FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
Risk markets continued to rally in Asia with the dollar softer versus G10 currencies, after a US session that was dominated by dovish FOMC minutes, which initially led the dollar gently lower, and pushed AUDUSD above 1.07 for the first time in almost four weeks. EURUSD traded 1.446-1.4414 and USDJPY 76.54-76.76. Crucially, the minutes revealed that ‘a few’ members felt that recent economic developments justified ‘a more substantial move’ at the Aug 9 meeting, but these members were willing to accept the change in forward rate guidance as “a step in the direction of additional accommodation”. Earlier, two Fed speakers seemed to reinforce market expectations that the FOMC is shifting towards the dovish end of the spectrum. Chicago Fed President Evans (2011 voter) revealed that “he would have wanted to do more” at the Aug. 9 meeting. Even Minneapolis Fed President Kocherlakota who dissented at the latest meeting, suggested he would not dissent again – at least not for the same reason. Instead he said he would now ‘abide’ by the Fed’s decision to introduce a conditional commitment to keep rates low until mid-2013. On the data front, house prices as measured by the Case-Shiller index showed further declines, and US consumer confidence fell to lows not seen since April 2009. Eurozone CPI and Canadian GDP numbers are due today.
EUR
The rebuttals continue after IMF Managing Director Lagarde over the weekend suggested that EU banks might need to be recapitalised. Bank of France Governor Noyer said he cannot understand why Lagarde would hold this view, and suggested she may have been misinformed by her IMF colleagues. The European Banking Authority also joined the debate, adding it is not calling for urgent and massive recapitalisation of EU banks. Our European banks team however continues to believe that the European banking system is grossly undercapitalised.
Noyer added that speculation about the possibility of a French ratings downgrade is an “absurd rumour”.
An Italian auction was poorly received. The bid-to-cover ratio was low at 1.269%.
Eurozone economic sentiment fell to 98.3 in August from a revised 103.0 in July.
The headline CPI rate for the Eurozone is expected to drop slightly to 2.40%, whle the unemployment rate should be unchanged at 9.9%.
CHF
For three of the past four weeks, the SNB has made a policy announcement on Wednesdays at approximately 07:00 GMT. Last week was an exception, but with sight deposits now very close to (or at) the SNB’s target of CHF 200 bn, investors will likely brace for the possibility of another SNB announcement. Having said that, the SNB is probably fairly satisfied with EURCHF above 1.18, and more importantly, the upward trend of recent days, and therefore may decide that a policy announcement is not warranted.
JPY
Japan’s new PM Noda said he held teleconference with US Treasury Secretary Geithner but did not discuss FX. However, he continues to watch FX moves closely.
Manufacturing and industrial output numbers were softer than expectations at 51.9 and 0.6% m/m respectively.
GBP
M4 money supply numbers showed a further contraction with the y/y number decreasing by 1.1%. This provides further fodder for the BoE doves and may strengthen the case for new asset purchases.
BoE’s Posen said the G7 central banks should buy assets to stop the economic downturn, and protect productive capacity and fiscal sustainability. He feels there are no credible threats of sustained higher inflation in advanced economies and more QE is needed.
SCHEDULE
EURGBP 0.8886 key resistance.
EURUSD BULLISH Initial resistance is at 1.4549 ahead of 1.4578; a break above this level would open up 1.4697, the key high from June 7. Near-term support lies at 1.4328.
USDJPY BEARISH Break below 76.34 would signal extension of losses towards the key low at 75.95 ahead of the psychological 75.00 level. Resistance is at 77.02.
GBPUSD NEUTRAL Resistance is at 1.6420 and support lies at 1.6255 ahead of 1.6208.
USDCHF BULLISH Focus is on initial resistance at 0.8278, a move above which would expose 0.8398. Support lies at 0.8041.
AUDUSD BULLISH There is potential for gains towards 1.0786 ahead of 1.0809. Initial support lies at 1.0621.
USDCAD NEUTRAL Resistance is at 0.9817 ahead of 0.9839, while a move below 0.9741 would trigger a bear trend.
EURCHF BULLISH Clearance of initial resistance at 1.1897 would open the way for a move towards 1.1973 ahead of 1.2172. Support lies at 1.1630.
EURGBP BULLISH Resistance at 0.8886 remains intact, a rise through this level would signal further gains towards 0.8915, a Fibonacci level. Initial support is at 0.8795.
EURJPY NEUTRAL Near-term directional triggers are at 111.94 and 110.11.
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