FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
The EUR continued to trade sub 1.30 vs. the dollar during the Asia session. A combination of growth fears, dollar demand and positioning liquidation hit high-beta names hard yesterday, with commodities in particular focus. Gold has tumbled from $1713/oz at the beginning of this week to $1565/oz. Overnight the data prints were no better, with flash PMI out of China showing ongoing contraction, and the Tankan survey in Japan coming in much weaker than expected at -4 for the Large Manufacturer’s Diffusion Index (cons. -2). During trading yesterday in Europe there were numerous comments suggesting political debate over the Eurozone’s future is yet to be settled. Governments which have signed up to the plans from last week’s summit are now expressing doubts over the ratification process and whether parliamentary backing could be secured. This threatens a drawn-out process for fiscal consolidation which markets may not have much appetite for. In addition, ratings action continue to hover: although French sources said that they had not received advance warning of a downgrade, the political and economic leadership in France appears to be conditioning for the loss of AAA status. Fitch also moved later during trading yesterday to downgrade give commercial banks in Europe by one notch each. A French Government Spokesperson said that France and Germany want a summit on growth and jobs in January, one element which was very much lacking in last weeks summit. Norges Bank also cut by 50bp, more than market expected. Non-Eurozone central banks are likely to exercise extreme caution in the coming months as the growth outlook of their biggest trading partners deteriorate and banking systems face further potential stress. The SNB may confirm this stance today at their policy decision. We expect the policy floor to be lifted to 1.25. EURUSD traded 1.2978-1.2999 and USDJPY 78.01-78.14.
EUR
Thursday’s SNB decision may be the last big market event of 2011, with plenty of hedge funds bettting on a move higher in the EURCHF floor. The economic backdrop has clearly deteriorated substantially; additional monetary stimulus would look well-justified, and we forecast a move in the floor to 1.25. Should the SNB deem this too risky for now, the statement will likely try to keep the threat of ‘further measures’ alive, and after an initial sharp drop, EURCHF would settle well above 1.20. Please see http://www.ubs.com/fx for details.
Late during the US session, Fitch downgraded five big European commercial banks by one notch each, pointing to ‘stronger headwinds facing the banking industry as a whole’.
German Chancellor Angela Merkel spoke to the bundestag. She said that Europe has embarked on an irreversible process to fiscal union. She added that the UK is still an important partner in the EU despite refusing to back fiscal integration. She also said there are no quick, easy solutions to the crisis, which will last years.
The IMF warns that a lack of reforms are weighing on the Greek economy. They said the situation may deteriorate as what Greek exports there are slow as the Eurozone situation deteriorates. Discussions over the dispersal of the next Greek aid tranche are underway, a decision which will be a crucial driver for markets over the next few weeks. EU and IMF officials will meet with Greek Prime Minister Papademos on December 16. The Wall Street Journal reported a Dutch official saying that IMF support for the Eurozone should be drawn externally.
ECB member Knot said he expects European leaders will solve the debt crisis as long as the financial rescue fund is increased, Reuters reports, citing a magazine. He added that the Eurozone rescue fund or contribution to the IMF has to be at least EUR1 trn. This suggests that the bigger the ESM is, the bigger the role the ECB will allow itself to play. However, the ECB’s Weidmann said that past experience shows unlimited bond purchases lead to inflation. He added that summit agreements go in the right direction but need to be implemented, in may ways this is key for the stability of the Eurozone.
Christian Lindner, the Secretary General of Germany’s FDP party, has stepped down, Dow Jones reports. This was following the defeat of an internal FDP vote to reject the ESM, but shows the FDP still deeply hostile to the current proposals.
Italy sold EUR3.0 bn of 4.75% Sept 2016 BTPs, at the top of the range. Cover was 1.417 times, and the yield 6.47%. In current market conditions this can be considered a good auction however.
France’s Foreign Minister Juppe says any loss of the country’s AAA rating would not be good news, but would not be a disaster. It looks as if the authorities in France are becoming increasingly resigned to the loss of AAA rating. French central bank governor Noyer also said such a downgrade would be unjustified and called the ratings agencies decisions ‘more on political rather than economic basis’.
Ahead today German manufacturing PMI is due, markets are looking for further contraction with a drop in the headline print to 47.5.
NOK
Norges Bank cut its deposit rate 50bp to 1.75%, more than expected. A 25bp cut was expected but the extra 25bp can be seen as a pre-emptive measure. The policy statement noted that “The Executive Board decided that the key policy rate should be in the interval 1.75-2.75% in the period to the publication of the next Monetary Policy Report on 14 March 2012, unless the Norwegian economy is exposed to new major shocks.”
Funding stress was also cited as a justification for the move. Norwegian banks have been deleveraging and cutting overseas funding, and now the effects are clearly being felt. For further details, please see the FX comment: Norges Joins The Party.
CHF
The SNB holds its policy meeting today. The economic backdrop has clearly deteriorated substantially and additional monetary stimulus would look well-justified. We have been calling for a move to 1.25 from currently 1.20 on the back of a worsening economic outlook and rising deflation risks. In the FX Comment: CHF -The last macro highlight of the year, Beat Siegenthaler outlines our views. If we get the floor rise, EURCHF would likely settle somewhere between 1.25-1.30 as the risk of further action would remain very much alive. Despite the threat of ‘further measures’, however, the SNB may decide that moving the floor was too risky at the moment as it might invite speculation and ultimately lead to intervention becoming necessary. Staying put would unlikely be a problem at this point as SNB credibility is strong. If the SNB decides to not move the floor, the statement would likely do its best to keep the threat of ‘further measures’ alive. As a result we believe that in such a scenario, following an initial sharp drop, EURCHF would settle well above 1.20. A move, however, would then likely follow at the March decision.
Swiss PPI came in lower than expectations with a monthly decline by -0.8% (-2.4% y/y). Our Swiss economist notes that the below consensus outcome of producer and import prices is above all the result of materially lower prices for pharmaceutical products both at the producer and at the import level. at this stage the main supporting factor for Swiss wholesale prices is with oil products. We continue to view call for a raise in the EURCHF floor in tomorrows meeting, although the decision will be close. Some new measures are likely in any case, given the increase in deflationary pressures.
GBP
The UK labour data was slightly better than expectations but nonetheless provided further evidence that the underlying market is weak. Nov. claimant count jobless claims rose +3.0k vs consensus of +13.7k, last +2.5k. The jobless rate fell marginally to vs 5.1% consensus. October 3m average earnings growth was at 2.0%, from September’s 2.3%. Our UK economist notes however that the improvement in claimant count number masks the deterioration in the LFS measure of employment that shows a 63k over the quarter and a 128k increase in unemployment. Unemployment on this measure is at its highest level since 1994.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURJPY 100.76 resistance.
EURUSD BEARISH Break below 1.2962 has opened 1.2867, the year-to-date low. Next support is at 1.2644. Resistance comes in at 1.3065.
USDJPY NEUTRAL Key directional triggers are at 78.29 and 77.49.
GBPUSD BEARISH Decline through 1.5423 has exposed 1.5272. Next support is at 1.5125, July 21 2010 low. Initial resistance is at 1.5532.
USDCHF BULLISH Clearance of 0.9506 has exposed 0.9602 ahead of 0.9776, Feb. 11 high. Support lies at 0.9430.
AUDUSD BEARISH Momentum is negative; decline through 0.9938 has opened 0.9833. A break below this would expose 0.9742 Resistance is at 1.0045.
USDCAD BULLISH Resistance is at 1.0474 ahead of 1.0524. Support is at 1.0327.
EURCHF BULLISH Rise through 1.2474 would open 1.2646. Initial support is at 1.2226.
EURGBP BEARISH Key support lies at 0.8356; a break below this would expose 0.8332. Resistance is at 0.8481.
EURJPY BEARISH Support is at 100.76, a break here would open the psychological level of 100.00. Resistance is at 102.99.
SCHEDULE
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