FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
The euro suffered overnight as fears over the situation in Greece have resurfaced. While the market is hoping for a clinching of a debt swap deal today with private sector creditors, securing cross-party support for further austerity measures and securing further funding from the troika is proving far more difficult. According to political leaders in Athens, the main parties have until noon today (local time) to respond to the troika’s demands, and so far there appears some distance between where the national unity government lies and the IMF’s targets. Talks continued late into the evening on Sunday and will resume today between the troika and the local authorities. Reports suggest that the main point of contention lies in private sector wage cuts and minimum wage declines, and there are fears that the Greek government will note the country has reached the limits on austerity.
At the same time, talks are continuing between private-sector bond holders and the Greek government, which also took place on Sunday. How to secure contribution from official-sector creditors is still in question, as opposition from various quarters remains strong. We believe the week ahead will be extremely significant for event risk and headlines could become a dominant driver for the euro. The ECB will also meet on Thursday, but key matters may have moved beyond their control by the time the Governing Council meets. Otherwise, the market is at least still managing to find some comfort from economic figures.
US payrolls surprised strongly to the upside on Friday, with 243k jobs added in January (cons. +140k) and the unemployment rate fell to 8.3%. Our economists have now upgraded their outlook for Q1 GDP from 1.5%y/y to 2.3%y/y, and our year-end unemployment rate forecast has been revised to 7.9% from 8.6% previously, though we note that the decline in labour force participation has contributed to the decline. In figures released overnight, retail sales came in softer than expected at -0.1%m/m (cons. +0.2%), though job ads improved. and Germany releases Factory Orders figures. The ECB, BoE and RBA are all meeting on policy this week, and the BoE is expected to decide on an expansion in the asset purchase programme while the RBA is expected to deliver another 25bp in cuts. Overnight EURUSD traded 1.3056-1.3130 and USDJPY 76.50-76.79.
EUR
Over the weekend, Greek Prime Minister Lucas Papademos held crucial talks with leaders of his national unity government to secure support for upcoming bailout talks. Several news sources reported that at present there is still some distance between the Greek authorities and the troika over the conditions for the next tranche. Greece is seeking some degree of easing of conditions but so far the feedback has not been positive.
Papademos said after the talks that the three parties have agreed additional spending cuts worth 1.5% of GDP for this year, and leaders will meet on Monday to finalise plans for bailout talks. The savings will be achieved by cutting wages, non-labour costs. A PASOK spokesman said that the political parties must submit their response to troika proposals by noon on Monday (10:00 GMT). Outstanding issues remaining include labour reform and bank recapitalisation.
Greek Finance Minister Venizelos said that currently ‘the moment is very crucial’ on Saturday. The troika also met with Greek officials on Sunday afternoon, but Reuters reported that there was ‘no indication’ on whether issues were resolved, or whether a preliminary deal was possible. Venizelos said that there was great ‘impatience and pressure’ from the troika and Eurozone partners.
The leader of the LAOS party, Georgios Karatzefaris, who is part of the national unity government, said that political leaders will resume talks on Monday, as opposed to Sunday night originally reported on Saturday by Venizelos. According to Bloomberg, Karatzefaris also said he ‘won’t accept ultimatums’ and called for the terms to be closely examined. He also said ‘I won’t contribute to the explosion of a revolution due to misery’.
Key Greek opposition leaders Samaras warned that Greece is ‘being asked for more austerity’, and Bloomberg reported that he ‘won’t agree to more austerity leading to recession’. As Samaras leads the second-largest party in the Greek parliament, there is real risk of Papademos’ government falling if Samaras withdraws support from the national unity coalition.
Press reports suggest that IIF Chief Dallara is currently in Athens finalising PSI talks. Compared with austerity discussions, the PSI talks appear to be close to agreement, though final take up by private-sector creditors remains to be seen. Markets will still need to watch for the potential implementation of collective action clauses and official sector involvement (OSI).
There remains significant opposition in Germany and beyond to public sector involvement in Greek debt relief. Dow Jones reported that German Economics Minister Philipp Roesler is leading opposition, warning sovereign creditors have already made an ‘enormous contribution’. The ECB meets this week and its debt swap participation will be a key point of focus at the post-decision press conference.
In more comments released overnight, Chinese Premier Wen Jiabao said China needs to help Europe due to ‘strategic considerations’, though this does not mean automatic support for further bailout packages. Premier Wen, in talks with German Chancellor Merkel last week, said that China is looking for ways to support Europe via ESM or EFSF but there is no word so far on further IMF support.
In figures released on Friday, Swiss trade figures were softer than expected, coming in at CHF2.07 bn. Exports rebounded by 6.1% but this was offset by rising imports. German factory orders are out on Monday.
JPY
BoJ Governor Shirakawa warned that JPY levels were ‘severe’ and ‘appropriate steps’ would be implemented.
GBP
January services PMI was above consensus at +56.0, rising from the December print of 54.0. Our UK economist notes that the headline business activity balance is at a 10-month high and above the long-run series average of 55.0. Details show the highest forward-looking business activity balance since May, the biggest rise on record, the strongest employment growth since March 2008, and fastest new business growth since July. This supports our view that BoE will raise asset purchase target by at most GBP50 bn in the next meeting.
AUD
Australian retail sales were softer than expectations, coming in at -0.1%m/m (cons. +0.2%). Our economists note the retail trend has clearly weakened, with flat values in the last 3 months, after previously showing some pick-up. We and the market are looking for 25bp in interest rate cuts during Tuesday’s meeting of the RBA.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BULLISH Resistance is at 1.3234 ahead of 1.3386. Support lies at 1.3026.
USDJPY BEARISH Two key supports are at 76.04 and 75.35. Resistance is at 77.15.
GBPUSD BULLISH Key resistance is at 1.5883, a break here would open 1.5947. Support lies at 1.5699.
USDCHF NEUTRAL Support lies at 0.9115 ahead of 0.9066, the Nov. 30 key low. Resistance is at 0.9250 ahead of 0.9339.
AUDUSD BULLISH Initial resistance is at 1.0794 ahead of 1.1007. Support lies at 1.0672.
USDCAD BEARISH Momentum is negative; focus is on 0.9892, a decline through this would signal scope for losses towards 0.9725. Resistance is at 1.0034.
EURCHF BEARISH Support lies at 1.2032 ahead of 1.2000 and resistance is at 1.2086.
EURGBP BEARISH Initial support lies at 0.8273 ahead of 0.8255. Resistance is at 0.8344.
EURJPY BULLISH Rally through 101.58 would open the key high of 102.54. Support is at 99.25.
SCHEDULE
Please visit GCI’s Economic Calendar for a schedule of market news and events.
