FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
The EUR has managed to avoid further losses during the Asia session but it is clear that it will take more than a blast of liquidity by the ECB to change the overall picture for the currency. In addition, even if the funds do succeed in preventing massive deleveraging by banks and protect financial stability, the perceived debasement of the currency, albeit temporary, means the euro will need to continue declining on a structural basis. However, we do acknowledge that the measures do buy precious time for Eurozone governments, both to issue at a less-than-prohibitive cost and also move forward towards a political solution. The stumbling blocks are still material, with Greece reporting ongoing struggles to negotiate its PSI and concerns over the approval process of recently-agreed fiscal measures on a Eurozone basis will linger. Meanwhile, debt woes elsewhere will also weight on sentiment as Fitch warned the US will also face a downgrade by late 2013 if the deficit is not reduced further. Political headwinds in Washington have not been a major factor in sentiment so far but this could shift rapidly. Ahead today GDP figures are due in the UK and in the US. Our economists are forecasting a larger downward revision to GDP growth (UBSe. 1.6%, cons. 2.0%) due to services consumption and reflects new data from the recently released Quarterly Services Survey (QSS). We note that consumer spending declines may cut Q3 growth by as much as 0.5%, only marginally offset by inventories, business investment and other consumption expenditures. Net exports were probably also weaker – this will be an increasingly relevant point up ahead for countries seeking to rebalance in an adverse global trading environment. Elsewhere on the data front, US jobless claims and the University of Michigan confidence index are due.
EUR
The ECB allotted EUR 489.191 bn in its 36 month operation. This was at the upper end of market estimates and initially sparked a brief rally in risk assets. The rally did not last long however, and investors sold the euro heavily afterwards. It seems a lot of news was priced in, more than the EUR250-350 bn according to consensus. Our European bank analysts expect that the majority of the take up came from the rolling off of the existing facilities (?141bn in 3m money will mature tomorrow) and a conversion of the short-term ECB borrowing into the longer-term facility. Further, while the 3YR funding could provide an additional breathing space for the European banks to manage their deleveraging, they believe that it does not improve the long-term outlook for the sector from an equity investor’s perspective.
The price action following the LTRO (heavy euro selling) will encourage the idea that a weak EUR can be part of the solution for the Eurozone (as a function of huge ECB balance sheet expansion) rather than a reflection of the problem. Our view remains that short EUR can work either with risk off due to policymakers failing or risk on due to easy monetary policy and a breakdown of the correlations between risk and EUR. The main difference is that the negative outcome involves extreme risk reversal skews being justified but the positive one (for risk) involves a slower and steadier trajectory downward for EUR.
National governments commended the action of the ECB, though there was less optimism that the liquidity could be channelled into bond-buying by banks. According to the Italian Banking Association, banks won’t increase their exposure to sovereign debt. ABI Chief Sabatini said “The EBA rules are a deterrent for buying sovereign bonds, so not even the ECB’s important liquidity injection&can be used to support sovereign debt’.
Dow Jones wires reported Italian banks had taken up over EUR110bn of funding today. In addition, 14 banks had taken advantage of the government’s bank bond guarantee scheme to generate collateral eligible for the LTRO, to the tune of EUR50bn.
The IMF announced that Fund officials will visit Rome next week to review the economy and the new budget. There is still no date set for the official monitoring mission, and the fund said more resources may be needed to protect the global monetary system.
European Commission President Barroso said he is confident the ECB will continue to help the Eurozone, and said governments have also taken big steps to tackle the crisis. However he conceded the Eurozone still doesn’t have all the necessary mechanisms to defend the monetary union.
Greek PM Papademos said the country must pass reforms before talks with the troika in Janaury to ensure continued funding. The next tranche is worth as much as EUR80bn and there remain questions over the country’s commitment to the austerity programme.
JPY
BoJ Governor Shirakawa said overnight that the biggest risk for Japan is now the Eurozone problem. He also said the JPY’s rise has merit in terms of imports and M&A for Japanese firms. He reaffirmed that monetary conditions in Japan were extremely easing and there was a need to boost growth to combat deflation. .
CHF
The Swiss Parliament voted down two proposals to introduce negative interest rates. However, the Swiss Finance Minister warned further measures are possible if conditions deteriorate, especially capital controls.
Swiss economics minister Schneider-Ammann said a recession in Switzerland was not likely, though the franc was clearly overvalued and he cited PPP at 1.35-1.40 for EURCHF.
GBP Targets: GBPUSD 1m 1.55, 3m 1.50.
The BoE minutes showed that the MPC voted 9-0 in favour of holding rates at 0.5% and QE at GBP275 bn. Overall, the MPC concluded that the balance of risks for growth and inflation had not really changed over the past month, but some policymakers flagged their readiness to boost the economy further. The BoE is still in wait and see mode. For some, there’s scope for further QE because of the November inflation forecast undershoot. For others, the risks to inflation are more balanced especially as labour productivity is weak.
UK public sector borrowing was GBP18.1 bn in November vs GBP19.7 bn expected and the revised GBP5.8 bn from GBP6.6 bn last month. (Reuters) The government only recently revised higher its estimate for public sector borrowing in the current fiscal year from GBP122 bn to GBP127 bn. (Research).
AUD, NZD
New Zealand’s Q3 Adjusted GDP came in at +0.8%q/q, stronger than market expectations of 0.6%. However, the annualised figure was softer at 1.9% (cons. 2.2%). This was due to revisions to prior figures, with Q4’10 growth revised lower to 0.3%q/q from 0.6%q/q, and Q1’11 down to 0.7%q/q from 0.9%q/q.
Moody’s affirmed Australia’s AAA status, citing very high per capita income, natural resources and a well-developed manufacturing and service sectors as reasons to maintain its current ratings.
NOK
Norway has offered NOK55 bn to the IMF to stabilize the world economy, according to Prime Minister Jens Stoltenberg. The first non-EU contribution ticks one box for the Bundesbank, which demanded non-EU participation to guarantee the legitimacy of the funding lines.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURGBP 0.8285 support.
EURUSD BEARISH Two key supports to watch are at 1.2946 and 1.2867. Resistance is at 1.3197.
USDJPY NEUTRAL Near-term directional triggers are at 78.29 and 77.49.
GBPUSD NEUTRAL Key resistance is at 1.5780 ahead of 1.5889. Support lies at 1.5497 ahead of 1.5465.
USDCHF NEUTRAL Support lies at 0.9235 ahead of 0.9176. Resistance is at 0.9415 ahead of key high of 0.9548.
AUDUSD NEUTRAL Initial support lies at 0.9895 ahead of key low at 0.9861. Resistance is at 1.0258 ahead of key high at 1.0380.
USDCAD BULLISH Resistance is at 1.0389, a break above which would expose the key high of 1.0424. Key support is at 1.0209.
EURCHF BEARISH Decline through 1.2123 would open the way towards 1.2012. Resistance is at 1.2254.
EURGBP BEARISH Focus is on 0.8285, a break of which would open the way towards 0.8202. Resistance is at 0.8390.
EURJPY BEARISH Key support area is at 101.05/100.76, a violation of which would open the psychological support of 100.00. Resistance is at 102.54.
SCHEDULE
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