FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
Both the AUD and NZD fell after disappointing domestic data releases. Unusually, the euro carried on regardless and further consolidated its recent gains. The possibility of a deal between Greece and private sector bond holders appears to be growing, according to the Financial Times. Our house view that coercive measures may be needed further down the line remains unchanged. The news comes on the back of the IMF’s proposal for a fresh $500bn funding call, which would be a significant boost to the funds’ resources. Whether Largarde’s call for new one-off contributions obtains much buy-in from non-Eurozone nations remains to be seen, but the momentum clearly matters for risk and the euro. EURUSD traded 1.2835-1.2879 and USDJPY 76.69-76.85 during the Asia session, while acceptable US data also helped equity markets finish yesterday on a more buoyant note. Industrial production was slightly softer than expected at +0.4%m/m, while PPI registered a decline of 0.1%. TIC data showed a rise in long-term capital flows into the US, and we expect such trends to remain a source of structural support for the dollar. Ahead on Thursday, the US releases CPI data. Price figures may attract more attention in the US in the short term as there is talk of an explicit inflation target being adopted by the Federal Reserve.
EUR
The Financial Times has reported that Greece is nearing a deal with private-sector creditors on a debt swap. Rather than a fixed coupon, which had been a point of contention, the current deal on the table looks for a variable rate, starting at 3% before rising to 4.5%. The IIF noted discussions would continue on Thursday, while the IMF will be waiting in the wings as talks on further aid cannot begin in earnest until the PSI is completed.
German Chancellor Merkel today tried to allay market fears of a watering down of the fiscal compact. She noted that negotiations are ongoing.
The euro rallied after Bloomberg reported that the IMF has said that they will propose boosting their lending resources by $1 trn. The comments were not official however so we question the reliability of the figures. It is clear that negotiations are underway behind the scenes so comments like this are to be expected. The current size of the available resources is $385 bn and Eurozone countries have pledged another c. $200 bn – so the rest would need to come from other countries, including the US, Japan and BRICs. While any development of this magnitude would be a significant boost to risk appetite, we note that previous G20 meetings have had a tendency to disappoint market expectations. Earlier, IMF chief Lagarde said the fund’s staff is still exploring ways to ensure ‘adequate fund firepower’.
A ‘senior Fitch Director’ said that a two-notch downgrade of Italy is ‘still an option’. Fitch still has Italy at A+ and has suggested action before month end. Ratings agencies remain in focus of Eurozone governments, though French President Sarkozy again played down the loss of France‘s AAA status by calling the downgrade itself a ‘non event’.
The German government has cut its 2012 growth forecast to 0.7% from 1% earlier. Germany sold EUR3.44 bn of its 0.25% two-year Schatz notes on Wednesday, paying an average yield that set a new a multi-decade low.
JPY
ECB Governing Council member Nowotny tentatively joined the EURJPY intervention debate in an interview with Japan‘s Nikkei newspaper. He said he understands Japan‘s concerns about a weak euro, but added that it was premature to declare that the euro’s moves are one-sided given that it continues to move within its normal range.
GBP
Nationwide consumer confidence figures were in line with consensus expectations and fell to 38 (prev. 40) – only two points above the lowest reading ever.
NOK Targets: EURNOK 1m 7.70, 3m 7.80.
AUD
AUDUSD drifted lower in the aftermath of a mixed – but generally soft – employment report. Employment fell -29.3k in December, despite expectations of a 10k increase. A steady unemployment rate was some consolation however, and full time employment actually increased. Our Australia economists still expect the RBA to trim rates again in February.
NZD
NZDUSD fell 50 pips overnight after Q4 CPI came in sharply below expectations at 1.8% y/y (cons. 2.6%, prev. 4.6%). Our New Zealand economist still thinks the RBNZ will remain on hold until June, but he acknowledges the risks to global growth, domestic demand, and inflation raise the risk that the OCR remains on hold for longer.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BEARISH Near-term support lies at 1.2734, a move below which would open 1.2624. Resistance is at 1.2902.
USDJPY BEARISH Key support lies at 76.33 with interim support at 76.55. Resistance is at 77.13.
GBPUSD BEARISH Decline through 1.5273 would open 1.5235 next. Resistance is at 1.5409 ahead of 1.5501.
USDCHF BULLISH Resistance is at 0.9498, a rise through which would open the key high of 0.9596. Support lies at 0.9306.
AUDUSD BULLISH Next resistances are at 1.0496 and 1.0567. Support lies at 1.0303.
USDCAD NEUTRAL Support lies at 1.0104 ahead of bear trigger at 1.0052. Resistance is at 1.0188 ahead of 1.0253.
EURCHF BEARISH Initial support lies at 1.2051 ahead of key support at 1.2000. Resistance is at 1.2130.
EURGBP BEARISH Near-term support lies at 0.8303 ahead of 0.8255. Resistance comes in at 0.8376.
EURJPY BEARISH Support lies at 97.69, a break below which would open 97.04. Resistance is at 98.80 ahead of 99.35.
SCHEDULE
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