FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
All eyes will be back on the Eurozone today as the leaders of the European Union hold their second summit in the space of a week in search of a comprehensive solution to the Eurozone debt crisis. However, pre-summit nerves are showing as Tuesday’s headline flow was hardly reassuring for those in search of a positive outcome. German lawmakers initially disputed the inclusion of language in the final draft calling for more secondary bond purchases by the ECB. Shortly afterwards, newswires reported that Wednesday’s meeting of EU Finance Ministers had been unexpectedly cancelled, which triggered a brief selloff of the euro and risk assets more generally. The announcement came without any explanation, and investors naturally assumed the worst. However, we note that the more important summits of EU and Eurozone leaders will still go ahead on Wednesday as planned. Given the negativity in markets it is surprising that EUR has held up relatively well, suggesting investors who wish to be short EURs already are, and most others are simply staying on the sidelines. Elsewhere, the recent run of solid US data hit a bump as consumer confidence came in exceptionally weak, returning to levels last seen in March 2009. If risk aversion wasn’t seen within the EUR per se, other markets clearly priced in uncertainty. US Treasury securities rallied across the curve, and USDJPY fell to a new post-1945 low, briefly touching 75.74. Gold quickly climbed almost $50, breaching $1700/oz for the first time in a month. The reaction suggests that some investors are beginning to anticipate another round of Fed easing, although this is not the base case of our US economists and recent reports suggest a greater interest to tackle the housing market in the US rather than stick to conventional QE. Overnight EURUSD traded in a range of 1.3893-1.3936 and USDJPY 75.97-76.16.
EUR
Three events on Wednesday are likely to vie for investor attention. First, the German parliament is due to vote on whether to authorize the use of EFSF leverage. Our European economists expect the vote to be carried without difficulty, although they acknowledge the “slight risk” that the motion may fail. In the latter (albeit unlikely) case, Chancellor Merkel would have no mandate to approve the use of leverage at the Eurozone summit later that day, and the euro would likely experience a sharp fall.
The first summit is scheduled to begin at 1600 GMT, where the entire complement of 27 EU Leaders are due to attend for a short meeting. A second summit of only the leaders of the 17 Eurozone countries then convenes at 1715 GMT. We expect a formal communiqu? to be released eventually, plus a possible press conference, but no set times have been given. However, given the group clearly has much talking to do, we would not be surprised to see discussions continue until 2200 GMT or beyond.
Newswire headlines suggested that much work remains to be done on the Eurozone’s so-called “comprehensive solution”. Un-named EU officials said that Wednesday’s Eurozone summit communiqu? is unlikely to quantify precisely the EFSF’s new leveraged capacity. Instead, a range of possible sizes might be announced. It also appears that a firm figure will not be provided for the size of the EU’s bank recapitalization ambitions. We also think we are unlikely to hear a concrete figure for the size of bondholder losses, but it will likely be made clear that the eventual figure will be well in excess of 21%. In short, the summit is likely to be largely a disappointment as far as investors hoping for finality are concerned.
Political tensions in Italy continue to build as a package of pension reforms is assembled ahead of Wednesday’s EU summits. The EU is insisting on specific measures and commitments and it is not clear if the Italian government is in a position to strike a compromise with the opposition on the matter.
JPY
The Bank of Japan’s two-day meeting is due to begin on Wednesday, with an announcement expected around 0400GMT on Thursday. The Nikkei newspaper reported that further easing will be discussed, perhaps by expanding its existing JPY 50 trn asset purchase facility by JPY 5 trn. We note that this is one of the gentler easing steps the BoJ could take, and that any ensuing USDJPY upside is likely to be small and short-lived and forgotten about entirely within a few hours.
Japanese Finance Minister Azumi said he had told G20 meeting Japan sees USDJPY level of 76/77 as appropriate, and stressed that he didn’t think the G20 communiqu?’s wording on FX prevented Japan from intervening in markets. He also said Japan was ready to buy more EFSF bonds if Europe comes up with a credible solution.
AUD
AUD dipped overnight after a soft Q3 CPI, which showed a 0.6% increase (nsa), in line with our forecasts. The annualized pace also edged down to 3.5% from 3.6%. Core measures were also soft. Our economists believe the Q3 numbers are now ‘low enough’ for an RBA cut and have revised RBA forecasts from a cut in Q1 2012 to November, and expect a follow-up cut in Q1 2012.
GBP
BoE Governor King gave his testimony to the Parliament’s Treasury Select Committee. King noted that the MPC came close to voting for asset purchases a month earlier in September. He said the decision was ultimately taken in October on the grounds that financial market volatility had not receded.
CAD
The Bank of Canada kept the policy rate unchanged at 1.0%, as had been widely expected. However, significantly, the bank dropped its explicit tightening bias and has now assumed a neutral policy stance. USDCAD climbed 40 pips on the announcement and got a second boost minutes later when it emerged that Wednesday’s meeting of EU Finance Ministers had been unexpectedly cancelled.
The Bank of Canada also lowered its growth forecasts to 2.1% (cons. 2.8%) in 2011 and 1.9% (cons. 2.6%) in 2012.
S&P affirmed Canada‘s long-term sovereign rating at AAA, outlook stable.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BULLISH Break above 1.4013 would expose 1.4100. Initial support lies at 1.3704.
USDJPY BEARISH Initial support lies at 75.74 ahead of 75.00, the psychological level. Resistance is at 76.49.
GBPUSD BULLISH Resistance is at 1.6083, a break through this level would open 1.6203. Near-term support lies at 1.5900.
USDCHF BEARISH Momentum is negative; key support lies at 0.8647 ahead of 0.8540. Resistance is at 0.8952.
AUDUSD BULLISH Resistance is at 1.0501 ahead of 1.0666. Initial support lies at 1.0203.
USDCAD BEARISH Support lies at 0.9991 ahead of 0.9885. Key resistance is at 1.0273.
EURCHF NEUTRAL Near-term directional triggers are at 1.2474 and 1.2123.
EURGBP BEARISH Support lies at 0.8632, a break below which would expose 0.8583. Initial resistance is at 0.8733.
EURJPY BULLISH Key resistance is at 106.54, a break above this level would open 107.68. Support lies at 104.78.
SCHEDULE
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