FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
The euro extended its weakness during the Asia session amid concern over the failure of Eurozone authorities to secure an aid package for Greece before bond redemptions are due. In comments made after the Eurogroup conference call, Jean Claude Juncker merely said ‘decisions’ would be made at next week’s full meeting but it appears doubts remain over Greece‘s ability to deliver. The stop-gap solution seems to be to come up with enough funds to repay creditors only while withholding other forms of aid. A bridging loan to last the next month is being planned, though essentially this is only buying time for a fuller discussion on the merits of a longer-term plan.
The headlines were a wake-up call to a market that had grown complacent about the risks around the current negotiations. Nevertheless Juncker said that strong assurances had been received from Greece‘s political leaders and implied that full agreement is only a few short steps away. He specifically mentioned the need for mechanisms to ensure stronger surveillance and to prioritise the repayment of debt owed to creditor nations. Nevertheless, he said that these outstanding issues would be addressed and declared himself ‘confident’ that the finance ministers will ‘take all the necessary decisions’ when they next meet in person on Monday. Greek Finance Minister Venizelos added that the bond swap details would be announced on Monday provided final agreement is reached on the terms of a second rescue plan.
FOMC minutes from the January meeting revealed that ‘a few’ FOMC officials still cling to the belief that more asset purchases will be needed this year. We note however that mainstream thinking within the FOMC appears to have backed further away from this position, and would only consider additional easing if the US economic outlook darkens. Overnight Australian jobs figures were far better than expected and the unemployment rate dropped to 5.1%, though we expect Grece to remain the dominant driver. EURUSD traded 1.3007-1.3068 and USDJPY 78.36-78.53.
EUR
Eurozone Q4 GDP was slightly above consensus but still fell -0.3% q/q. Italy Q4 GDP was slightly softer though, at -0.7% q/q vs -0.6% cons.
ECB Governing Council Coene said the ECB has agreed it does not wish to make a profit from its transactions in Greek bonds. He said the plan is to return profits to national governments (who are shareholders in the ECB) and then “when the profit from past years is distributed, each government will determine what proportion is due to Greece“. It is not clear if Coene is referring only to SMP portfolio profits, or whether a larger redistribution of profits made from other ECB operations and holdings is also being considered. ECB’s Asmussen said that it is possible for the ECB to pass any profits made on their bond purchases to the national central banks (NCBs), who can then use them for Greek aid. He stressed once again that a direct contribution to a second Greek assistance package is not possible for the ECB.
China‘s central bank governor Zhou said BRIC countries are waiting for the right time to help Europe. He said China has not cut its reserves exposure to euro-denominated assets as a result of the crisis.
Late on Wednesday the Eurogroup released their post-conference call statement, noting that the Eurogroup will take ‘necessary decisions’ on Greece next Monday, while the troika has presented its Greek debt sustainability report. Crucially a EUR325mln cuts target had been ‘identified’ though they noted ‘further considerations’ were necessary.
ECB Governing Council member LIikanen said that lower rates were ‘conceivable’ but warned that ECB would face bigger risks and look into other measures for policy signalling. We expect the ECB to administer another 50bp in cuts this year to stave off economic risks.
JPY
USDJPY gave back some of its recent gains on the back of some worrisome Greek headlines, and upward progress appears to have stalled entirely. Japanese JGB yields fell to 11bp yesterday for the first time in over a year on the back of the BoJ’s fresh round of easing. However, given the effective floor on yields is 10bp, the BoJ’s ability to induce further yen weakness through conventional means is starting to reach its limits. For USDJPY to continue higher in a sustainable way we will need to see US yields climb materially, which they have so far refused to do.
GBP
The BoE released its quarterly inflation report and sees headline CPI at 1.8% in 2 years, in line with our Economists estimates. While the forecast has increased from the previous report, it is still below 2%, leaving some room for further QE if it is deemed appropriate. The forecasts suggest that inflation will be below target for a good period of the period however. In the press conference, Governor King said he did not believe that asset purchases exhibit diminishing returns.
January jobless claims rose more than expected at 6.9k (vs 3.0k cons). The claimant count rate remained unchanged at 5.0%. however. Average weekly earnings were also up marginally at 2.0%.
AUD
Australian jobs increased by 46.3k in January, far stronger than expected and the unemployment rate dropped to 5.1%.
Our ananlysts note that overall, while a strong print today, over several months, jobs & hours growth is still soft. But the unemployment rate is key, and is now edging down. With hiring intentions staying firm, likely stronger future jobs growth underline why we thought the unemployment rate wouldn’t rise much. As for the RBA, our economists note that after having held in February on their forecast for a rise in unemployment to 5.5%, it seems unlikely they’re going to now cut again unless the UR jumps ‘meaningfully’ or Q1 inflation surprises. As such we no longer look for easing up ahead and the AUD will likely sustain short-term support, barring adverse developments in Europe.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD NEUTRAL The pair is testing 1.3028; a clear break here would open 1.2973 ahead of 1.2891. Resistance is at 1.3216 ahead of 1.3291.
USDJPY BULLISH Resistances are at 78.76 and 78.98. Support is at 78.18.
GBPUSD NEUTRAL Supports are at 1.5642 and 1.5582. Resistance is at 1.5771 ahead of 1.5849.
USDCHF NEUTRAL Key upside trigger is at 0.9263, a clear break here would open 0.9339. Support lies at 0.9143 ahead of key low at 0.9066.
AUDUSD BULLISH Near-term resistance is at 1.0791 ahead of 1.0845. Support lies at 1.0629.
USDCAD BEARISH Key supports to watch are at 0.9926 and 0.9892. Resistance is at 1.0052, a prior low.
EURCHF NEUTRAL Near-term resistance is at 1.2116 ahead of key high of 1.2133. Support lies at 1.2054 ahead of 1.2032, the month-to-date low.
EURGBP BEARISH Decline through 0.8330 has opened supports at 0.8283 and 0.8265. Key resistance is at 0.8422.
EURJPY BULLISH Resistance is at 103.49 ahead of 104.32. Support is at 101.66.
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