FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
Expectations continued to build overnight for impending solutions for the Eurozone sovereign debt crisis. Several different papers have reported different plans, from enlarged ECB resources to even the Fed providing funding to the IMF. Eurozone leaders will start meeting today to set the groundwork for Friday’s crunch talks. True, it seems that the market has been here before, only to be disappointed at every single turn, but the vibes fromBerlinandFrankfurtsuggest that the political establishment and the European Central Bank have now reached an understanding on what needs to be done. Perhaps more importantly, the leaders now recognize what is at stake, for the rhetoric on Eurozone breakup by the most pro-European of leaders are now at levels which would have been unthinkable previously. Markets have already rallied in anticipation of good news, and the process has also enjoyed some help from firm data outside of the Eurozone. Friday’s payrolls number may have registered a somewhat disappointing headline print at 120k, but the dip in the unemployment rate to 8.6% is welcome news, depending on interpretation.
Ahead this week, politicians aside, the ECB will take centre stage, but the BoE, BoC, RBA and RBNZ will all be deciding this week. Markets expect the ECB and RBA to deliver rate cuts (we expect unchanged for both), but the pressure to adopt fresh stimulus measures would perhaps be less pressing should the Eurozone’s decisions surprise to the upside. The market may choose to square some positioning in risk ahead of the crunch talks, but the headline risk is also clearly to the positive side and the current squeeze may yet find legs for a few days. Ahead today, PMI figures are out throughoutEurope but headlines will be the dominant driver for currencies. The non-manufacturing ISM is due out in theUS. EURUSD traded overnight in a range of 1.3375-1.3441 and USDJPY 77.89-78.11..
EUR
German Chancellor Angela Merkel pledged to work towards fiscal union, one which is legally enforceable. Headlines over the past few days suggest that plans are taking shape to set the wheels in motion at Friday’s Eurozone summit. However, Merkel has also rejected quick fixes to the current problems, and the ECB will unlikely increase their firepower unless they see structural solutions put in place.
European Economics Commissioner Rehn warned that “This week, the stable future of the euro and thus the economic recovery inEurope and employment are at stake”. He called for a ‘convincing’ package to come into force at the upcoming summit. He previously warned that time was running to save the euro.
ECB President Draghi told the European Parliament that a ‘fiscal compact’ was needed for the Eurozone to regain credibility in markets. He said that ‘countries are on the right track to reform but a credible message is needed now’. It is widely assumed that Draghi will be more open to stronger asset purchases once such a ‘compact’ can be reached.
According to the Financial Times, the ECB is expected to step up in its response to the crisis by helping the banking sector. This may come in the form of longer refinancing operations, but this does not mean that the ECB will increase its bond purchases.
German Chancellor Merkel and French President Sarkozy are set to meet on Monday to decide on further Eurozone integration. This would mark the beginning of a week of talks leading up to the European Union Summit on Friday where concrete proposals are expected towards fiscal union. Bond markets have rallied in the hope of agreements but we note that headline risk remains strong.
We expect the ECB to remain on hold this week, though the market expects a 25bp cut. However, we have cut our 2012 GDP forecasts aggressively and expect another policy move in the first quarter of next year. Otherwise on the data front, Eurozone composite PMI and Eurozone retail sales are due.
According to Die Welt, the Fed may join other central banks and provide the IMF with funding for the Eurozone. The reported noted Eurozone central banks may pay up to EUR100bn into special funds within the IMF, while other central banks may also participate.
The Sunday Times reported that the ECB is preparing a EUR1tln infusion for the Eurozone as part of the comprehensive package. The story said that the plan would be executed ifEurope’s leaders reach agreement on a broader political reform of the currency bloc – imposing strict budget controls on nations struggling to control their state finances.
Italy passed another EUR20bn austerity package over the weekend. This is more welcome news but implementation will be closely watched..
GBP
The Bank of England will decide on policy this week. We expect no change in the asset purchase programme though developments in the Eurozone will have a greater bearing on theUK’s domestic conditions, from macro to financial stability.
UK services PMI is due on Monday, we expect a 51.8 print (cons. 50.5).
CAD
Canadian payrolls came in far weaker than expectations again at -19k, vs. expectations for a 20k rise. However, the breakdown was more favourable than last months’ as full time jobs increased by 35k, though this was offset by a 53k drop in part-time numbers.
The Bank of Canada will decide on policy on Tuesday. Our economists believe the Bank will leave the overnight rate target unchanged at 1.00%. Despite Q3 domestic economic growth which exceeded the Bank’s projections (from October Monetary Policy Report), concern has increased regarding the economic outlook due to external factors, primarily potential fallout from the European sovereign debt crisis.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BEARISH Break below 1.3259 would open the key low of 1.3212. Resistance is at 1.3607.
USDJPY BULLISH Focus is on 78.29, a move above which would expose 78.83. Support lies at 77.49.
GBPUSD BEARISH Decline through 1.5526 would expose 1.5459. Resistance is at 1.5756.
USDCHF BULLISH Key resistance is at 0.9331, a break here would pave the way for 0.9401. Support lies at 0.9066.
AUDUSD BULLISH Focus is on 1.0337, a break of which would expose 1.0447 while support lies at 1.0151.
USDCAD NEUTRAL Initial support lies at 1.0055 ahead of 0.9975. Resistance is at 1.0223 ahead of 1.0364.
EURCHF BULLISH Resistance is at 1.2394 ahead of key high of 1.2474. Support lies at 1.2226.
EURGBP NEUTRAL The near-term directional triggers are at 0.8620 and 0.8519.
EURJPY NEUTRAL Resistance is at 105.70 ahead of 106.74 while support lies at 103.34 ahead of 102.49.
SCHEDULE
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