FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
The euro continued to sell off during the Asia session amid signs that the Eurozone sovereign debt crisis is escalating again. Friday’s Eurozone headlines continued to haunt the euro overnight but, adding to the downside pressure, a weekend report in a Greek newspaper claimed that if the next quarterly instalment of EU/IMF funding is not released, Greece will run out of money by July 18. EURUSD traded 1.4065-1.4147 and USDJPY 81.59-82.02. EURCHF made a new record low of 1.2345. Asian equities are down about -1.5% at the time of writing. The S&P 500 finished -0.77% weaker on Friday. New York Fed President Dudley continued to sound dovish, and his views were unchanged from those he expressed the day before. He repeated that policy should not ‘overreact’ to higher energy prices. Although he conceded that higher gasoline prices are ‘troubling’ to everyone, he said the recent decline in commodity prices is a ‘hopeful sign’. There were no US data releases on Friday. Attention this week is likely to focus on Thursday’s second estimate of Q1 GDP – our US economists are in line with the consensus and expect a small upward revision to the earlier estimate.
EUR
We remain cautious on the euro given all the headline risk surrounding the latest phase of Europe’s fiscal crisis.
According to the Greek press, the IMF suspended its quarterly review of Greece’s fiscal consolidation program until such time as further austerity measures and more aggressive plans for the privatisation of state assets are drawn up. If true, this raises the risk that the next quarterly instalment of rescue funds could be delayed.
Fitch cut Greece’s credit rating by three notches, to B+ from BB+. The rating remains on negative watch. The agency cited increased political and implementation risk to the fiscal consolidation program. It sees a higher risk that EU/IMF funding will be delayed, and also warned it would interpret a ‘reprofiling’ of Greek bond debt as a default event. The downgrade brings Fitch in line with Moody’s, while S&P rates Greece one notch lower still. Greek 10y bond yields rose to a new record high since the launch of the euro, closing at 16.18%. On a more positive note, Fitch said it expects the question of a new rescue package for Greece, as well as the role of private creditors, to be resolved by the end of June. This chimes with weekend comments by Eurogroup Chairman Juncker who said Europe will ‘try to solve the Greek debt problem in June’.
French Finance Minister Lagarde said that Greece is threatened with bankruptcy and urged privatisation plans be brought forward. She stressed again that debt rescheduling will not happen, but said she would accept any voluntary concessions that Greek bondholders might be willing to make.
Bundesbank President and ECB Governing Council member Weidmann said that if a Eurozone country in receipt of financial assistance fails to take the necessary steps to consolidate its finances ‘further support should no longer be taken for granted and the country should be prepared to bear the severe consequences that are likely to ensue once financial assistance is withdrawn’. Referring specifically to the consequences for ECB collateral eligibility, he said any ‘reprofiling’ of the maturities of Greek bonds ‘would make it impossible to accept them as collateral&under the existing rules of the Eurosystem’s collateral framework’. This echoes comments made earlier in the week by ECB Executive Board member Stark.
The head of the IMF’s mission to Ireland, Chopra, said a comprehensive approach to Europe’s debt crisis is now a matter of urgency, and that Europe needs to quickly upgrade the EFSF so that it can deal more flexibly with the crisis. He added that the continued availability of ECB liquidity is critical for countries dealing with banking issues.
Norway announced it would suspend the payment of a $42 mn grant to Greece, alleging that Greece had not fulfilled its commitments and may have broken rules. The grant is not in any way related to Greece’s financial rescue plan announced in May 2010. However, this was not immediately apparent to investors, and the euro sold off on Friday in the confusion.
The IMF approved its part of Portugal’s ?78 bn rescue package, which amounts to one-third of the total. This clearly shows the IMF is functioning despite the resignation of its Managing Director Strauss-Kahn. Concerns over the repayment of a bond maturing on June 15 should ease, with ?6.1 bn of IMF cash due to be made available immediately. Europe’s rescue facilities, the EFSF and the ESM, are due to kick into action over the coming weeks to raise additional funds for Portugal.
S&P affirmed Italy’s long-term rating at A+ but downgraded the outlook to negative from stable. The agency cited the weak growth outlook, and the potential for “political gridlock” which “could contribute to fiscal slippage”.
JPY
BoJ Governor Shirakawa pointed to the positive aspects of yen strength. Although he conceded that a stronger yen would squeeze exporters in the near-term, he said yen strength can help the terms of trade in the longer run. The remarks suggest Japanese officials are becoming more tolerant of a strong yen. However it should be noted that Japan’s currency policy is decided by the Ministry of Finance, not the BoJ.
GBP
BoE MPC member Dale re-affirmed his hawkish stance over the weekend. This is a significant development given the minutes of the May 5 policy meeting described his decision to vote for a hike as ‘finely balanced’. However, in an interview published in the weekend Financial Times, there was no sign his commitment to an early hike had waned. Although he did not say so explicitly, the much stronger than expected April CPI report released last week may have reinforced his view. Dale conceded that although he is not confident a self-sustaining UK recovery has taken hold, he is even more worried about high inflation. He acknowledged the adverse impact a rate hike would have on some families, but said the cost would be even greater if inflation were to become more persistent and if the BoE were to lose its credibility.
UK April retail sales were firmer at +1.1% m/m (prev. +0.8%). The ONS attributed the stronger print to warm weather, and to several public holidays which occurred in quick succession.
CAD
The CAD endured a double dose of downside on Friday after two data releases fell short of expectations. First the inflation report was weak: headline CPI came in softer than expected at +0.3% m/m in April (cons +0.5%), and at +3.3% y/y (cons +3.4%). Core CPI however, was perfectly in line with consensus expectations at +1.6% y/y, and remains comfortably inside the BoC’s target range of 1-3%. Next, retail sales were also soft, stagnating in March against expectations of a +0.9% m/m expansion.
TECHNICAL OUTLOOK
EURCHF clears 1.2403 key low
EURUSD BEARISH Break below 1.4121 has shifted focus to 1.4048/21 support zone. Near-term resistance is at 1.4346 ahead of 1.4389.
USDJPY NEUTRAL Break above 82.23 and 82.55 is required to trigger the bull trend; near-term support is at 80.94.
GBPUSD BEARISH Momentum is negative with initial support at 1.6091 ahead of 1.6046. Initial resistance is at 1.6351.
USDCHF NEUTRAL 0.8951 and 0.8706 mark the near-term directional triggers.
AUDUSD BEARISH The pair heads towards 1.0506; break of the level would expose 1.0443. Near-term resistance is at 1.0711.
USDCAD BULLISH Rise above 0.9794 would expose 0.9849. Support lies at 0.9641.
EURCHF BEARISH Break of 1.2403, the key low from Dec 30, has exposed 1.2314, trend channel support. Resistance is at 1.2500.
EURGBP BEARISH Pressure on 0.8674; breach of the level would expose 0.8655. Resistance is at 0.8722.
EURJPY BEARISH Violation of 115.23 has opened up the way towards 114.29 and 113.42, resistance holds at 117.24.
SCHEDULE
Please visit GCI’s Economic Calendar for a schedule of market news and events.
