FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
The euro staged a modest recovery during the Asia session after a failed attempt to break back below 1.40. EURUSD traded 1.4002-1.4081 and USDJPY 81.77-82.09. EURCHF also climbed back above the 1.2450 level, helped higher by some warnings from the SNB about the deflationary risks associated with a stronger Swiss franc, and about its willingness to act if necessary. Asian equities were relatively steady after yesterday’s global selloff, which also contributed to the modest pick-up in sentiment. Earlier, the S&P 500 closed 1.2% lower. St Louis Fed President Bullard implied that the Fed is likely to remain on hold for some time after the end of QE2, and pointed out that “a pause allows more time to assess the strength of the economy”. These comments are very much in tune with remarks made by Fed Chairman Bernanke at his inaugural press conference. Bullard went on to say by the word “pause” he meant that rates would stay near zero and that the key “extended period” language would remain. There were no US data releases yesterday, and the calendar is thin today too. New home sales are due however, along with speeches from Fed officials Duke, Hoenig and Plosser.
EUR
Greek Finance Minister Papaconstantinou implied that if Greece does not receive the next quarterly tranche of cash it will be unable to honour its financial obligations. Imagining the likely consequences, he said “the country will halt payments” adding that “wages, pensions – all the state’s expenses will not be paid.” Papaconstantinou also revealed that the IMF has made it “absolutely clear” that it cannot disburse the next tranche without a guarantee that European funding will be made available to Greece next year. This requirement potentially introduces further delay.
Greece announced plans to privatise several state assets. It also revealed it’s intention to impose fresh fiscal austerity measures designed to save a further ?6 bn. Further details are due to be announced next week, and presented to parliament in early June. The stated ambition is to lower the deficit to 7.5% of GDP in 2011. There has been no official reaction as yet from the troika.
Fitch affirmed Belgium’s credit rating at AA+ but lowered the outlook to negative from stable, citing heightened political risk. The agency said Belgium would likely be downgraded if it misses official deficit targets.
S&P provided some clarification on its decision to lower the outlook on Italy’s rating to negative from stable on Friday. The agency said it does not expect Italy to seek financial assistance from the EU or from the IMF “due to the absence of imbalances”. S&P also acknowledged that Italian banks, unlike those in Greece, Ireland, Portugal, or Spain, have made little use of ECB liquidity.
ECB Executive Board member Bini-Smaghi said markets are sometimes complacent about inflation expectations but that the ECB is monitoring the risks of second-round inflation effects “very closely”. On whether Greek bonds would be rendered ineligible at ECB tenders in the event of default, he said the ECB has to lend to “sound counterparties”.
Portugal’s Finance Minister dos Santos said that “sovereign restructuring is not on the agenda in Portugal” and that the country’s sovereign debt is on a sustainable path.
ECB settled no bonds last week under its Securities Markets Program. The sovereign bond purchasing program has now been dormant for eight weeks.
CHF
SNB Vice Chairman Jordan said he is very worried about the Swiss franc’s rise and would act if deflationary risks were to emerge. He did say however that, until now, the export sector has coped reasonably well with the stronger CHF. Jordan added that interest rates can stay low for longer if inflationary risks remain contained.
TECHNICAL OUTLOOK
EURUSD focus on 1.3903.
EURUSD BEARISH The pair bounced back from the 100 day moving average at 1.3969 yesterday. Overall focus is on downside with initial support at 1.3903 ahead of 1.3855. Resistance is at 1.4147.
USDJPY NEUTRAL Need a break above 82.23 and 82.55 to trigger the bull trend; near-term support is at 81.32.
GBPUSD BEARISH Decline through the 1.6091 has exposed 1.6046, while initial resistance lies at 1.6239.
USDCHF NEUTRAL 0.8951 and 0.8706 mark the near-term directional triggers.
AUDUSD BEARISH Break of 1.0506 has shifted focus to 1.0443 and 1.0390. Near-term resistance is at 1.0657.
USDCAD BULLISH Upside potential; the pair targets 0.9828/49 resistance area. Initial support is at 0.9724.
EURCHF BEARISH Recovery has resistance at 1.2500. While the level holds, expect the cross to continue its loss towards 1.2324 ahead of 1.2297.
EURGBP BEARISH Support is at 0.8655/26 area. Initial resistance is at 0.8800.
EURJPY BEARISH Focus is on 113.42/00 area ahead of 110.54, while resistance holds at 117.24.
SCHEDULE
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