FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
North Korean media announced that leader Kim Jong-il died over the weekend, sending USDJPY briefly higher. Officials from Japan and the Republic of Korea stressed that both countries remain on their guard, although the yen recovered when fears of an immediate military reaction receded. Although Kim Jong-il had already picked his third son Kim Jong-un as the next head of state, a smooth leadership transition is by no means guaranteed, and we remain cautious on the yen in the immediate future given the headline risk.
Late on Friday, Fitch put the ratings of several Eurozone countries on review and lowered the outlook on France to ‘negative’ from ‘stable’. We note that S&P already has France‘s rating on review and, Fitch’s move does not break new ground. However, Fitch also warned that a comprehensive solution for the Eurozone debt crisis is ‘beyond reach’ – a comment which may reinforce market concerns that an elegant solution to the crisis may not be politically possible. Moody’s downgraded Belgiumby two notches to Aa3 after keeping it on review for two months. Although the market is better prepared for further ratings action, the risk of more bad news on this front before the year-end is likely to keep investors on the edge. The Riksbank is scheduled to announce its policy decision later this week, while GDP figures are due in several countries.
EUR
Fitch put six Eurozone countries ratings watch negative and also lowered the outlook on France to negative. The countries affected were Belgium, Italy, Spain, Slovenia, Cyprus and Ireland. This comes on the back of S&P announcing a review of 15 of the 17 Eurozone countries two weeks ago. The market is continuing to watch for any S&P decision for France, as S&P had previously noted it would make a decision as soon as the European Union summit concluded.
Moody’s lowered Belgium‘s rating from Aa1 to Aa3, with a negative outlook. The agency warned that risks from deterioration in funding conditions would hurt Belgium and the government’s efforts to push through fiscal consolidation.
In a Financial Times interview, ECB President Draghi again indicated his opposition to ramping up ECB bond purchases. He also broached the subject of Eurozone exit – he said that leaving would not help the exiting country given that inflationary pressures would be unleashed, and given austerity measures would still need to be introduced. He also rejected the suggestion that it would be good for the remaining Eurozone countries if a weak country were to leave. His rationale is that a Eurozone exit by a single country would amount to a “substantial breach of the existing treaty”, and once that line is crossed “you never know how it ends really”. ECB President Draghi is due to speak again at 15:30 GMT today.
ECB Executive Board member Bini-Smaghi said the ECB had never been ‘dogmatic’ about interest rates. He also said that the size of bond purchases needs to be determined from ‘time to time’, but acknowledged the need for financial stability, as without it there wouldn’t be any price stability.
ECB Executive Board Member Stark explained his reasons for resigning this year in an interview. He expressed dissatisfaction with state of the monetary union and its direction. He stressed “It’s a fundamental orientation of this monetary union, to forbid the monetary financing of government debt through the ECB. He also said that the ECB’s bond buying program is limited in its scope, and that the bank cannot indefinitely increase its balance sheet.
GBP
UK Deputy Prime Minister Clegg described recent comments from France on the UK‘s economy as ‘unacceptable’ and called for the rhetoric to be calmed. However, he warned that Britain could be ‘isolated’ from Europe due to recent decisions at the European Union Summit.
Ahead this week, the Bank of England will likely remain dovish in its December MPC meeting minutes due on Wednesday. We expect the vote on both policy decisions to remain unanimous.
Markets are also likely to focus on November public finance data. The government revised up its forecast for the fiscal deficit from ?122bn to ?127bn for the current fiscal year in the Autumn Statement. We agree with its new forecasts.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BEARISH Key support is at 1.2946; a break below this would open 1.2867, the Jan. 10 low. Resistance is at 1.3084.
USDJPY NEUTRAL Near-term directional triggers are at 78.29 and 77.49.
GBPUSD BEARISH Key downside trigger is at 1.5409 with interim support at 1.5434. Initial resistance is at 1.5557.
USDCHF BULLISH Pressure is on support at 0.9331; as long as this holds, watch out for a break above 0.9548 ahead of 0.9602.
AUDUSD BEARISH Focus is on 0.9861; a break below this would expose 0.9833. Resistance is at 0.9993.
USDCAD BULLISH Key upside trigger is at 1.0424, a violation of which would open 1.0474. Support is at 1.0298.
EURCHF BEARISH Initial support is at 1.2123, key low from Oct. 3. A break below this would open 1.2012, Sept. 19 low. Resistance is at 1.2398.
EURGBP BEARISH Tough support lies at 0.8356; a break below this would expose 0.8332. Resistance is at 0.8426.
EURJPY BEARISH The cross is consolidating above key support at 100.76; a break below this would open the psychological level of 100.00. Resistance is at 102.99.
SCHEDULE
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