FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
The dollar stayed firm during the Asia session, and continued its advance against the euro, the yen, the AUD, and the NZD. EURUSD traded 1.4048-1.4107, USDJPY 80.64-81.07. There was little in the way of news from the open, but the weekend arrest of IMF Managing Director Dominique Strauss-Kahn is not helping sentiment, given the possible implications for today’s meeting of Eurozone finance ministers. Asian equities are down approximately -1% at the time of writing, and gold is hovering near $1490/oz. The S&P 500 closed down -0.81% on Friday. On the data front, the underlying trend in US core CPI is still accelerating, which reinforces the view that the Fed will likely not extend QE2 beyond June. Core CPI for April rose in line with consensus expectations at +1.3% y/y (prev. +1.2%), setting the fastest pace since Feb. 2010. The University of Michigan consumer sentiment index beat expectations, rising to 72.4 in May (cons. 70.0). The NY Fed released details of US participation in the recent bout of coordinated FX intervention which was designed to weaken the yen. US monetary authorities bought “$1 billion against Japanese yen” on March 18. This is substantially less than the $8.5 bn worth of USDJPY the Bank of Japan bought on the same date. The ECB does not reveal the size of its intervention operations, but the US contribution is certainly much greater than the quantity of yen sold by the Bank of Canada ($0.124 bn), and the Bank of England (GBP0.15 bn).
EUR
IMF Managing Director Strauss-Kahn was arrested and detained in New York on Saturday, and charged with several serious offences. The euro is likely to react negatively as his arrest injects a degree of uncertainty at a critical moment in the Eurozone sovereign debt crisis. Specifically, Strauss-Kahn had planned to attend Monday’s meeting of Eurozone finance ministers, where the terms of the Portugal rescue were due to be finalised.
The IMF announced that Deputy Managing Director Shafik will attend Monday’s Eurogroup meeting instead of Strauss-Kahn. German Finance Minister Schaueble said the arrest will not affect discussions on Eurozone rescues. Schaeuble added that if Greece cannot return to markets next year, then further measures must be discussed.
ECB Governing Council member Nowotny said that an exit by Greece from the Eurozone would be “economic madness”. ECB President Trichet described the notion of a Eurozone exit as an “absurd hypothesis”, adding that Greece has “no other way” out of the crisis apart from consolidating its fiscal affairs.
Ireland’s Prime Minister Kenny said Ireland “has no intention of defaulting”.
Q1 GDP numbers were released across the Eurozone and were generally firmer than expected. The composite number came in at +0.8% q/q (cons. +0.6%). The standout number came from Germany, where Q1 GDP growth rose to +1.5% q/q (cons. +0.9%). On the other hand, Portugal entered a technical recession in Q1, with GDP down -0.7% q/q (cons. -0.3%). Given the ECB focuses largely on the performance of ‘core’ Eurozone economies, these numbers support the view of our European economists that the ECB will likely hike again in July.
The EU Commission revised up its inflation forecast and now sees Eurozone CPI at +2.6% y/y in 2011 (prev. +2.2%).
EFSF CEO Regling conceded that there is a possibility of solvency problems for Ireland, Greece and Portugal. He said private investors should be involved if these risks materialise.
AUD
Excluding re-financing, the value of outstanding housing finance fell -0.2 m/m in March, taking levels back down to where they were in November 2008. Our Australian economists acknowledge that this latest release adds to the generally disappointing data flow recently, but they stick to their view that the RBA is next likely to hike in August.
TECHNICAL OUTLOOK
EURUSD targets 1.4021.
EURUSD BEARISH Momentum is negative; the pair targets 1.4021 with next support at 1.3903. Resistance is at 1.4340.
USDJPY BEARISH While 81.85 continue to cap recoveries, a break below 80.34 would expose 80.00 and 79.57.
GBPUSD BEARISH Break of 1.6166 has exposed 1.6128 Fibonacci level. Near-term resistance is at 1.6308.
USDCHF NEUTRAL Recovery through 0.9000/12 would put odds in favor of a bull trend. Support lies at 0.8798.
AUDUSD NEUTRAL Break of 1.0537 has shifted our focus to 1.0513; a break below the level would trigger a bear trend. Resistance is at 1.0717.
USDCAD BULLISH Recovery through 0.9722 favors reversal. Next resistance is at 0.9772, while support is at 0.9600.
EURCHF BEARISH Initial support is at 1.2551, break of this would expose 1.2485. Resistance is at 1.2694.
EURGBP BEARISH Pressure on 0.8674/55 support zone; break through this would open 0.8618. Resistance lies at 0.8800.
EURJPY BEARISH Decline through 114.16 and 113.56 has opened up the way towards 113.00 key Fibonacci level. Resistance is at 115.54.
SCHEDULE
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