FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
Risk sold off heavily overnight as China posted its weakest quarterly growth figures in two years on softer conditions domestically and a fall in external demand. Given the European Union is China‘s largest trading partner, investors are justifiably questioning Europe‘s ability to register enough growth to help alleviate its debt crisis. The soft data added to worries sparked yesterday by Germany warning markets not to be too expectant of a grand bargain at the upcoming EU summit. Even though Eurozone leaders have pledged to work with haste towards a comprehensive solution, Chancellor Merkel’s government warned against quick fixes while outstanding issues are yet to be resolved. On the data front, yesterday’s US Empire manufacturing was disappointingly weak. Ahead today the German ZEW survey is due, and CPI is out in the UK (UBSe. 4.70%, cons. 4.90%). Fed Chairman Bernanke is due to speak later in the session. EURUSD traded 1.3725-1.3788 and USDJPY traded 76.79-76.88.
EUR
A German government spokesman, Siebert, started the expectations management exercise for next weekend’s EU summit, saying that dreams that the euro crisis being solved by next Monday cannot be fulfilled. He said the search for a solution would continue into 2012. We agree and believe that expectations for a ‘comprehensive solution’ have perhaps become stretched. Policymakers are likely to try to play down these expectations over the next few days and the risk of disappointment is now quite high.
At the close of the US session, Moody’s expressed some concern about how France‘s fiscal position might evolve over the coming months. The agency noted that a number of challenges may lie ahead for France given it may have to support other EU sovereigns and banks – both of which could mean new French liabilities. Moody’s said it would observe France‘s progress over the next three months. We stress however that Moody’s did not downgrade France‘s credit rating, did not put the rating on negative watch, and did not lower the outlook on the rating (which remains at “stable”).
ECB Executive Board member Stark also appeared to play down expectations of a breakthrough at the upcoming summit, saying that what is on the table now is not the “quantum leap” the ECB had requested. He said that asking the ECB to do more would overburden the central bank and challenge its independence.
Portugal‘s finance minister announced that the budget deficit in 2011 would be about EUR 3.4 bn more than expected.
Canadian Finance Minister Flaherty said he is disappointed by Europe‘s response to the crisis and that, unless decisive action is taken, a global crisis will ensue.
AUD
The minutes are due from the RBA’s Oct. 3 policy meeting. Our economists noted that the RBA overall reiterated the post-meeting release, where the bank took another step in the dovish direction. However, our economists stress that the meeting was held during the must turbulent times in markets of late and given sentiment has shifted somewhat since, the actual release may not wholly represent the RBA’s current thinking. It is clear their policy path remains conditional on growth and inflation figures.
GBP
CPI figures are due today – the first price release since the BoE embarked on a new round of QE. Given balance sheet expansion has been approved it is clear that the BoE is less worried about inflation overshooting to the upside rather than the downside, as it was clear in the run-up to the QE vote that the Eurozone debt crisis had already risked credit conditions contracting sharply. Our economists expect a 4.70% print vs. consensus at 4.90%.
We have gone long a 2-month GBPUSD Butterfly, with the following parameters: Strikes: Leg 1: Buy 1.4500 put / Leg 2 Sell 1.5100 put (2x notional) / Leg 3 buy 1.5700 put; Spot reference: 1.5773, Max Payout 3.80%. The cost is 0.802% (indicative). We believe this structure is an attractive way of expressing our fundamental negative view on sterling.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BULLISH Focus is on 1.3937, a break of which would open 1.4013. Key support lies at 1.3685.
USDJPY NEUTRAL Resistance is at 77.49 ahead of 77.86, whereas support lies at 76.31 and 76.11.
GBPUSD BULLISH Initial resistance is at 1.5869, a break above which would expose 1.5945. Support lies at 1.5722.
USDCHF NEUTRAL Support lies at 0.8836, a break here would expose 0.8647. Resistance is at 0.9039 ahead of 0.9123.
AUDUSD BULLISH Clearance of 1.0399 would expose 1.0440, a Fibonacci level. Near-term support lies at 1.0102.
USDCAD NEUTRAL Resistance is at 1.0339, while support lies at 1.0044.
EURCHF NEUTRAL Key resistance is at 1.2435; a break here would expose 1.2495. Near-term support lies at 1.2218 ahead of 1.2123.
EURGBP BULLISH Initial resistance is at 0.8797, a break through which would open 0.8842. Support lies at 0.8583.
EURJPY BULLISH Break above 108.00 would expose 109.09, while support lies at 105.13.
SCHEDULE
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