FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
Risk ended the Monday session on a buoyant note though trading was generally light due to a UK holiday and limited activity in the US post Hurricane Irene. Nonetheless, there is still a suggestion that markets are not giving up on the chances of new QE, and today’s FOMC minutes releases will probably be more forthcoming with information compared to the Jackson Hole speech last Friday. What is clear, is that activity data has been extremely challenging of late, with the Dallas Fed manufacturing survey became the latest regional survey to disappoint expectations, coming in at -11.4 (cons. -9.0). With the September FOMC decision gearing up to be arguably the most important one of the year, both voting and non-voting members appear keen to make their voices heard. Regional Fed Presidents Plosser, Fisher, and Kocherlakota have already been exposed as hawkish dissenters at the last policy meeting, and Kocherlakota is also due to speak later today. Chicago Fed President Evans (2011 voter) is scheduled to appear on CNBC, and is likely to stick to his traditionally dovish stance. House price and consumer confidence data are also due. Investors will also be keeping an eye on developments in the Eurozone, as Germany struggles to overcome political opposition to the current package of plans and Finland’s dispute with partners over collateral for their aid contribution for Greece shows no sign of abating. EURUSD traded 1.4508-1.4526 and USDJPY 76.86-76.98.
EUR
Speaking before the European parliament, ECB President Trichet sounded a hawkish note, warning that ample liquidity could facilitate the build-up of price pressures. Trichet denied that the ECB had taken on too much risk. He said the balance sheets of the Fed and the Bank of England have increased by relatively more than the ECB’s,
Trichet stressed that full and timely implementation of the July 21 summit agreement is critical. Eurogroup Chairman Juncker said that the current difficulties surrounding the provision of Greek collateral for Finland would not stop the implementation of the July 21 agreement. Reuters released a proposal from Finland to create a Luxembourg-based company to hold Greek assets as security for new loans to Greece. The Finnish proposal would require Greece to transfer assets to a holding company operating under Luxembourg law. In the case of a Greek default on EFSF loans, the ownership of holding company shares would transfer to member states. The Greek collateral issue is putting a cloud over the EFSF implementation schedule and the potential for euro-negative surprises are significant.
The ECB announced that EUR6.65 bn worth of Eurozone sovereign bond purchases settled last week, down from EUR14.49 bn the week before, and down from EUR22 bn the week before that. Given the ECB has progressively less and less work to do to hold down yields, it would appear that the selling pressure on Italian and Spanish debt is declining.
Yesterday’s German CPI print showed a negative sequential number, at -0.1%m/m. Even though Trichet struck a hawkish tone yesterday, data may prove less forthcoming for the ECB hawks. CPI is due tomorrow and the market is currently looking for a 2.5% print. Ahead today Eurozone confidences indices are out. Italy will also auction up to EUR8bn in bonds today.
CHF
Sight deposits held at the SNB by commercial banks averaged CHF189.037bn over the past week, taking levels very close to the CHF200bn target. In fact, given the reported figure is an average over the entire week, the CHF 200 bn target may already have been reached. The SNB will likely be fairly satisfied with EURCHF at 1.18, and more importantly, the upward trend of recent days.
JPY
Finance Minister Noda won the election for DPJ party leader, and is now poised to succeed Prime Minister Kan in the coming days. The entire cabinet resigned overnight, paving the way for his confirmation as the new PM via parliament and investors will pay close attention to cabinet formation talks up ahead.
The unemployment rate increased unexpectedly to 4.7% (cons. 4.6%), but overall household spending dropped by less than expected. Retail trade figures overnight were very disappointing, coming in at 0.7%y/y, -0.3%m/m.
GBP
Consumer credit and M4 figures are due today. Money supply is already contracting on both a monthly and annualised basis. Further deterioration could strengthen the case for new asset purchases by the BoE but the vote split at this stage remains finely balanced.
SCHEDULE
EURUSD BULLISH Pressure is on 1.4578; a break above this level would open up 1.4697, the key high from June 7. Near-term support lies at 1.4328.
USDJPY BEARISH Decline through 76.34 would expose the key low of 75.95. Resistance is at 77.70.
GBPUSD NEUTRAL Resistance is at 1.6534 and key support lies at 1.6208.
USDCHF BULLISH Focus is on 0.8278, a break of which would expose 0.8398. Support lies at 0.8041.
AUDUSD BULLISH Clearance of 1.0786 would open the way for gains towards 1.1007. Initial support lies at 1.0561.
USDCAD NEUTRAL Key support lies at 0.9708, a Fibonacci level and resistance is at 0.9839.
EURCHF BULLISH Initial resistance is at 1.2172 ahead of the key high at 1.2346. Support lies at 1.1555.
EURGBP BULLISH Key resistance is at 0.8886; a rise through which would expose 0.8915, a Fibonacci level. Initial support is at 0.8795.
EURJPY BULLISH Break above 112.71 would confirm the bull trend and open 114.18, a reaction high. Initial support lies at 110.55.
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