FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
FX markets traded mostly sideways during the Asia session, although the dollar enjoyed a very modest bid tone. News reports over the state of Spain‘s governments and banks are leading to further uncertainty, even though the overall story is not new. As such, we still regard any rally above 1.30 in EURUSD as unsustainable. Meanwhile, the US has managed to register some more positive data. Factory orders increased by 1.8% in November – less than expected but still robust compared to the US‘ G10 peers. In comments made in a paper, Fed Chairman Bernanke warned that more action was needed on the housing market, and further price declines are still possible. Today, several job surveys are out in the US, ahead of the upcoming payrolls release. Retail sales figures are also due in Germany and France is due to auction a range of OATs, aiming to raise EUR7-8 bn. Our euro rates strategy team sees this as an important test of investor appetite for French paper following the significant spread widening of France over Germany in the past two weeks. Fortunately, France still holds a AAA rating and the auctions are expected to be supported particularly by domestic investors after the recent underperformance of longer-dated French paper.
EUR
Germany‘s services PMI for December was revised down to 52.4 from 52.7 preliminary, but that still represents a significant lift from November’s 50.3. The news from Italy was more worrying however. Italian services PMI fell to 44.5 (cons. 45.3), from 45.8 in November. Our European economists note that the latest data indicate negative Q4 growth for Italy, perhaps in the region of -0.3% to -0.5%.
The flash Eurozone CPI for Dec. was in line with expectations at +2.8% y/y. This supports the ECB’s forecasts made in their December meeting. Our European economists expect the ECB will cut the refi rate by a further 50bp in Q1.
Eurogroup Chair Juncker said that a ‘return to the drachma is not an option for Greece‘ and called 2012 a ‘key year’ for the Eurozone. German Chancellor Merkel announced she will meet with Italian Prime Minister Monti next week.
Germany sold EUR5 bn in 10-year bonds. The official bid to cover ratio was 1.3x. Portugal sold EUR1 bn in 3m T-bills, and the auction was well covered.
The Financial Times reported that Spain expects banks to set aside up to EUR50 bn in new provisions. Citing Economy Minister Guidnos, the report stressed the need for the Spanish banking sector to clean up balance sheets, without leaning too much on central government assistance.
There is increasing scrutiny on Spain‘s fiscal health, especially that of its regions and banking system. There were reports, later denied, that Spain was seeking IMF and EU help for its banking system. In addition, there were reports that a Spanish region needed help from the central government to repay an overdue loan. This was also denied, but it underscores that even though the Spanish national balance sheet appears to be robust, contingent liabilities from the banking sector and regions may weigh on sentiment, and could add to downside pressure in the euro.
Greek PM Papademos warned that the country faces risk of a disorderly default in March without a bailout deal, and everything is to be determined in the coming weeks.
On Thursday, German retail sales and Eurozone industrial new orders are due.
GBP
UK PMI construction surprised to the upside at 53.2, while consumer credit numbers were also robust at ?0.4bn. Mortgage approvals increased slightly to 52.9k. However, M4 money supply continued to decline, falling by 0.6% m/m.
Sterling has rallied strongly of late but we expect growth headwinds to weigh more on sentiment ahead. A weaker than expected reading in today’s important services PMI could prompt the market to reappraise its view on sterling’s prospects.
AUD
Australia‘s trade surplus for November came in weaker than expected at a 9-month low. Although AUD was unperturbed, our Australia economics teams observe that iron ore and coal exports – Australia‘s two main exports – fell quite sharply. This provides the first tangible evidence that softening external conditions are beginning to have a negative impact on the domestic economy.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BEARISH Focus is on 1.2858; a decline through which would signal scope for deeper pull back towards 1.2588. Resistance is at 1.3077.
USDJPY BEARISH Support lies at 76.33, a move below this level would open key low of 75.35. Near-term resistance is at 77.17.
GBPUSD BEARISH Initial support is at 1.5502, a break of which would open 1.5469. Resistance is at 1.5692.
USDCHF BULLISH Pressure is on 0.9470, a clearance of which would expose the key high of 0.9548. Key support lies at 0.9244.
AUDUSD BULLISH Resistance is at 1.0387, a move above this level would open 1.0447 next. Support is at 1.0233.
USDCAD BEARISH Key support lies at 1.0052, a break below which would open 0.9975. Resistance is at 1.0220.
EURCHF NEUTRAL Initial support lies at 1.2126 ahead of 1.2051. Resistance is at 1.2254 ahead of 1.2398.
EURGBP BEARISH The cross is testing 0.8285, a close below this level would open the way for 0.8252 and 0.8202 next. Resistance is at 0.8372.
EURJPY BEARISH Focus is on key low at 98.66, a decline through which would open 97.65. Resistance is at 100.31.
SCHEDULE
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