FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
FX markets consolidated yesterday’s sharp moves overnight but risk appetite stayed broadly weak with Asian equities catching up on the falls in the US and Europe yesterday. Focus will be on the Italian debt markets again after the volatile price action seen yesterday, where yields at all points on the Italian sovereign curve closed above 7% for the first time since the launch of the euro, with the exception of 3m bills. Italy aims to sell up to EUR5 bn in 12m bills at 0930 GMT on Thursday, followed by a 5y auction on Monday. FX investors will be tuned to the outcome of these auctions, if in fact they go ahead as planned. Further euro downside followed after Reuters reported that Germany and France are exploring the idea of a smaller Eurozone, which would consist only of countries that are ready to take the plunge toward deeper economic integration. Bloomberg then reported that a commission within German Chancellor Merkel’s CDU party wants to craft a framework to allow a member state to leave the Eurozone, but remain in the EU. Meanwhile the political stalemate in Greece continues – Papandreou has formally resigned as prime minister, but so far his successor has not been named. In Italy, former EU Commissioner Monti has been appointed by President Napolitano as a senator for life. Given Monti is not an elected politician, this could be seen as an attempt to facilitate his appointment as a future Italian prime minister.
EUR
Bloomberg reported that a commission within German Chancellor Merkel’s CDU party wants to craft a framework to allow a member state to leave the Eurozone, but remain in the EU.
Italian 10 year yields moved above 7% and excessive market volatility triggered circuit breakers in the futures market as increased uncertainty over the political situation in Italy led to widespread risk aversion.
Newswires reported that two factions with Italian Prime Minister Berlusconi’s parliamentary party oppose his plans for early elections, and instead would appear to back proposals for a technocratic administration. The speakers of both houses of the Italian parliament announced they aim to approve the proposed financial stability law by Sunday evening – a few days earlier than planned. This would allow Berlusconi to resign as promised.
EU Council President Von Rompuy said the aim is to keep the Eurozone together with all 17 countries on board. He conceded that progress at last week’s G20 was ‘very limited’, and suggested Europe needs to engage better with BRIC countries.
ECB Governing Council member Costa said the ECB has taken its power to act to the limit.
EU Commissioner Barroso said that a Europe divided between the core and the periphery will not work.
Bloomberg reported that German Finance Minister Schaeuble said that Italy should request aid from the EFSF if it needs it. The remark was allegedly made at a private meeting. Schaeuble added that he is not worried about the current level of Italian yields given that they are similar to levels that prevailed before the euro was introduced.
Elsewhere, the Italian opposition has announced it will pose “no obstacles” to the fast approval of the EU reforms, pledging to stay in parliament over the weekend and get it done within a week. Our European economist notes that this would accelerate Berlusconi’s resignation and the start of consultations to form a new government considerably.
CHF
EURCHF jumped 20 pips after Swiss Economy Minister Schneider-Amman said the Swiss franc is ‘massively overvalued’ and that purchasing power parity theory suggests that fair value lies at 1.35 or even 1.40. The minister added that SNB Chair Hildebrand is ‘aware of his responsibility’
SEK
The Riksbank minutes were dovish as expected. They stated that Sweden’s economic development will be weaker in the coming period and European and US developments will subdue the Swedish economy. Board member Wickman-parak said that expansionary monetary policy can be extended further ahead without jeopardising the inflation target.
NZD
Australia October employment rose +10.1k, while the jobless rate was 5.2%, both slightly better than consensus estimates.
In its semi-annual financial stability report, the RBNZ noted that risks to the New Zealand economy and financial system have risen. Deputy Governor Spencer says he does not expect to see much NZD strength in the near term. However, the RBNZ Governor Bollard said that isks to economy are up, and the outlook is still positive.
The PMI came in at 46.5, taking it below 50 for the first time since March, and back to levels last seen in June 2009.
TECHNICAL OUTLOOK
USDCHF clears 0.9083.
EURUSD BEARISH Support lies at 1.3406 ahead of 1.3346. Resistance is at 1.3871.
USDJPY NEUTRAL Resistance is at 78.10 ahead of 78.27. Support lies at 77.44 ahead of 76.95.
GBPUSD NEUTRAL Near-term resistance is at 1.5969 ahead of 1.6131. Key support lies at 1.5877 ahead of 1.5825.
USDCHF BULLISH Clearance of 0.9083 has opened 0.9151, a break above which would expose 0.9316. Near-term support lies at 0.8923.
AUDUSD NEUTRAL Key support lies at 1.0102; a break below which would open 1.0000. Resistance is at 1.0398 ahead of 1.0447.
USDCAD BULLISH Focus is on 1.0273, a rally through which would expose 1.0365. Support lies at 1.0055.
EURCHF BULLISH Key resistance is at 1.2474, a clearance of this level would open 1.2646. Support lies at 1.2281.
EURGBP BEARISH Support lies at 0.8456, a break below which would open 0.8394. Resistance is at 0.8612.
EURJPY NEUTRAL Key support lies at 104.75; a break below which would signal scope for weakness towards 104.02. Initial resistance is at 107.65 ahead of 108.25.
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