FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
News was thin on the ground during the Asia session, but that did not stop EURUSD falling further to a five-week low. AUDUSD also dropped over 100 pips as risk sentiment remained fragile despite stronger US economic data earlier. The Bank of Japan left monetary policy entirely unchanged as widely expected. EURUSD traded 1.3435-1.3557 and USDJPY 76.98-77.15. Italian Prime Minister-designate Monti spoke late on Tuesday declaring that the pieces appeared to be in place for a new government – we expect an official announcement on the cabinet’s composition later today. Italian and Spanish 10y yields remain elevated and investors will be nervous about the risk that yields may hit levels that could trigger shifts in repo market margin requirements. We still consider the euro overvalued at current levels. Although we acknowledge that short positions are heavy, event-based short covering over the past two weeks has re-opened the path for fresh downside. US retail sales were stronger than expected at 0.5% (cons. 0.3%), and the Empire Manufacturing headline reading moved back into positive territory.
EUR
Spain sold EUR3.16 bn worth of 12m and 18m t-bills at yields of 5.022% and 5.159% respectively. Our fixed income team views this as a weak auction and Spanish yields continued to drift higher afterwards, along with those of other Eurozone sovereigns.
The debt protection costs of France, Italy, Belgium and Spain hit record highs on Tuesday, while the German 2-year yield fell below 0.3% for the first time.
The German ZEW survey came out mixed. The investor expectations figure was worse than expected at 55.2 (cons. 52.5) but the current climate figure was somewhat better at 34.2 (cons. 32.0).
The French Finance Minister stressed that EFSF leverage must reach EUR1 trn, and expressed full confidence in the ECB. He said EFSF enhancements are expected to be completed by December. He also said France could meet its 2012 deficit goal even with growth at 0.5%.
Greek GDP showed how austerity and high debt costs are continuing to sap the economy. Greek seasonally unadjusted GDP shrank 5.2% y/y in Q3, after 7.4% y/y and 8.3% y/y declines in the previous quarters.
Italian PM-designate Monti is expected to announce his new government at 1100 GMT on Wednesday. On Tuesday he noted that the ‘framework was clearly delineated’ though some more time was needed.
GBP
Labour market data and the November inflation report are due out of the UK. We expect a dovish tone in the report which could point to additional easing, and should continue to weigh on sterling. October CPI released yesterday was slightly softer than expectations at 5.0%.
JPY
The BoJ left policy entirely unchanged at Wednesday’s policy meeting, as widely expected.
Finance Minister Azumi said his position is unchanged on FX intervention, and we expect the MoF/BoJ to be on high alert in light of recent volatility.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BEARISH Momentum is negative; support lies at 1.3406 ahead of 1.3346. Resistance is at 1.3540.
USDJPY BEARISH Near-term support lies at 76.82 ahead of 76.34. Resistance is at 77.50.
GBPUSD BEARISH Focus is on 1.5719, a break below which would expose 1.5681. Resistance is at 1.5828.
USDCHF BULLISH Key resistance is at 0.9316; a clearance of which would expose 0.9506. Near-term support lies at 0.9079.
AUDUSD BEARISH Pressure is on 1.0052, a break through which would open the way for losses towards 1.0000 and 0.9909. Resistance is at 1.0182.
USDCAD BULLISH Clearance of 1.0273 has opened 1.0365 ahead of 1.0419. Support lies at 1.0199.
EURCHF BULLISH Rise through the key high of 1.2474 would signal scope for gains towards 1.2646. Support lies at 1.2281.
EURGBP BEARISH Decline through 0.8486, the key low from Nov. 10, would expose 0.8456. Resistance is at 0.8558.
EURJPY BEARISH Break below 103.32 would expose 102.43. Resistance is at 104.38.
SCHEDULE
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