FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
WORLD
The Australian dollar fell towards the end of the Asia session after Fitch downgraded the ratings of three Australian banks. Earlier, AUD got a modest boost from parliamentary testimony by RBA Governor Stevens who painted a relatively upbeat picture of the economic outlook. Crucially, he stuck to previous guidance and did not suggest the RBA is poised to cut the cash rate. Looking to external risks, Stevens said China is getting on top of its problems around inflation and the property market. However, he sounded more cautious on Europe, noting anxiety over the sovereign debt crisis has not gone away, nor will it for some time.
EURNOK traded back above 7.50 overnight, having forcefully broken below a key support level at 7.48 yesterday. With approval in principle now granted for a new Greek aid program, and FX volatilities at multi-year lows, conditions look right for investors to add to risk positions for another week or so – especially in the run-up to the ECB’s LTRO on Feb. 29. However, we recommend staying nimble given questions remain over how smoothly the PSI transaction will proceed, especially now that a credit event seems increasingly likely. Also we remain on guard for ratings actions over the coming weeks in response to the ECB’s acquisition of de facto super-senior status. Overnight EURUSD traded in a 1.3316-1.3380 range, USDJPY 79.86-80.46.
EUR
The ECB does not appear to have concerns about the likely path of inflation in the Eurozone. ECB President Draghi said he sees no sign of inflationary pressures at the moment – rather ‘quite the opposite’. ECB Governing Council member Liikanen echoed that view, and repeated that the ECB has never said there is an interest rate floor at 100bp – effectively implying that the ECB could cut the refi rate further if it felt this were needed.
In an interview with the Wall Street Journal Draghi warned against any watering down of fiscal consolidation targets as this ‘would elicit an immediate reaction by the market’. The comments may dampen hopes the ECB would be in a position to influence governments to adopt more pro-growth policies to ease debt burdens rather than simply relying on austerity measures alone.
Draghi rejected the notion that sovereign bond markets might be adversely affected by the ECB’s refusal to take losses on its Greek bond holdings. Instead he said the ECB’s SMP holdings are small relative to the size of European bond markets. He said he was ‘surprised’ that the market showed no ‘elation’ after the new Greek program was approved on Monday.
On Thursday the Greek parliament approved the debt swap law, which contains legislation for retroactive collective action clauses. Finance Minister Venizelos said that ‘Greece will be a different country after this transaction’.
German final Q4 GDP figures are due on Friday; we and the market are expecting a 0.2% quarterly decline.
JPY
Moody’s kept the outlook on Japan’s rating at ‘stable’, noting that credit-negative factors for Japan have not yet reached the critical mass needed to justify an actual downgrade. Moody’s thinks increased purchases of JGBs announced by the BoJ last week will be temporary. However, the agency seemed conscious of the risk that these purchases might weaken the government’s resolve to show greater fiscal prudence.
GBP
Two Bank of England MPC members sounded dovish. Fisher said he has an ‘open mind’ on whether more easing is needed. He repeated that the economic outlook is still ‘incredibly uncertain’, noting that ‘if anything I feel slightly more comfortable about the inflation outlook than the outlook for growth’. He went on to describe a possible upward cost shock due to oil as ‘the last thing we need at the moment’. Miles said the UK economic situation is still precarious and monetary policy therefore needs to be expansive.
The second estimate of Q4 UK GDP is due on Friday. Our UK economist is in line with consensus and expects the previous estimate to be confirmed at -0.2% q/q.
AUD
RBA Governor Stevens said the settings of monetary policy are ‘about right for the moment’. He stuck to previous policy guidance and, crucially, did not suggest that a cut to the cash rate was in the pipeline. The OIS market was unmoved by the remarks and continues to price in 43bp of further easing over the next 12 months. However, AUD got a moderate boost from Stevens’ relatively upbeat assessment of the economic outlook.
Stevens added that the recent bout of AUD strength is a bit ‘odd’ given that the terms of trade have already peaked. However he said he was not attracted to the idea of trying to prevent AUD from rising further, and said the RBA has carried out no intervention recently.
The Australian dollar fell 30 pips toward the end of the Asia session after Fitch downgraded the ratings of a number of Australian banks. There has been a lot of market interest in the funding costs of Australian banks recently on the grounds that if banks raise their lending rates, this could give the RBA greater freedom to lower the cash rate.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BULLISH Break above 1.3322 has opened 1.3435 ahead of 1.3548. Support lies at 1.3187.
USDJPY BULLISH Next resistances are at 80.40 and 80.83. Support lies at 79.86.
GBPUSD NEUTRAL Resistances are at 1.5815 and 1.5881. Key downside trigger is at 1.5645 and next support is at 1.5582.
USDCHF NEUTRAL Support is at 0.8961 and 0.8862. Resistance is at 0.9149 ahead of 0.9207.
AUDUSD NEUTRAL Support lies at 1.0598 and 1.0570. Resistance is at 1.0756 ahead of 1.0845, the Feb. 8 key high.
USDCAD BEARISH Momentum is negative; support lies at 0.9924, a move below which would open the key low at 0.9892. Resistance is at 1.0020.
EURCHF NEUTRAL Resistance is at 1.2084 and support is at 1.2032, the month-to-date low.
EURGBP BULLISH Clearance of 0.8486 has opened 0.8562 ahead of 0.8598. Support lies at 0.8453.
EURJPY BULLISH Resistance is at 107.65 ahead of 108.16. Support is at 106.16.
SCHEDULE
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