FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
The euro weakened after the euro-sceptic True Finns party won third place in Finland’s weekend election, raising doubts about whether a financial rescue of Portugal can go ahead as planned. EURUSD traded 1.4350-1.4450, and USDJPY 82.86-83.27. A series of weekend policy meetings passed without incident – the G7 did not even issue a communiqu?. The G20 reached agreement on indicative guidelines for various economic variables. These will eventually be used to assess whether a given economy is contributing to global economic imbalances, and whether corrective action is needed. However, it was stressed again that these were not numerical targets, suggesting plenty of leeway exists. US core CPI rose by only +0.1% m/m (cons. +0.2%). However the annualised figure ticked higher and was in line with consensus expectations at +1.2% y/y. Chicago Fed President Evans, a current FOMC voter and a well-known dove, said “as long as core inflation year over year is 1.5 percent or lower, I’d be surprised if I’m advocating a tightening in policy” in 2011. He said he was “more comfortable” with the idea that $600 bn is a “good sized program” for QE2, implying that he is less likely to support an extension beyond June. Philadelphia Fed President Plosser, also an FOMC voter in the current year, said “inflation is not imminent”, but he worried about inflation “a year, a year-and-a-half down the road”. This is entirely in tune with his recent hawkish commentary.
EUR
Eurozone CPI for March was revised upwards to +2.7% y/y from the earlier flash estimate, helping to keep ECB rate hike expectations supported. However, this was not enough to prevent euro downside as concern over Eurozone sovereign risk intensified once again. Irish and Portuguese spreads over bunds widened significantly. Greek spreads in particular closed above 1000bp – a new high since Greece joined the euro. CDS spreads also blew out.
Ireland was downgraded by Moody’s from Baa1 to Baa3 on Friday, but this was not the key driver. What has changed in recent days is that FX investors now see a greater risk of a Greek debt restructuring event before the new ESM rescue facility becomes operational in July 2013.
The origin of the latest bout of nervousness can be traced back to Wednesday’s comments by German Finance Minister Schaeuble. He revealed that Greece’s debt position is currently being assessed, and that “something must be done about it” if doubts over debt sustainability arise. On Friday, Schaeuble tried to downplay these remarks saying that they had been interpreted “somewhat erroneously”, and he implied that restructuring was not necessarily what he had in mind. Nevertheless, Germany’s deputy foreign minister Hoyer, said that a voluntary debt restructuring would “not be a disaster”. EFSF CEO Regling also did not rule out the possibility, saying that the possible need for restructuring will depend on Greece’s ability to execute reforms and on the performance of the global economy.
EU Commissioner Rehn elaborated further, confirming that a “sustainability review” of Greece’s debt is currently underway and should be completed by late spring or early summer. He said the study was a normal part of the quarterly review process, but that “this time it is of particular importance”.
A weekend Financial Times article kept the story alive, reporting that Germany is drawing up plans to restructure Greek debt, a claim which a German Finance Ministry spokesperson later said was “without any basis in reality”. Greek Prime Minister Papandreou again denied speculation that Greece might one day default, saying that Greece’s problems would be solved “not by restructuring the debt, but by restructuring the country”. Finance Minister Papaconstantinou repeated that “restructuring is simply not on the cards” and that the pain and cost of restructuring is bigger than the benefit.
Portugal repaid on schedule a maturing bond worth approximately EUR4.2 bn. FX investors are now likely to focus on the next major bond redemption on June 15. The principal sum, along with associated coupon payments, comes to approximately EUR5 bn. Portuguese officials have already implied that external assistance through the EFSF may be needed to meet that repayment.
Ireland’s Finance Minister Noonan said he has made significant progress in getting his European counterparts to agree on lowering the interest rate charged on loans advanced by the EFSF. He said he would like to see the interest rate lowered when Portugal’s rescue package is agreed.
JPY
The G20 communique released over the weekend did not mention currency intervention specifically but expressed a “readiness to provide any needed cooperation” to Japan to help deal with the aftermath of the earthquake.
Japanese Finance Minister Noda and US Treasury Geithner met. Afterwards, Noda said the recent G7 FX intervention was “very significant and effective”. Geithner expressed satisfaction that the G7 were able to come together “in exceptional circumstances&to help Japan contain the risk that a sharp appreciation of the yen would damage the recovery”. Neither Noda nor Geithner revealed whether Japan is seeking another round of intervention, or whether the G7 might be willing to act on any such request.
Noda repeated that the disaster-relief budget currently being framed would not require any additional JGB issuance. However, he said that a second supplementary budget which is also in the pipeline would require “significant amounts of funding”.
NZD
NZDUSD hit a new three-year high on Friday night, briefly breaking above 0.8000. New Zealand’s Finance Minister English said the pair is likely to trend back towards the mid-0.60s in the near future.
The RBNZ announced the creation of a 3-year swap facility with the PBoC worth CNY25 bn. The new facility allows the RBNZ to borrow in CNY if markets were to become disrupted to the point where NZ businesses were unable to borrow in CNY directly. The move marks another step in the internationalisation of the CNY.
NZ Q1 CPI came in softer than expected at +0.8% q/q (cons. 1.0%). This supports our analyts’s view that the RBNZ will wait until March 2012 before delivering the next rate hike.
TECHNICAL OUTLOOK
EURUSD BULLISH Focus is on 1.4520; a break here would expose 1.4579 and 1.4685. Initial support is at 1.4291.
USDJPY NEUTRAL Break of 82.55 would put odds in favour of a bear trend. Initial resistance is at 83.78 ahead of 84.26.
GBPUSD BULLISH Focus is on 1.6428/58 resistance zone. Near-term support is at 1.6227.
USDCHF BEARISH Outlook is bearish with focus on 0.8852/23 support area. Near-term resistance lies at 0.9076.
AUDUSD BULLISH Pressures 1.0584, break here would expose 1.0600/40 area. Support lies at 1.0458.
USDCAD BEARISH Momentum is negative; the pair targets 0.9557/27 support area. Near-term resistance is at 0.9670.
EURCHF BEARISH A move below 1.2837 would expose 1.2788, resistance is at 1.2958.
EURGBP BULLISH Violation of 0.8882 would open up the way towards 0.8924/42 zone, while support lies at 0.8793.
EURJPY BULLISH As long as support at 118.00 holds, pullback is seen as a correction. Initial resistance is at 120.35 ahead of 121.48.
SCHEDULE
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