FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
China‘s unexpected weekend decision to cut the reserve ratio requirement by 50bp boosted risk appetite throughout the Asia session. The effect was magnified by the element of surprise. USDJPY scrambled higher to 79.89 but the rally was cut short when the Japanese trade deficit for January came in smaller than expected. Although China‘s stimulus measure in itself is limited in efficacy and comes amid signs of a slowdown, the PBoC’s joining of the ranks of major central banks adding to easing will help to further stabilise economic conditions. Meanwhile expectations continue to build ahead of Monday’s meeting of Eurozone Finance Ministers and the outcome of the meeting is likely to be a defining moment for how risk appetite evolves throughout the week. Germany‘s Finance Minister Schaeuble suggested a decision would be made on the ‘whole program’ on Monday and he backed away from the idea of a piecemeal step-by-step approval process that could drag on for several weeks. That’s a promising development.
However, Eurogroup Chair Juncker indicated that much negotiation is still needed if full agreement is to be reached by Monday night. The Financial Times reported that the Greek parliament is to vote this week on adding CAC clauses into existing Greek bond contracts. This is likely to be seen as a preparatory step towards an enforced compulsory restructuring should voluntary participation levels disappoint. It also raises the risk that Greece will be downgraded again given S&P has already announced that if legislation is passed to insert such clauses then “we would lower the issue ratings on debt issues concerned to ‘D’ from ‘CC’”. In addition, any subsequent invocation of these CAC clauses would very likely cause CDS contracts to be triggered, although the decision on this point will rest with ISDA. In a further sign of progress towards a second rescue package for Greece, a Greek official announced that the debt swap for private investors would be launched by March 8, with the aim of concluding the transaction three days later. Overnight EURUSD traded in a range of1.3156-1.3238 and USDJPY 79.35-79.89.
EUR
The Financial Times reported that a decision on both the PSI deal and the new Greek bailout is likely at Monday’s Eurogroup meeting. The article noted that “the new programme might still not be fully finalised, though, as a list of new prior actions could be imposed yet again”. Meanwhile Dow Jones cited a Dutch Finance ministry report that Greece may only get the second bailout after elections in Greece have passed. It is clear that negotiations remain tense and there are many issues to resolve before the funds are finally released.
Governor Visco of the Italian central bank implied that Italian banks have even greater freedom to participate in the ECB’s upcoming 3y LTRO on Feb. 29. He said the pool of eligible collateral available to Italian banks will increase by EUR 70-90 bn as a direct result of the ECB’s decision to accept loans as collateral at refinancing operations.
Visco went on to express concern about credit contraction in Italy however, noting the ‘very marked’ decline in credit advanced to corporates in December, which continued at a more modest pace in January. He said it was ‘crucial that the economy does not fall victim to credit asphyxiation’.
Overnight ECB’s Asmussen said Greece is not a thread to the world economy, and said that he expected conditions for the second bailout to be completed by Monday. He also noted that the dollar would remain the world’s most important reserve currency for the foreseeable future.
Austrian Finance Minister Fekter said that Eurozone officials will discuss an escrow account for the Greek bailout package. However, she said that this is for now being prepared ‘on the technical level’ and details would be discussed ‘intensely’ on Monday.
US Treasury Secretary Geithner said that the US will ‘encourage’ the IMF to support agreement on Greek economic reforms, but failed to commit to new funding for the IMF itself.
On Friday German President Wulff resigned, but we expect no market impact from this.
JPY
Bank of Japan Governor Shirakawa said that the BoJ has ‘set a clear stance’ and committed the central bank to ‘strong monetary easing’. He also said that the BoJ will complete the planned asset purchases programme by year-end. Shirakawa denied there was political interference behind the BoJ’s recent decisions.
Finance Minister Azumi stressed that the BoJ had ‘effectively adopted an inflation target’ and said both he and Shirakawa shared the inflation target view.
GBP
Bank of England MPC member Posen offered his interpretation of the latest quarterly inflation report in a speech on Friday. He would not be drawn on whether yet another round of QE was being considered. However he said that the inflation forecast, which assumes the QE target remains unchanged in future ‘gets us close to target with the risks pretty balanced’. We note that his comments suggest some satisfaction with current policy settings – an unusual state of affairs for Posen who has been the most dovish member of the MPC for over a year.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD NEUTRAL Resistance is at 1.3291 ahead of bull trigger at 1.3322. Support lies at 1.3115 ahead of 1.2974.
USDJPY BULLISH Clearance of 79.53 has opened resistance at 80.24. Interim resistance is at 79.89 while support lies at 78.80.
GBPUSD NEUTRAL Key upside trigger is at 1.5929, a break here would open 1.6096 next. Supports are at 1.5790 and 1.5645.
USDCHF BULLISH Resistance is at 0.9300 ahead of 0.9339. Key support lies at 0.9066.
AUDUSD BULLISH Focus is on 1.0845, a break above which would signal scope for gains towards 1.1081. Support lies at 1.0689.
USDCAD BEARISH The pair is testing 0.9926; a clear break here would open 0.9892. Resistance is at 1.0052, a prior low.
EURCHF NEUTRAL Resistance is at 1.2116 ahead of key high of 1.2133. Support lies at 1.2063 ahead of 1.2032, the month-to-date low.
EURGBP BEARISH Near-term support is at 0.8278 ahead of 0.8255. Key resistance is at 0.8422.
EURJPY BULLISH Clear break above 105.70 would open 106.04 next. Support is at 103.44.
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