FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
The full G20 summit kicks off in Cannes today with the situation in Greece firmly in the minds of all participants. Before the gathering the Eurozone is to hold yet another summit (though dubbed ‘mini-summit’) amid the search for further clarity with regard to the situation with the referendum. It is clear that the Eurozone leadership is has accepted the vote but are fully framing it in the context of whether Greece wants to remain in the Eurozone; if the answer is in the negative then the Eurozone leadership will look to contain the fallout, and key officials are now openly contemplating the possibility. Much will depend on how the referendum is phrased, though Greek President Papandreou would need to get past a confidence vote first, scheduled for late Friday. Back in the US, The FOMC statement and subsequent press conference by Fed Chairman Bernanke were relatively unremarkable. No new policy initiatives were announced, and the Fed repeated its existing pledge to keep the policy rate exceptionally low until at least mid-2013. There was no discernable shift in Bernanke’s stance on the possibility of further QE3. The dollar enjoyed a brief and shallow bounce immediately afterwards suggesting a minority of investors had expected a more dovish outcome. The FOMC had a dovish dissenter for the first time in several years in the form of Chicago Fed President Evans who voted for additional easing, but was outnumbered 9-1. The three previous hawkish dissenters voted with the majority on this occasion. Fed GDP forecasts were sharply cut: 2011 GDP is now seen in a range of 1.6%-1.7% (the previous estimate was 2.7%-2.9%). However, there were no meaningful changes to the inflation forecast implying that the hurdle to QE3 remains high. Headlines continued to dribble out of Europe as G20 leaders began arriving in France for the summit on Nov. 3-4. Investors will continue to monitor whether non-Eurozone G20 participants would be willing to inject funding into the EFSF. Overnight EURUSD traded 1.3665-1.3756 and USDJPY 78-78.16. The ECB decision is due today.
EUR
Eurogroup Chair Juncker and French President Sarkozy, and Greek Prime Minister Papandreou announced that the Greek referendum would take place on Dec 4/5. Sarkozy said that Greece will not get a ‘single cent’ of the now overdue sixth tranche unless Greece first enacts the terms of the second rescue. IMF Managing Director Lagarde said that she hopes Greece will receive its sixth tranche of cash by mid-December, provided the Greek electorate votes ‘Yes’ to the referendum. Sarkozy added that his Greek friends must decide if they want to make the journey with the rest of Europe. Merkel said she puts the euro’s stability over that of Greece. The euro dropped 25 pips on these remarks
Papandreou said Greek people are mature and wise and will make the right decision, but he declined to reveal the wording of the referendum. He said he was proud to be in the Eurozone and that the Greek people wanted to keep the euro.
Although Greece was originally believed to have enough cash to last only until mid-November, an unnamed Greek government source revealed on Wednesday that Greece has cash reserves large enough to last until December.
French President Sarkozy is due to meet with the Chinese leadership on Wednesday night, after which possible aid to boost the EFSF capacity may be announced.
Lagarde described the decision to hold a referendum as a ‘hiccup’, and criticized how policy can change from ‘one day to another’.
The Italian cabinet are due to meet on Wednesday night amid reports that new austerity measures may be announced.
China’s Deputy Finance Minister said that the G20 would discuss whether to boost IMF resources to help cope with the Eurozone crisis.
An IIF letter to the G20 Leaders reportedly said that EU banks face “inevitable” deleveraging due to higher capital requirements announced as part of the recently-devised bank recapitalization plan. The letter went on to say that credit supply to the private sector could contract by 5% or more. Elsewhere, the Germany banking association said the debt write-down for Greece does not make sense before the Greek referendum, and expects private creditors to widely approve the Greek debt haircut.
Further PMIs were released across Europe. Of these, the Italian PMI was most worrying at 43.3 – well below consensus expectations of 47.2. German unemployment rose 10K (cons. -10K)
The euro came under slight pressure after ‘sources’ reported that the EFSF 10y issuance had been postponed. Other sources told Reuters that the EFSF is now expected to bring a EUR3 bn offering to market over the next two weeks, after initially planning the sale for Wednesday. If correct it will likely be due to adverse market conditions for issuance.
GBP
UK October PMI construction came in at 53.9 vs 50.0 consensus. Our UK economist notes however that, it’s not worth getting too excited about. Construction data is volatile, not well linked to the PMI series and most importantly, it’s only 5% of GDP. Thursday’s services PMI is much more important.
TECHNICAL OUTLOOK
EURCHF 1.2123 support.
EURUSD NEUTRAL Resistance is at 1.3871 ahead of 1.4003, while support lies at 1.3609 ahead of 1.3567.
USDJPY NEUTRAL Resistance is at 78.42 ahead of 78.98. Support lies at 77.43 ahead of 76.94.
GBPUSD BULLISH Initial resistance is at 1.6097, a break above which would expose 1.6167. Support lies at 1.5825.
USDCHF NEUTRAL Support lies at 0.8764 ahead of 0.8568, a key low from Oct. 27. Initial resistance is at 0.8960 ahead of 0.9083.
AUDUSD NEUTRAL Near-term resistance is at 1.0428 ahead of 1.0567. Support lies at 1.0118, a break below which would expose 1.0071.
USDCAD NEUTRAL Near-term directional triggers are at 1.0273 and 0.9975.
EURCHF BEARISH Pressure builds on 1.2123, a break below this level would expose 1.2012. Resistance is at 1.2288.
EURGBP BEARISH Support lies at 0.8548, a break here would open 0.8530, a key low. Resistance is at 0.8670 ahead of 0.8723.
EURJPY BULLISH Break above 109.24 would expose 111.94, key high from Aug 29. Near-term support lies at 105.68.
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