FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
The euro managed to recover further overnight as markets prepare for the opening of the EU Summit tomorrow. More details on what will be proposed surfaced yesterday and the new focus appears to be on the financial firepower of the Eurozone’s current rescue mechanisms, in addition to the pursuit of changes in the Eurozone’s treaties and institutional framework. Combining ESM and EFSF is being planned, though given the same level of guarantees, investors may question the efficacy of these proposals. US Treasury Secretary Geithner was in Europe rallying the Eurozone authorities and pledged to support the German-French scheme for greater fiscal integration. However, he dismissed suggestions that the Fed could also play a role in crisis resolution.
Nevertheless, the slow-drip of new schemes of tweaks of current measures continue to grab the headlines. Multiple sources have reported that the European Union is now contemplating turning the ESM into a ‘credit institution’ which would enable it to access ECB funding. This was mulled for the EFSF in the past but Germany expressed explicit opposition and the ECB itself was relatively cool on the idea. However, given the ESM operates under different treatise and funding mechanism, there is clearly room for maneuver. According to draft reports from EU President Van Rompuy’s office, fast-track approval of Treaty reform would be made, and not require all parliamentary approval in member states. He also seeks to change decision-making within the ESM which would involve less ‘unanimous decision’ making, which appears to be the current framework.
Ahead today, the ECB will be holding a 3m dollar auction and investors will look at the take-up closely, especially in the wake of central banks’ coordinated action to calm funding markets. Activity data across Europe will also be out, and Germany will be looking to build on a strong factory orders print this week in industrial production numbers. The same figures are also out for Norway and UK. On the policy front, the RNBZ decision is due at 2000 GMT..
EUR
In the wake of the S&P downgrade of Eurozone outlooks, the EFSF has also been put on credit watch negative due to quality of the guarantees in doubt. S&P warns that the EFSF may lose 1-2 notches from its current AAA status.
French Finance Minister Baroin ruled out new austerity measures in the wake of the ratings decision. He said that France would not need to inject new capital into the banking system, and the decision by S&P did not take into account the decisions made on Monday. He said the summit this week would be ‘decisive’. Press reports note that French President Sarkozy has told the ruling UMP coalition that the situation is ‘serious’ and that France ‘needs to pull together’.
Austrian Finance Minister Fekter said she firmly believed the Austrian AAA is not in danger, and said the S&P warning is directed at Europe rather than individual countries. The EUR also rallied briefly after Fitch said French fundamentals support AAA rating despite the euro crisis, but capacity to absorb future shocks have been largely exhausted.
German Finance Minister Schauble said that collective action clauses would likely remain in ESM, which is somewhat contradictory to earlier reports suggesting an avoidance of fresh private sector haircuts. The Economics Minister said the German Economy itself is ‘absolutely intact’ and had ‘no difficulties on financial markets’.
The Slovakian Finance Minister said his country also wanted private sector involvement in the ESM, but said it was not ‘necessarily needed’. He warned that pushing for PSI could risk any agreement, in a subtle warning to Germany.
EU President Van Rompuy said there is a need to ensure ‘bigger resources’ for the IMF via bilateral loans to deal with the Eurozone crisis, and there will be a review of the EUR500bn ceiling of the Eurozone’s permanent bailout fund. His announcement that the ESM may also be ‘given features of a credit institution’ is a significant step as this would open up the way to give ECB funding to the ESM.
A Japanese Ministry of Finance official said that despite the ratings warnings, Japan‘s stance on EFSF remains unchanged and the country will continue to invest in the vehicle as long as France and Germany continue to guarantee payment.
A group of US senators will meet with the IMF chief Christine Lagarde on Wednesday to discuss the crisis. There will be some focus on the US position as the Senate is crafting a bill to limit the US‘ participation and overall exposure to the Eurozone.
GBP
The Bank of England announced the establishment of an ‘extended collateral term repo facility’. The central bank announced this facility will be used to mitigate risks from short-term sterling liquidity shortages and provide extra liquidity to the banking system against collateral.
The facility appears similar to the SLS established during the financial crisis, though the SLS itself targeted long-term maturities while the ECTR appears to be pre-emptive in nature and will focus on the short-end.
CHF
CPI figures came in lower than expected overnight, with sequential inflation falling by 0.2%m/m and annualized inflation dropping to -0.5%. The September forecasts from the SNB had assumed CPI to hit this level in Q2 next year, and it is clear that deflationary pressures are escalating at a faster pace than expected.
Swiss unemployment came in at 3.1%, the highest since April.
The SNB also released November reserve figures, which have fallen to CHF229.3bn at the end of November. The SNB attributed the decline from CHF245bn the previous month to FX swaps rolling off..
CAD
The Bank of Canada chose to keep rates on hold at 1% in Tuesday’s decision. The note that on balance recent indicators have been stronger than October projections, and both the household and business sector have been robust. The result was certainly less dovish than expected, and the BoC already views there is ‘considerable stimulus’ and rates are at historical lows, so there was a lower necessity to act.
AUD
Australian GDP came in stronger than expected, coming at 1.0% q/q and 2.5% y/y. The breakdown was firm as well, as savings rates increased and business investment was robust. However, housing was soft.
Our analysts note that looking ahead, with the strength in capital expenditure likely to continue, the outlook for the RBA cash rate (UBSe -25bp in February) depends on the balance of exports – and how much they slow into 1H12 on a weaker global growth – against how much the consumer and housing sectors respond to a less hawkish RBA and lower lending rates. We continue to favour AUD on the crosses heading into 2012.
NZD
The RBNZ is expected to keep rates on hold at 2.50% at their upcoming meeting. The market is not looking for any shift in the immediate future, though our economists note that the central bank could yet mention the prospects of interest rate cuts, which would pressure the NZD further.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
USDCHF 0.9331 resistance
EURUSD BEARISH Support lies at 1.3428, a break below which would open 1.3259. Resistance is at 1.3548.
USDJPY BULLISH Resistance is at 78.11 ahead of 78.29. Key support lies at 77.30.
GBPUSD BEARISH Support lies at 1.5561, a decline through which would open 1.5526. Resistance is at 1.5726.
USDCHF BULLISH The pair approaches the key resistance of 0.9331; a break above which would open 0.9401 next. Support lies at 0.9112.
AUDUSD BULLISH Rally through 1.0328 would open 1.0447. Support lies at 1.0151.
USDCAD BEARISH Pressure is on 1.0079, a clear break below which would expose 1.0041 and then 0.9975. Resistance is at 1.0223.
EURCHF BULLISH The cross is consolidating below 1.2474; a break above which would be a key bullish event and open 1.2646. Support lies at 1.2226.
EURGBP NEUTRAL The near-term directional triggers are at 0.8620 and 0.8519.
EURJPY NEUTRAL Support lies at 103.34 ahead of 102.49 while resistance is at 105.00 and then 105.70.
SCHEDULE
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