FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
Investors will probably need to brace for a second day of uncertainty as the political situation in Greece remains on edge. After a day of denial and counter-denial, George Papandreou remains in power but the opposition is clearly unwilling to enter into any form of negotiation to form a national unity government with him at the helm. Key global leaders gathering in Cannes are watching the situation unfold with unease, but their options are currrently limited to prevent any form of major fallout. The G20 leaders have been very open about the need to discuss a response strategy should Greece exit the Eurozone, even though there have been unanimous calls for Greece to stay as it would be the best way forward for the country itself and the global economy. Further discussions will continue throughout the day in both Athens and Cannes on the issues at hand, but investors would be more interested to discern whether a confidence vote would take place in the Greek parliament and what would happen should the Prime Minister win or lose it; for if it does go ahead and Papandreou does secure backing, the referendum issue may resurface, which would introduce fresh volatility. IMF officials and G20 participants have been clear that a new IMF credit line for countries suffering from ‘exogenous shocks’ would be made available, while the fund’s resources would also enjoy a boost, but a final number is still under discussion. On the data front, we are looking for a 95k headline number in US non-farm payrolls and 110k private payrolls growth; the unemployment rate should dip to 9.0%. Although the figures remain soft, they should add credence to the Fed’s view that the US economy is no longer facing short-term shocks and the need for new stimulus at this stage is insignificant. Overnight EURUSD traded 1.3789-1.3838, USDJPY 78.00-78.12.
EUR
The ECB cut the refi rate by 25 bp to 1.25%. During the subsequent press conference ECB President Draghi said Europe is heading toward a mild recession, and that ongoing market tensions are expected to dampen the pace of growth through the second half of the year. These were the most dovish ECB comments uttered since January. However, ECB Governing Council member Mersch later went further still and declared that the Eurozone economy is ‘practically in freefall’.
Draghi added that some downside risks to the economy have already materialized, and that it is very likely the ECB’s 2012 growth forecasts will get revised down significantly. Asked about Italian yields, he said these were not the focus of the meeting. Referring to the SMP, he said it is the duty of governments to bring yields down through credible fiscal policies, implying the ECB does not intend to scale up its bond purchases.
The current state of play in Greece is that Papandreou has not resigned, a confidence vote in the government is still scheduled for Friday night, and although plans for a referendum in early December have been effectively shelved the idea has not been completely taken off the table. The potential departure of Papandreou as prime minister over the coming days should remove the threat of a referendum altogether as there appears to be little appetite for it – on government or opposition benches.
Another PASOK parliamentary party member resigned, reducing Papandreou’s majority to a single seat. This raises the risk that Friday’s confidence vote fails – an event which would officially topple the PASOK administration. Unnamed newswire sources reported that Papandreou had the support of only 110 parliamentarians, well short of the 151 needed to secure a majority in the confidence vote.
However all the signs are that parties are working towards the creation of a unity government, which could in principle take the reins on an interim basis if Friday’s confidence vote fails. It seems opposition parties are not overly keen on this, but might be persuaded to participate if a near-term election date were set, and the unity government were understood to be temporary from the outset. However, it is not clear at this stage if such a show of unity would be enough to persuade the EU/IMF to disburse the sixth tranche in time to repay a maturing bond on Dec. 19.
The G20 meeting continues and we expect publication of the final communiqu? before the weekend. Newswire reports said Eurozone nations are considering pooling their IMF SDR allocations. This could in principle allow the Eurozone to borrow from the IMF on behalf of a fiscally weak member-state, and the amounts involved would greatly surpass what a single country could borrow from the IMF if acting alone. Newswire sources also claimed the IMF is considering a large allocation of additional SDRs – if so, this would further boost the borrowing ability of vulnerable sovereigns, as borrowing ceilings at the IMF are expressed in terms of quota percentages which depend on SDR allocations.
However, the wires also warned that these credit lines may also not be applicable to countries such as Spain and Italy, which largely negates the need for any expansion as it is mostly large Eurozone nations which face the biggest risks. Sources also indicate Italy is to agree to commit to deficit reduction in the G20 statement.
JPY
Japanese Finance Minister Azumi said he explained to US Treasury Secretary Geithner the rationale behind Japan‘s decision to intervene in FX, and Geithner neither supported nor opposed the intervention.
A Japanese government official said Japan will continue to buy EFSF bonds – he did not indicate how much although we note that Japan previously announced it had purchased 20% of the first EFSF bond issue in January.
GBP
UK October services PMI was on the soft side of consensus at 51.3 (cons. 52.0).
BoE MPC member Bean said that survey evidence points to only very moderate growth at best in Q4.
CHF
SNB Board member Danthine said the SNB chose 1.20 as the floor in EURCHF because that level balanced the risks involved. On one hand there were the economic risks of “recessions and deflation” and on the other “you had to be credible in the eyes of the financial markets”. He added that SNB monetary policy is not influenced by worries over losses incurred in intervention operations.
Danthine warned that further measures will be taken if the outlook for the economy or deflation risks justify it.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD NEUTRAL Key support lies at 1.3567; a break below this level would open 1.3406. Resistance is at 1.3871 ahead of 1.4003.
USDJPY NEUTRAL Initial resistance is at 78.42 ahead of 78.98. Support lies at 77.43 ahead of 76.94.
GBPUSD BULLISH Resistance is at 1.6097, a break above this level would expose 1.6167. Support lies at 1.5825.
USDCHF BEARISH Near-term support lies at 0.8718 ahead of 0.8568, a key low from Oct. 27. Initial resistance is at 0.8960.
AUDUSD NEUTRAL Resistance is at 1.0567, while support lies at 1.0148.
USDCAD NEUTRAL Near-term directional triggers are at 1.0273 and 0.9975.
EURCHF BEARISH Tough support lies at 1.2123, a break below this level would expose 1.2012. Resistance is at 1.2288.
EURGBP BEARISH Initial support lies at 0.8548 ahead of the key high of 0.8530. Resistance is at 0.8670 and 0.8690.
EURJPY BULLISH Break through 109.24 would reinforce the bullish conditions and open 111.94. Near-term support lies at 106.50.
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