FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
The dollar had a mixed session in Asia, rising against the yen, but weakening against the euro. The AUD was supported by hawkish RBA minutes, which signalled another rate hike is likely in the coming months. EURUSD traded in the 1.4130-1.4244 range, while USDJPY traded between 80.70 and 81.46. The US debt ceiling was reached yesterday as expected, but Treasury Secretary Geithner announced a “debt issuance suspension period” in a bid to avoid breaching the debt limit until August 2. The term is a misnomer – in fact, normal Treasury auctions will continue during this time, as the Treasury will free up some issuance capacity by changing procedures at two government sponsored retirement funds.
US equities closed down about 0.5% and Treasury yields in the longer-end of the curve moved lower. Data releases were limited to a disappointing Empire Manufacturing print and the latest TIC flows. There are some housing prints ahead along with industrial production but the dollar will likely react to developments elsewhere and broader market participant sentiment in general in the interim.
EUR
Eurozone finance ministers agreed to a rescue package for Portugal worth ?78 bn. As expected, no agreement was reached on what to do about Greece, and several officials again reiterated their wish to see the results of the EU/IMF’s latest quarterly assessment before deciding on a course of action. The wider group of EU finance ministers are due to meet today, so two-way headline risk for the euro will remain elevated for another day at least.
Eurogroup Chairman Juncker said that Eurozone finance ministers are now very close agreeing on the legal text required to implement the ESM – the proposed rescue vehicle that is due to take over from the EFSF in July 2013. He added that discussions on Greece will be concluded in June.
Eurozone headline CPI was in-line with previous estimates at +2.8% y/y, well above the ECB’s target of below but close to 2.0%. A 25bp ECB rate hike in July remains the base case of our European economists.
ECB Governing Council member Nowotny said if the economy continues on its present recovery track, then the ECB will need to act accordingly. He said the ECB has made it clear it wants to pursue a strategy to exit from crisis mode policies, and it would be problematic to wait too long for a policy normalisation.
For today’s German ZEW survey, we expect an improvement in both economic sentiment and the current situation. A strong start to 2011 with an above-consensus Q1 GDP print has already allayed concerns on slowing momentum in the Eurozone. Nevertheless, we remain cautious on the euro in the medium-term given the persistent sovereign concerns and the impending end of QE2.
GBP
Today, we expect an unchanged CPI at +4.0% y/y vs. consensus +4.1%. The BoE already raised its inflation forecasts in its latest quarterly inflation report but a surprise jump in the level should keep rate hike expectations alive and benefit sterling. Our analysts expect the first rate hike in August.
AUD
The RBA minutes from the May 3 meeting were more hawkish than the policy statement itself. This reconciles the tone with the hawkish quarterly statement of monetary policy published three days later. Board members judged that “if economic conditions continued to evolve as expected, higher interest rates were likely to be required at some point”. Consequently, although our Australian economists stick to their call for two more 25 bp hikes this year (in August and November), they now acknowledge the risk that the next hike could come even sooner.
The minutes also referred again to the strong AUD being a useful aid to containing inflation, and noted that AUD inflows from overseas reserve managers were partly responsible for the strong exchange rate.
TECHNICAL OUTLOOK
AUDUSD 1.0513 key support.
EURUSD BEARISH Break through 1.4048/21 support area would pave the way for a move towards 1.3903. Resistance is at 1.4340.
USDJPY BEARISH The pair holds below 81.34; while this level is intact focus is on the downside with initial support at 80.34 ahead of 80.00.
GBPUSD BEARISH Initial support is at 1.6128 Fibonacci level, break of this would expose 1.6091. Near-term resistance is at 1.6308.
USDCHF NEUTRAL Support lies at 0.8784, while resistance is at 0.8951 ahead of 0.9012.
AUDUSD BEARISH Pressure on initial support 1.0513, only a break here would confirm the bear trend and expose 1.0443. Resistance is at 1.0717.
USDCAD BULLISH Recovery pressures 0.9772, key retracement level; break of the level would expose 0.9800 and 0.9849. Near-term support lies at 0.9684.
EURCHF BEARISH Focus has shifted to 1.2485 ahead of key support at 1.2433. Resistance is at 1.2614.
EURGBP BEARISH Support is at 0.8674/55 zone; break through this would open 0.8618. Resistance lies at 0.8800.
EURJPY BEARISH Break below 113.42 would expose 113.00 key Fibonacci level. Near-term resistance is at 115.63.
SCHEDULE
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