FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
Although Eurozone officials have repeatedly warned over the last 72 hours that the weekend is unlikely to deliver a cure-all for the sovereign crisis, there is a heightened sense of urgency after emergency talks yesterday between French President Sarkozy, German Chancellor Merkel and the heads of the IMF and ECB. In particular, the Financial Times reported that the size of the European bank recapitalization plan is likely to be only EUR70-90 bn or less, and that banks would be given up to 9 months to raise the capital. We note that this would likely disappoint market expectations, being too small in scale and too slow in delivery. France is of particular interest in this respect due to its higher banking risks, and multiple news reports suggest that yesterday’s emergency talks were aimed, in part at determining how France would be able to retain its AAA rating. German Finance Minister Schaeuble, according to Handelsblatt, also said that he is no longer ruling out a Greek default, though Greece itself continues to deny that this is on the cards. Yesterday the Greek Parliament passed an initial reading of the new austerity measures, despite a nationwide strike. Elsewhere, activity data are due in Europe and the US,, but we expect headline risk to dominate price action. Overnight EURUSD traded 1.3687-1.3783 and USDJPY 76.68-76.86.
EUR
According to a Bloomberg report, a draft paper of the EFSF bank recapitalization plans envisages focusing on financial sector repair. Banks taking aid will have to restructure, and only distressed banks with systemic risk are eligible. These terms appear to be more stringent than what is currently being discussed, but they are based on the initial July 21st agreements.
According to Handelsblatt, citing members of the German panel of European affairs, German Finance Minister Schaeuble told the group that he will no longer rule out a default when talking to banks about a haircut on Greece‘s debt. Talks are ongoing regarding the PSI which could feature a 50% haircut on Greek debt.
The Financial Times reported that the size of the European bank recapitalization plan is likely to be only EUR 70-90 bn or less, and that banks would be given up to 9 months to raise the capital. We note that this would likely disappoint market expectations, being too small in scale and too slow in delivery.
French Finance Minister Baroin said that France would like the EFSF to obtain a banking license but recognises that the ECB and Germany are opposed to this. We note that a banking license would in principle allow the EFSF to use the ECB to provide the required leverage.
Newswires reported that IMF Managing Director Lagarde, ECB President Trichet, French President Sarkozy, and German Chancellor Merkel met for emergency talks in Frankfurt, but no further details were announced. We note however that the fact that the meeting took place at all suggests negotiations have become bogged down, at least for now.
France‘s Central Bank Governor Noyer said that French banks can already withstand a sovereign debt default, but that more capital could be raised with the participation of sovereign wealth funds.
Finland‘s Prime Minister Katainen said that he doubts Sunday’s EU Summit can produce big decisions given that the crisis is so deep that it cannot be solved with a single meeting.
Greek police estimated that over 120,000 people demonstrated outside the Greek parliament ahead of tomorrow’s parliamentary votes on further austerity measures. It was the biggest anti-austerity demonstration so far.
Austria‘s Finance Minister ‘s Fekter said models to make the EFSF more flexible need significantly more preparation. She added that a banking concession for the EFSF is under intense discussion, and there are still questions on this. She also wants to see bigger private-sector contribution to the second Greek rescue package.
GBP
The BoE minutes showed a unanimous vote in favour of the QE program. It was reported that a program between 50 and 100 billion was discussed, an indication that further purchases may indeed be on their way. As expected, the MPC emphasized that the action was pre-emptive and they maintain the view that inflation will fall from the current highs in 2012. Sterling initially sold off following the headlines but, in similar fashion to the announcement itself, rallied back afterwards.
BoE Governor Mervyn King warned that ‘time is running out’ for authorities to coordinate international action and called for a ‘bold response’. He also noted that inflation should fall sharply up ahead as base effects from higher energy prices and tax increases fade and warned that growth would ‘stall’ without fresh stimulus. He also warned that the economic recovery had ‘gone off track’ and it would take longer to restore normality to economic growth and fiscal conditions.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BULLISH Key resistance is at 1.3937; a break above which would open 1.4013. Support lies at 1.3653 ahead of 1.3566.
USDJPY NEUTRAL Resistance is at 77.49 while support lies at 76.31.
GBPUSD BULLISH Clearance of 1.5853 would expose 1.5945. Support lies at 1.5632.
USDCHF NEUTRAL Focus is on 0.9123 ahead of 0.9316. Initial support lies at 0.8881 ahead of 0.8786.
AUDUSD BULLISH Initial resistance is at 1.0264 ahead of key high of 1.0399. Near-term support lies at 1.0102 ahead of 1.0000.
USDCAD NEUTRAL Resistance is at 1.0273 and 1.0339 while support lies at 1.0085 and 1.0044.
EURCHF BULLISH Resistance is at 1.2495, a break above this level would expose 1.2646. Support lies at 1.2290.
EURGBP BULLISH Break above 0.8797 would expose 0.8842. Support lies at 0.8688/64 area.
EURJPY BULLISH Initial resistance is at 106.54 ahead of 107.68. Support lies at 104.02.
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