FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
In the absence of any major news risk sentiment was more stable in Asia. Investors still seem to evaluate implications of the SNB’s decision to introduce a price floor in EURCHF. Although the SNB’s decision must be respected such a move should be temporary in nature as the SNB still has to stick to its mandate which is to ensure price stability. Although the move may help domestic business sectors it may ultimately spark more volatility in global markets as safe haven demand will be redirected to alternative safe havens, including the greenback. With the greenback more sensitive to risk aversion this may drive inflation and liquidity expectations abroad lower and hence be another factor keeping global risk sentiment unstable.
As EURCHF has been the most preferred vehicle to express a negative view on the Eurozone periphery, a stable EURCHF puts EURUSD downside at more risk. Last but not least the SNB’s action may complicate conditions in countries such as Japan as the JPY will be more sought in periods of rising risk aversion. As such latest development may ease conditions to some domestic business sectors in Switzerland but may ultimately redirect safe haven demand and volatility to areas, where growth conditions may be more unstable. Under such conditions negative feedback effects through further weakening external demand on the back of rising uncertainty cannot be excluded.
Elsewhere, Australian GDP was released stronger, but RBA Governor Stevens reaffirmed that the central bank remains in a wait and see mode. Most Asian stock market indices are trading in the black, with the Nikkei up by 1.5%. EURUSD traded 1.3986-1.4065 and USDJPY traded 77.15-77.54. We keep a cautious stance on risk sentiment, and remain sellers on rallies in EURUSD.
EUR
The Constitutional Court is due to rule on the legality of Germany‘s participation in the original Greek rescue, and German involvement in the EFSF.
German Finance Minister Schaeuble confirmed Chancellor Merkel’s latest comments in saying that Greece will not receive aid payments this month if the conditions of the rescue package are not met.
IIF Managing Director Dallara said that he does not expect a ‘hard default’ for Greece (the IIF is the group that is assisting the implementation of private sector involvement in Greece). Dallara went on to say that it will take some weeks for the participating banks to assess their options.
A meeting between the finance ministers of Finland, Germany, and the Netherlands broke up without agreement on how to resolve the impasse over Greek collateral.
Spain‘s Economy Minister Salgado said the recovery is ongoing and the Eurozone is not going to fall back into a recession.
JPY
The BoJ kept monetary policy unchanged, leaving the interest rate at a range of zero to 0 to 1%. According to the central bank the economy will resume a moderate recovery. However there is the need to carefully watch how FX market moves affect the economy. Developments in the US and Europe are closely watched.
We generally do not expect the Ministry of Finance to follow in the footsteps of the SNB by defining a floor in USDJPY which they would seek to defend, especially due to the strong dependency on the Fed’s monetary policy stance itself and as the risk of such a move would be extraordinarily high given the costs related to the setting of a floor against the greenback.
GBP
UK Chancellor Osborne said the Eurozone needs greater fiscal integration, but that the UK would not participate in this. Osborne also ruled out another burst of fiscal stimulus. Another senior Treasury official once again said the UK would stick to its plans for fiscal consolidation.
CHF
The SNB set a minimum exchange rate target for EURCHF at 1.20, and announced the line will be defended by buying FX in unlimited quantities. They also said if the economic outlook and deflationary pressures demand it, the SNB will take further measures. By way of justification, the bank said the massive overvaluation of the CHF posed an acute threat to the Swiss economy. Imposing negative rates for foreigners still remains an option.
The SNB will be determined in defending the price floor as long as deflation risk remains in tact. However, in line with SNB Vice Chairman Jordan’s recent comments such action is temporary in nature and only thinkable as long as in line with the central bank’s mandate to ensure price stability.
Swiss August CPI came in softer than expected at -0.3% m/m (cons. -0.2%), and +0.2% y/y (cons. +0.3%). Rising deflationary forces may have been behind the timing of the SNB’s actions today, although the plan has clearly been in preparation for several weeks now.
Swiss FX reserves reached CHF253.35 bn at the end of August, up from CHF182.1 bn in July. The increase was not due to FX intervention during the month. Rather, this is a gross figure and is largely due to the impact of FX swaps which simultaneously increased the bank’s FX assets and liabilities. Net FX reserves are therefore much smaller than the gross figure implies. Valuation effects due to currency movement and returns on existing investments are also likely to have affected reserve level.
CAD
Fitch affirmed Canada‘s AAA long term rating, outlook stable.
Our analysts do not expect any change of policy to emerge from Wednesday’s Bank of Canada’s policy meeting. This is very much in line with consensus opinion where all 27 economists surveyed by Bloomberg expect no change.
Investors however will be especially interested in whether Governor Carney will shift guidance in the policy statement to allow for the possibility of future policy rate cuts.
This is the first BoC policy meeting since the US ratings downgrade, and since the Fed spectacularly extended the Fed funds rate guidance. However, the scope for surprises from today’s meeting seem limited given that Governor Carney signalled a wait-and-see approach as recently as August 19.
AUD
Australian GDP for the second quarter was released at 1.4%y/y, well above expectations for a rise of 0.5%. Both more than expected household spending and miners rebuilding stocks helped economic growth. However, the risk for an upside surprise was already high after business inventories were reported considerably higher on Monday.
RBA Governor Stevens signalled that the central bank will keep a neutral monetary policy stance for the time being, especially given the degree of uncertainty related to global growth. He expects households and firms to stay cautious for some time. Nevertheless according to him there is no certainty if this will refrain demand and hence inflation. Given no indication for the RBA to take a more active monetary policy stance anytime soon we expect the AUD to remain driven by global risk sentiment.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
USDCHF 0.8951 key resistance
EURUSD BEARISH Sell-off through 1.3951 would open the way towards the key low from July 12 of 1.3837 ahead of 1.3752. Initial resistance is at 1.4278.
USDJPY BEARISH Initial support is at 76.43, a break through which would open 75.95, the key low from Aug 19. Resistance is at 77.70 ahead of 78.10.
GBPUSD BEARISH Sharp fall through 1.6006 has exposed support at 1.5906 ahead of the key low from July 12 of 1.5781. Near-term resistance is at 1.6201.
USDCHF NEUTRAL Key resistance is at 0.8951, while support lies at 0.7841.
AUDUSD BULLISH Watch for a move above 1.0666 to expose 1.0765, while support at 1.0445 holds.
USDCAD BULLISH Rise through 0.9969 would open the way for 1.0010. Support lies at 0.9854.
EURCHF NEUTRAL Resistance is at 1.2346 and support lies at 1.1819.
EURGBP NEUTRAL Break above 0.8886 would open 0.8915, while a move below 0.8697 would expose 0.8643.
EURJPY BEARISH Momentum is negative; focus on 106.61, a break here would expose 105.44. Initial resistance is at 110.95.
SCHEDULE
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