FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
The Eurogroup was not impressed with the inter-party agreement from Athens and late after the Eurogroup meeting yesterday Greek PM Venizelos was sent back to Athens with demands for deeper cuts. It appears that the EU finance ministers are not prepared to sign off the deal until they get a stronger sense that Greece will actually push through with its pledges. Lawmakers there are supposed to vote on the new austerity measures over the weekend and an “implementation law” is supposed to be considered in the next 10-15 days, according to local sources. Eurogroup chair Juncker stated on Thursday that there is now another week for new cuts to be found and he hoped the Eurogroup would be able to sign off on the plans at a new meeting next Wednesday – another deadline markets will need to contend with. In the background, the PSI deal is still running, but the ECB’s participation has been of greater focus and now it appears they would not be able to calculate their own participation until Greece reaches agreement with other troika members. This only adds to potential uncertainty up ahead. While the ECB offered no change in policy, Draghi initially refused to be drawn into discussions on the subject, he later revealed his thoughts on the legality of transferring ECB holdings to the EFSF. President Draghi’s post-decision conference revealed the ECB’s stance on several issues.
On the macro front, little has changed and the bank remains in data-watch mode. Draghi stressed that while economic data has stabilised there are downside risks and it is too early to fully assess the impact of the 3y LTROs. On the subject of the LTROs themselves, Draghi dismissed the idea that there was any stigma attached and said that their use should be seen as a commercial or business decision only. The easing of collateral requirements further – allowing several countries’ national central banks to accept credit claims as collateral, may help with overall LTRO volumes, though at a cost to the ECB’s balance sheet risks. EURUSD traded 1.3251 – 1.3291, USDJPY77.54-77.75.
EUR
While the ECB offered no change in policy, President Draghi’s conference revealed the ECB’s stance on several issues. On the macro front, little has changed and the bank remains in data-watch mode. Draghi stressed that while economic data has stabilised there are downside risks and it is too early to fully assess the impact of the 3y LTROs. On the subject of the LTROs themselves, Draghi dismissed the idea that there was any stigma attached and set that their use should be seen as a commercial or business decision only.
The large elephant in the room was of course the ECB’s stance on Greece and the majority of questions were directed to this. While Draghi initially refused to be drawn into discussions on the subject, he later revealed his thoughts on the legality of transferring ECB holdings to the EFSF. He stated that swapping the bonds with the EFSF for any loss would simply be debt monetisation but then noted that “if you consider the EFSF is governments, so if the ECB gives money to governments that’s monetary financing. If the ECB distributes part of its profits to its member countries as part of the key, capital key, that’s not monetary financing.” While this quote can be interpreted in many ways it at least leaves the door open for ECB involvement in the debt swap, provided it is done at cost or better.
Following December’s announcement of widening collateral eligibility, the ECB published details on the new criteria, which have been established for the national central banks of 7 countries (France, Italy, Spain, Cyprus, Ireland, Portugal, Austria). BoI Director General Saccomani said that the new rules with give Italian banks the chance to increase borrowing by up to EUR70 bn.
Any hopes of a major announcement from the Eurogroup faded on Thursday afternoon., Greek PM Papademos’ office said talks with the troika ended ‘successfully’ but Dutch and German officials then hit the wires to downplay hopes of a final decision. Finally German Finance Minister Schaeuble announced that there will be no deal announced at the Thursday meeting, since the current deal does not fulfil conditions. He added that it is still not clear whether the deal can successfully reduce the debt burden to 120% of GDP., which is what the troika requirements have previously stated.
Eurogroup Chair Juncker said overnight that a new programme will provide a comprehensive blueprint for Greece‘s debt sustainability. The bailout may comprise of EUR100bn in new loans, and EUR30bn to encourage the debt swap. In addition, he said new proposals on governance and monitoring were required but no decisions were being made. A new Eurogroup meeting has been announced for next Wednesday to approve the programme.
JPY
In figures released overnight, domestic CGPI was softer than expected at -0.1%m/m, 0.5%y/y. Growth and price concerns remain strong – Japanese Finance Minister Azumi warned that Japan will intervene in FX as appropriate, and need to seek other countries’ cooperation but won’t hesitate to act solo to counter speculation. Current FX levels do not reflect fundamentals.
Prime Minister Noda said JPY rise since last summer putting downward pressure on economy, government and BoJ need to work closely together.
BoJ Governor Shirakawa said that there is currently no policy gap between the BoJ-government, and all central banks share goals of price stability but use differing terms and policy frameworks.
GBP
As expected, the Bank of England delivered an additional GBP50bn in the quantitative easing programme. In the statement, Governor King noted that there were some more positive signs and a gradual strengthening of output should be supported by a gentle recovery in household real incomes but issues in the Eurozone remain the big concern. He also referred to the continued credit squeeze in the UK domestic market. The pound earlier found some support from better than expected trade and industrial production data and the reaction to the QE announcement was relatively muted.
UK December industrial output rose +0.5% m/m vs +0.2% consensus. Our UK economist notes that the outperformance was driven by manufacturing output, which jumped 1% on the month – higher than the 0.2% expected by markets. UK December trade data also beat expectations, with the deficit at GBP7 bn vs GBP8.6 bn cons and GBP8.9 bn last. Our analyst notes that this is December data and we already have the preliminary Q4 GDP print. Normally, a big surprise in the monthly print raises the scope for a revision to the GDP outturn, but the ONS has stated that the impact of the IP data on GDP is small.
AUD
The AUD took a knock overnight as the RBA’s Statement on Monetary Policy was interpreted as dovish. Our economists note the Central Bank warned the global outlook “remains clouded”. A disorderly outcome to debt problems in Europe (and contagion to our trading partners) remains the major downside risk to the global economy. However, this risk has reduced “somewhat”. Although risks around the US are more balanced. Asia and China are “skewed slightly to the downside”. The RBA also noted uncertainty surrounding “significant structural change”, with a “once-in-a-century investment boom in resources”, but “high real exchange rate”. We continue to look for 25bp in additional easing up ahead, somewhat more optimistic than market expectations.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BULLISH Break above 1.3386 would open 1.3435. Support lies at 1.3089.
USDJPY BULLISH Clearance of 77.42 has put focus on 77.75; a break here would open 78.29, the Nov. 29 key high. Initial support is at 77.02.
GBPUSD BULLISH Resistance is at 1.5886, a move above which would open 1.5947. Support lies at 1.5730.
USDCHF NEUTRAL Key support lies at 0.9066; a decline through which would expose 0.8961. Resistance is at 0.9263 ahead of 0.9339.
AUDUSD BULLISH Near-term resistance is at 1.0791 ahead of 1.0845. Key support is at 1.0672.
USDCAD BEARISH Initial support is at 0.9926 ahead of key low at 0.9892. Resistance is at 1.0034.
EURCHF BEARISH Support lies at 1.2086, a move below which would expose 1.2053. Key near-term resistance is at 1.2133.
EURGBP BEARISH Initial support lies at 0.8330 ahead of 0.8283. Key resistance is at 0.8422.
EURJPY BULLISH Rally through 102.54 has opened resistances at 103.98 and 104.32. Support is at 101.66.
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