FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
FX markets got off to a shaky start in Asia after Standard and Poor’s downgraded the US long term credit rating from AAA to AA+ late on Friday evening. The outlook is negative and the ratings agency warned that further action could be taken in the next two years. USDCHF fell sharply to a new record low of 0.7480. USDJPY also came under downward pressure but comfortably held above the all-time low. Gold rose over $50, breaching $1700/oz for the first time, and set a new high of $1715/oz. US 10y Treasury yields dropped 7bp, and are holding at 2.50% at the time of writing, while both Brent and WTI are both more than $3 lower. The downgrade has also taken its toll on equities: S&P futures are down -2.5%, the Nikkei 225 is -2.0% weaker, while trading in the Korean shares was briefly suspended after the KOSPI fell nearly 6%. EURUSD traded 1.4289-1.4432, and USDJPY 77.58-78.47.
EUR
The ECB issued a statement which potentially opens the door to the purchase of Spanish and Italian debt as early as today – it did not say so explicitly but did pledge to “actively implement” the SMP bond buying program. Any such decision would put a floor under risk but we continue to expect strong risk aversion regardless. The G7 issued a statement pledging to take coordinated action where needed over the coming weeks to ensure liquidity, and to support financial market functioning, stability, and economic growth. No commitment to coordinated intervention was given, but the G7 agreed to “consult closely” with regard to actions in FX markets. On Friday, non-farm payrolls were better than expected at 117k and private payrolls were very firm at 154k. The unemployment rate fell to 9.1%.
Late Friday afternoon, with risk aversion still plaguing markets, European leaders announced that they were in communication throughout the day regarding the situation in Eurozone bond markets, culminating in a late press conference in Rome, hosted by Italian Prime Minister Berlusconi and Finance Minister Tremonti. Berlusconi announced an acceleration of the austerity program.
On Sunday German and French leaders announced their commitment to the EFSF’s new-found flexibility and called upon partners to speed up fiscal austerity packages. Full ratification of the EFSF’s new powers is not expected until October at the earliest which leaves the ECB as the only buyer for now..
JPY
Finance Minister Noda said that confidence in the dollar has not waivered and that there has been no change in the market’s trust in US Treasury securities.
AUD
We went short AUDUSD at 1.0420 as a trade recommendation overnight targeting a fall to parity on the back of what we expect will amount to widespread risk aversion over the coming days. Our stop is placed at 1.0510.
CAD
Canadian employment was mixed. The headline number was soft at +7.1k, however, the unemployment rate fell to 7.2% (cons & UBSe 7.4%) as fewer people participated in the labour force
Our analysts note that on the plus side full-time employment rose 25.5K, while part-time jobs fell 18.4K and private sector employment surged 94.5K while public sector jobs plunged 71.5K and the number of self-employed fell 15.9K. Most of the job cuts were in health care and education. The Canadian dollar remains solid based on fundamentals but risk aversion would prove problematic at this stage.
TECHNICAL OUTLOOK
AUDUSD breaks 1.0391.
EURUSD BEARISH Initial support is at 1.4055, a break here would expose 1.4014 and 1.3951. Resistance is at 1.4536.
USDJPY NEUTRAL Resistance is at 79.41 while support lies at 76.97.
GBPUSD BULLISH Clearance of 1.6440 and has opened the way for 1.6496 ahead of key high at 1.6547. Near-term support lies at 1.6224.
USDCHF BEARISH Clear break of 0.7500 would extend losses towards 0.7439, Fibonacci level. Resistance is at 0.7802.
AUDUSD BEARISH Break of 1.0391 has opened the way towards 1.0187 and 1.0113. Resistance is at 1.0527.
USDCAD BULLISH Key resistance is at 0.9913, a move above which would pave the way for 0.9974. Support lies at 0.9742.
EURCHF BEARISH Support lies at 1.0500, a push below would open the way towards 1.0319. Resistance is at 1.1205.
EURGBP BEARISH Initial support is at 0.8643, a break below which would expose 0.8611. Near-term resistance is at 0.8792, Fibonacci level.
EURJPY BEARISH Move below 110.30 would expose key support at 108.71. Resistance is at 114.18.
SCHEDULE
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