FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
The US dollar lost more ground to the AUD during the Asia session after Australian Q2 CPI came in well ahead of expectations. As for the US debt ceiling impasse, the rhetoric emanating from Washington suggests that there is still some distance to cover for both sides to reach an agreement, though the market appears inured to the fact that any deal reached at this stage would probably be insufficient to ward off revisiting the issue in a few quarters’ time, if not sooner. White House Chief of Staff Daley said he is confident Congress will work to prevent a default but offered no details on how talks are progressing. On the data front, consumer confidence rebounded but housing figures were soft. EURUSD traded 1.4492-1.4536, and USDJPY 77.70-78.09.
EUR
Moody’s downgraded Cyprus two notches to Baa1 citing fiscal problems, the political climate, and exposure of the banking system to Greece.
ECB Governing Council member Lipstok noted that interest rates were still very low even after the recent increase.
Eurozone M3 figures are due on Wednesday, along with CPI figures out of Germany.
JPY
Reuters reported that ‘sources’ suggest Japanese policymakers are considering solo FX intervention as an increasingly viable near-term option. Solo action would indeed be their only option as multilateral G7 intervention would not be viable this time around. They are likely to wait for events to unfold in the US first however, as policymakers might do the work for them.
Finance Minister Noda repeated his recent warnings that yen moves have been “one-sided” and that he is watching FX moves closely..
GBP
UK GDP growth was in line with consensus at +0.2% q/q. Sterling found some support though as the ONS reported that special factors dragged growth by around 0.5ppt. Without these, growth would have been a much more respectable 0.7%. Our UK economist notes that 0.5ppt was probably bigger than many might have expected. However, 0.2% is weak and as such, talks of QE2 will re-emerge, but in our view, with consumer price inflation yet to peak, the MPC is very unlikely to start another round of QE for fear of dislodging expectations.
BoE’s Weale said in a German newspaper that the BoE forecasts show risk of double-dip recession in UK, perhaps in winter. However, the hawkish Weale repeated his calls for rate hikes, saying that inflation levels remain high.
AUD
AUDUSD reached new post-flotation highs after an above consensus Q2 CPI report. CPI rose +0.9% q/q (cons. +0.7%) and +3.6% y/y (cons. 3.4%).
NZD
New Zealand Finance Minister Bill English said the NZD was strong because the market was starting to see it as a safe-haven currency. We believe the low liquidity of the NZD suggests this status is hard to justify for now and NZD strength is more a consequence of US dollar weakness. He also warned that the combination of a stronger NZ dollar and lower commodity prices would be negative for the country.
CHF
The KoF leading indicator is due on Wednesday, the market is looking for a decline to 2.11 from 2.23, though these are still relatively elevated levels. Lack of deflation risk means the SNB is unlikely to take action despite the strength of the currency.
TECHNICAL OUTLOOK
AUDUSD clears 1.1012
EURUSD BULLISH While support lies at 1.4324, a break above 1.4578 would signal extension of gains towards 1.4697.
USDJPY BEARISH Momentum is negative; scope for further weakness towards 77.41 ahead of 76.25, a key low. Resistance is at 78.70.
GBPUSD BULLISH A clearance of 1.6473 would open 1.6547. Initial support lies at 1.6262.
USDCHF BEARISH Watch for a clear break of 0.8000, psychological level, to extend weakness towards 0.7927. Resistance is at 0.8178.
AUDUSD BULLISH Rise through 1.1012 has paved the way towards 1.1198. Support lies at 1.0944.
USDCAD BEARISH Initial support lies at 0.9385 ahead of 0.9252. Near-term resistance is at 0.9531.
EURCHF BEARISH Violation of 1.1496 would expose 1.1374. Initial resistance is at 1.1781.
EURGBP NEUTRAL Near-term directional triggers are at 0.8895 and 0.8798.
EURJPY BEARISH While resistance at 113.66 remain intact, expect a decline towards 112.04 ahead of 111.46.
SCHEDULE
Please visit GCI’s Economic Calendar for a schedule of market news and events.
