FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
The euro continued its slide as Asian markets opened on a very weak footing. Major equity indices are trading weaker as fears of further escalation in the Eurozone crisis increased. German media reported over the weekend that the Finance Ministry was already looking at contingencies in the event of a Greece downgrade, while the Economics Minister of Germany also warned that talk of Greece default should not be considered taboo. EU Commissioner Almunia also noted that new rescues could not be ruled out. Despite speculation to the contrary on Friday, Greece did not announce any default over the weekend as PM Papandreou announced an intention to stay the course. In addition, a new property tax was announced by the finance ministry in a bid to improve revenue.
On the policy front, uncertainty also remains within the Eurozone in the wake of Juergen Stark’s resignation from the Executive Council of the ECB on Friday. The immediate fear over the erosion of the ECB’s policy integrity hurt the EUR, but investors may choose to take a different view if the ECB does take a material turn to the dovish side in the immediate future, which is considered rather essential right now to guarantee financial stability. On the data front Monday is expected to remain quiet. With USDJPY trading heavy again, investors will also be on the watch for BoJ action. The G7 Finance Ministers’ meeting failed to yield an agreement on coordinated action, though Japan believes it has received a go-ahead for unilateral action. USDJPY traded 76.93-77.69 and EURUSD 1.3495-1.3678.
EUR
Late on Friday, ECB Executive Council member Juergen Stark announced his resignation. Press reports suggest that disputes over the ECB’s decision to recommence bond purchases drove his decision. Germany Deputy Finance Minister Asmussen has been proposed as his successor. Stark announced he would continue to serve until a replacement is announced. The development is regarded as EUR-negative as the composition of the ECB is turning more dovish with the departures of Trichet, Weber and Stark, though if the ECB does become more accommodating towards easing in various forms, it could contribute significantly to improvement in financial stability.
Fears that the Greek debt rollover/swap would not hit the 90% target caused the EUR to sell off as well, on the back of fears that Greece would announce a default as a result. So far these fears have proven unfounded. On Saturday Greek PM Papandreou announced that Greece would stay the course, and Finance Minister Venizilos announced a new property tax would be implemented to maintain revenue targets.
EU Economic and Monetary Affairs Commissioner Rehn said that he welcomed the Greek commitment and noted that EU staff would likely return to Greece in the coming days, allowing the Q3 Troika report to be completed by month-end.
Bloomberg reported that French banks could face a downgrade as early as this week. This would force funding costs to rise again within the Eurozone financial system and pressure risk in general. We remain cautious on the EUR at current levels.
The G7 Finance Ministers meeting did not agree on immediate coordinated stimulus. On Financial Stability, the noted that “monetary policies will maintain price stability and continue to support economic recovery. Central Banks stand ready to provide liquidity to banks as required. We will take all necessary actions to ensure the resilience of banking systems and financial markets. In this context we reaffirm our commitment to implement fully Basel III.”
EU Commissioner Joaquin Almunia noted overnight that new rescues within the Eurozone could not be ruled out, though he said that he did not envisage a recession in the Eurozone.
CHF
The SNB meets for their quarterly policy decision this week. We doubt much will be announced as the SNB has already actively introduced new policy measures throughout the past month, though the post-decision press conference could reveal more details about the implementation of the exchange rate floor for EURCHF.
AUD
In figures released overnight, the trade surplus in July was $1.8bn as expected (UBS: $1.7bn, mkt: $1.9bn), steady from June (albeit revised down from $2.1bn). This is the 5th straight surplus, and is in line with the $1.8bn average surplus since April 2010.
Our analysts note the number indicate only a modest start into Q3 – with exports still disappointing due to an only slowly recovering trend of coal. More positively however, the positive trend in capital imports is consistent with the unfolding capex boom.
JPY
The G7 Finance Ministers’ meeting failed to announce coordinated action on FX either, merely stating “We reaffirmed our shared interest in a strong and stable international financial system, and our support for market- determined exchange rates. Excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability. We will consult closely in regard to actions in exchange markets and will cooperate as appropriate.”
Japanese Finance Minister Azumi had been warning of fresh action, and pledged to seek ‘understanding’ from G7 peers this weekend. The outcome of the G7 appears to have been welcomed in Japan as a green light for intervention, with Azumi noting “No one was opposed to my explanation. I think I gained an understanding of our stance on foreign-exchange rates.”
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURJPY breaks 105.44.
EURUSD BEARISH Sharp sell-off through 1.3525 has opened 1.3428 ahead of 1.3245. Initial resistance is at 1.3678.
USDJPY BULLISH Clearance of 78.10 would expose 78.60. Near-term support is at 76.69.
GBPUSD BEARISH Focus is on the key low from July 12 at 1.5781. A break of this level would expose 1.5719. Resistance is at 1.5991.
USDCHF BULLISH Key resistance is at 0.8951, a move above this level would open the way for 0.9012. Support lies at 0.8706.
AUDUSD BEARISH Break below 1.0315 would confirm the bear trend and expose 1.0246 next. Resistance is at 1.0478.
USDCAD BULLISH Rise through 1.0010, the key high, would pave the way towards 1.0058. Support lies at 0.9869.
EURCHF NEUTRAL Key resistance is at 1.2346 and support lies at 1.2036.
EURGBP BEARISH Pressure is on trend line support drawn off June 2010 low at 0.8559. A break here would expose 0.8534 ahead of 0.8479. Resistance is at 0.8612.
EURJPY BEARISH Fall through 105.44 has opened the way for further losses towards 100.00. Initial resistance is at 106.05.
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