FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
Risk appetite faltered just before the Asia session got underway after Fitch warned that contagion from Europe could spread across theAtlantic, and might eventually have negative outlook implications for the ratings of US banks. This undid much of the positivity triggered by a stronger than expected US industrial production report. US headline inflation cooled to 3.5%, while core inflation was steady. Capital flows into theUSsurprised to the upside. Although these points are still not enough to turn theUSdollarinto a growth currency, the sustained flow of capital into theUSto capture stronger growth will likely pick up speed if the flow of solid economic data can be maintained. On Thursday the news and data flow is somewhat lighter, thoughEuropewill face more bond auctions by sovereigns and slip-ups are likely to prove costly. Mario Monti was formally sworn in as Italian prime minister with a purely technocratic cabinet, and we believe he will need to race against time to come up with comprehensive plans to turn aroundItaly’s debt situation. EURUSD traded 1.3422-1.3553 and USDJPY 76.94-77.07.
EUR
Franceappears to be shifting its position again on the question of whether to give the EFSF a banking license. Having initially advocated this approach months ago, only to drop the idea weeks later, it appears the proposal may once again be back on the table. In comments made on Wednesday afternoon, Finance Minister Baroin said an EFSF banking license would be the best way to create a structural firewall around the Eurozone and to prevent contagion. However, he said that “Germanyhas reservations that are more than historical, almost sociological and structural, concerning such an intervention from the central bank”. Indeed,Germany’s deputy finance minister flatly ruled out such an approach, saying “it is essential that the EFSF cannot tap the ECB”.
In a report, Fitch ratings agency said the ratings outlook for US banks could materially worsen if conditions in the Eurozone were to deteriorate. However, the agency acknowledged that US banks had significantly reduced exposure to Eurozone banks.
Italian Prime Minister Monti was officially sworn in on Wednesday. Eurogoup chief Juncker said he was the ‘right man’ to reformItaly. Juncker also noted thatGermany’s debt to GDP ratio was actually larger thanSpain’s, but “no one wants to know about that”.
The Troika review forPortugal was largely positive. The ECB said the mission agreed on program policies and growth in 2011 was better than expected. However, 2012 would be more challenging in growth terms, and the report warned that the program’s success depended on structural reforms. Crucially, the next EUR8bn tranche would be disbursed either in December or January.
The IMF’sEurope director resigned without giving details on Wednesday.
GBP
The BoE released its quarterly inflation report, downgrading both its GDP and CPI outlooks. The report stated that inflation is likely to be below target in the next two years and the outlook for growth is unusually uncertain. Growth is expected to be markedly weaker than the Bank had previously thought. They see the Eurozone crisis as the biggest single risk to theUK. The fan charts show CPI at around 1.3% in 2 years. Provided that CPI begins to decline as the BoE expects, the scope for further asset purchases is relatively high, especially if conditions in the Eurozone deteriorate further.
Labour data was mixed, October jobless claims increased +5.3k vs +21.0k consensus and the claimant count rate fell to 5.0% vs 5.1% expected. However, the ILO unemployment rate rose to 8.3%.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BEARISH Near-term support is at 1.3406; a move below this would open 1.3346. Resistance is at 1.3557.
USDJPY BEARISH Decline through 76.82 would expose 76.34. Resistance is at 77.50.
GBPUSD BEARISH Support at 1.5719 is broken to open up 1.5681. Next support lies at 1.5614. Resistance is at 1.5828.
USDCHF BULLISH The pair approaches the key resistance at 0.9316; a clearance of which would expose 0.9506. Near-term support lies at 0.9139.
AUDUSD BEARISH A break through 1.0052 has opened 1.0000, which lies ahead of 0.9909. Resistance is at 1.0184.
USDCAD BULLISH Initial resistance is at 1.0288; a clearance here would likely extend the gains towards 1.0365. Support lies at 1.0159.
EURCHF BULLISH Rise through the key high of 1.2474 would signal scope for gains towards 1.2646. Support lies at 1.2281.
EURGBP BEARISH Initial support lies at 0.8519, a break below which would expose 0.8486. Resistance is at 0.8612.
EURJPY BEARISH Pressure is on support at 103.32; a move below this would expose 102.43. Resistance is at 104.39.
SCHEDULE
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