with a 7-2 decision on interest rates and 8-1 vote on QE. The tone was dovish and little changed from last month, as most members noted that recent developments had reduced the chance that policy tightening was warranted in the near term. Our UK economist’s view is that the committee believes there is an outside chance that, similar to Japan, the UK is in a liquidity trap. That, together with the view that it is easier to tackle inflation than deflation, is enough to convince the MPC to keep monetary policy ultra-accommodative to give growth a chance.
Public sector finances figures are due out of the UK today.
TECHNICAL OUTLOOK
EURJPY 112.95 resistance.
EURUSD BEARISH Initial support is at 1.4134, a break of which would expose 1.4069. While, a recovery through 1.4295 would open 1.4375.
USDJPY BEARISH Momentum is negative; a break below initial support at 78.44, Fibonacci level, would open 76.25, a key low. Resistance is at 79.61.
GBPUSD BULLISH Watch for a break above 1.6194 to confirm the bull trend and target 1.6254 next. Initial support is at 1.6069.
USDCHF BEARISH Decline through 0.8152 would extend losses towards 0.8033. Initial resistance is at 0.8335.
AUDUSD BULLISH Key resistance is at 1.0802; a move above which would confirm the bull trend, next level comes in at 1.0889. Support lies at 1.0598.
USDCAD BEARISH Pressure on initial support at 0.9446, a drop below this level would expose 0.9385. Resistance is at 0.9513.
EURCHF BEARISH Initial support is at 1.1515, a move below which would open 1.1374. Resistance at 1.1806 holds.
EURGBP BEARISH While resistance at 0.8847 holds, focus on support at 0.8757 ahead of 0.8705.
EURJPY BEARISH As long as resistance at 112.95 holds, expect a downside move towards 111.18 ahead of 110.66.
SCHEDULE
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