FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
The euro is trading on a firm note as markets are somewhat more optimistic that several outstanding issues on Greece are close to resolution. Firstly, late into the session on Tuesday a Greek government spokesperson finally announced that political leaders would meet on Wednesday to respond to the bailout proposals by noon. It appears that a tentative deal has been secured with the troika, though some individual points on how the cuts are going to be achieved remain outstanding. More importantly, press reports suggest that the ECB is close to agreeing terms on participating in the Greek debt swap. The Wall Street Journal reported that the central bank will swap its holdings at purchase cost with the EFSF, so it won’t take a loose.
Crucially, national central banks will not participate as this may be perceived as resembling fiscal transfers, which currently remain barred in the Eurozone on a legal basis. These central banks are holding Greek bonds in their investment portfolios. Despite some provisioning having been made they will be expected to receive full repayment. These plans are contingent upon resolution of private sector involvement, and investors will likely grill the ECB on details during Thursday’s post-decision press conference. Elsewhere, consumer credit numbers in the US were also buoyant, rising by over $19bn in December, after a $20.4bn gain in November.
Our analysts note that this is the largest back-to-back gain since 2001, with figures largely led by non-revolving credit. These figures suggest that credit demand is remerging from the household sector in the US and may prove crucial in driving business expectations up ahead. The JOLTS labour survey out of the US also points to slight gains in job openings as employment conditions continue to improve, consistent with the latest BLS statistics. Ahead today, we expect more details to surface on Wednesday on how Greece is going to proceed on the bailout and the PSI, but all parties involved must realise that the clock is ticking, and with each passing hour the odds of some destabilising unilateral step will rise. EURUSD traded 1.3242-1.3286 overnight, USDJPY traded 76.76-77.15. The data calendar is relatively light today.
EUR
The euro suffered somewhat after German industrial output in December fell by 2.9% m/m vs 0.0% consensus. Our European economist notes that the positive surprises in leading indicators are yet to be reflected in hard data. It’s still too early to say if activity is improving. In y/y terms, German IP looks unlikely to drop deep into negative territory.
Dow Jones reported that the meeting between Greece‘s party chiefs has been pushed back for a second time to Wednesday. Greek officials cited ‘technical details’ for the delay but based on commentary throughout the day there is clearly significant outstanding disagreement.
Greek conservative leaders Samaras said that he is still opposed to cuts in pensions, which would deepen the recession. He noted that the document on the reform package is still being awaited and the details are needed before he decides to back the measures. German media reported overnight that despite reports of a deal, the troika believes Greece‘s government has ‘immense problems’ and is unable to carry out already-approved reforms, citing the draft report of the three institutions providing financing.
According to the wall Street Journal, the ECB is now willing to exchange Greek bonds with the EFSF, but will not take any losses on the exchange. Sources note the exchange will contribute to Greece‘s debt reduction though it is dependent on the PSI being completed. National Central Banks of the Eurozone will not participate, probably to obviate fears of legal challenges surrounding the perception of a fiscal transfer.
German Chancellor Merkel said she rejected a Greek exit of the Eurozone and that question ‘doesn’t arise’. She warned that such a step would be of ‘incalculable impact’, but also warned that current situation is very complicated and there is a lack of ‘transparency’ on the part of domestic leaders.
The IIF’s representatives have left the Greek PM’s office after talks on the PSI. No deal was announced, but key leaders of talks have stated that fresh negotiations with private-sector creditors will continue in Paris.
The ECB reported it provided Italian banks with EUR202.6 bln of funding in January, down from EUR209.995 bln in December. analysts note that banks are all saying that most of the ECB funds have not been used for the lending/carry trade, rather just kept as liquidity buffers for forthcoming bond maturities. Customer funding is OK, with deposits and retail bonds flat since the summer. ECB use will likely go up materially in February because of the 3 years LTRO and banks may become more aggressive in carry trades provided there is clarity on both Greece and EBA methodology.
CHF
SNB’s Jordan verbally defended the SNB’s 1.20 floor when he gave a speech to the Swiss-American Chamber of Commerce. EURCHF rallied 20 pips into the meeting, as the usual speculation of a EURCHF floor rise circulated around markets, but Jordan barely changed his line from a recent FT interview. He said the SNB is firmly committed to the 1.20 floor, can buy unlimited quantities of foreign currency and will take additional steps if warranted.
Jordan stressed that the ‘commitment to the floor applies at any time, from the moment the market opens in Sydney on Monday to when it closes in new York on Friday’. This suggests that the SNB are currently on 24-hour watch for EURCHF price action and ready to deploy at a moment’s notice.
The Swiss unemployment rate came in at 3.4% (cons. 3.5%).
JPY
Overnight Japan‘s trade balance came in at -Yen145.8bn, worse than expectations of -?135bn. The current account balance on annualised basis was down -74.7%, coming in at Yen303.5bn. The whole figure for 2011 was Yen9.62tln, the weakest in 15 years and the largest y/y fall on record.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BULLISH Clearance of 1.3234 has opened 1.3386 ahead of 1.3435. Support lies at 1.3089.
USDJPY NEUTRAL Support lies at 76.75 ahead of 76.49. Resistance is at 77.15 ahead of 77.42.
GBPUSD BULLISH Break above 1.5883 has opened the resistance at 1.5947 ahead of 1.6096. Support lies at 1.5789.
USDCHF NEUTRAL Pair is testing the key support area of 0.9115/066, a decline through which would expose 0.8961. Resistance is at 0.9263 ahead of 0.9339.
AUDUSD BULLISH Next resistances are at 1.1007 and 1.1081, July 27 2011 high. Support lies at 1.0672.
USDCAD BEARISH Focus is on 0.9892, a decline through this would signal scope for losses towards 0.9766/25. Resistance is at 1.0034.
EURCHF BEARISH Support lies at 1.2032 ahead of 1.2000 and resistance is at 1.2109.
EURGBP BEARISH Initial support lies at 0.8255 ahead of key low at 0.8222. Resistance is at 0.8385.
EURJPY BULLISH Focus is on 102.21/54 area; a rally through which would open 103.98. Support is at 100.38.
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