FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
Risk sentiment improved in Asia, mainly on the back of yesterday’s constructive performance of European and US markets after news that the BoE, ECB, BoJ, and SNB were opening dollar swap lines with the Fed. This is a clear sign that central banks want to dispel concerns about dollar funding. ECB President Trichet said the globally coordinated decision on dollar liquidity is a clear illustration of close cooperation between central banks. The Swiss National Bank made no change to monetary policy and indicated that its EURCHF policy is unlikely to change in the short term, saying it is prepared to buy foreign currency in unlimited quantities. Most Asian stock market indices are trading in the black, with the Nikkei up by 2.0%. EURUSD traded 1.3867-1.3893 and USDJPY traded 76.68-76.87. On the data front yesterday, the Philadelphia Fed index came in at -17.5 vs -15.0 consensus. Our US economists note that the employment index rose into positive territory, and the new orders index rose but still suggested contraction. The six-month outlook measures also improved notably. Investor focus will now shift to today’s meeting of EU finance ministers and central bankers, which US Treasury Secretary Geithner will also be attending.
EUR
Dollar swap lines with the Fed will be opened by the BoE, ECB, BoJ, and SNB. This will see dollar liquidity provided in 3-month as well as 7-day facilities. The ECB’s 7-day facility has rarely been used (although 2 banks recently tapped it this week). This move is a clear sign from the central banks that they want to put the dollar funding issue to the backseat. It is a precautionary measure and they want to show to markets that they are wiling to provide liquidity if and when it is needed.
Reuters reported that US Treasury Secretary Geithner will press European officials to use the EFSF as a form of TALF. The key issue around TALF in a European context would be to assist with bank bond rolls. Previously, the TALF was designed to take asset backed securities and create a Fed assisted market. .
ECB’s Stark said the ECB liquidity measures will stay as long as needed; he said a coordinated system of economic policies is needed; and Eurobonds are not the solution to debt crisis.
After 15 Months, it was reported that Belgian political parties have reached a breakthrough in talks to forma new Government
EU commissioner Rehn said it is clear the sovereign debt crisis has worsened. There is a need for countries to get their budgets on a sustainable path
ECB’s Mersch said that that he could imagine Eurozone bonds issued jointly by the AAA credit-rated states. Nowotny said that the ECB’s bond buying is temporary and the ECB would need to rethink its bond buying program if EFSF ratification is delayed. However, German Chancellor Merkel said euro bonds are ‘absolutely’ the wrong way forward.
GBP
BoE’s Weale moved from being one of the most hawkish on the committee to sounding dovish, suggesting that QE could be implemented if inflation risks undershooting its long-run target and also noted that the risk of recession has increased since July.
UK inflation expectations for two years ahead rose to +3.5% in August vs +3.2% in May. For the year ahead they rose +4.2% in August vs +3.9% in May, according to the BoE. Our UK economist notes that the MPC will be somewhat worried by these developments, especially because inflation is yet to peak, but in general, the BoE has held the view that inflation expectations tend to follow actual inflation.
UK August headlines retail sales were slightly above consensus at -0.2 m/m vs -0.3% cons, with the underlying (ex-fuel) growth at -0.1% m/m vs of -0.2% expected..
CHF
As expected the SNB offered no change in policy. However, the bank said it aims for sight deposits of over CHF200 The bank said it is prepared to buy foreign currency in unlimited quantities; aiming to defend the 1.20 FX goal.
Our analysts notes that the SNB’s conditional inflation forecast has shifted substantially downwards due to the CHF’s massive appreciation and deterioration in the global economic outlook. For 2011, the forecast shows an inflation rate of 0.4%, for 2012 a rate of -0.3% and for 2013 a rate of 0.5%. This forecast is based on the assumption of a 3-month Libor of 0.0% and further weakening in the CHF. Although there’s no risk of inflation in Switzerland in the foreseeable future, there are downside risks for price stability if the CHF does not weaken any further.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD resistance 1.4022.
EURUSD BEARISH While resistance holds at 1.4022, a Fibonacci level, watch for a fall below 1.3704 to expose 1.3591.
USDJPY BEARISH Break below 76.43 would open up 75.95, the key low. Resistance is at 77.68.
GBPUSD BEARISH Decline through 1.5707 would expose 1.5676. Resistance is at 1.5991.
USDCHF BULLISH As long as support at 0.8540 is intact, a clearance of 0.8854 would open 0.8928 next.
AUDUSD BEARISH Fall through 1.0111 would expose the key low at 0.9928. Resistance is at 1.0478.
USDCAD NEUTRAL The near-term directional triggers are at 1.0027 and 0.9725.
EURCHF NEUTRAL Resistance is at 1.2191, the high from Sept 6. Support lies at 1.2000.
EURGBP NEUTRAL Rise through 0.8886 would trigger a bull trend while a pull back through 0.8639 would signal resumption of bear trend.
EURJPY BEARISH Initial support is at 104.55 ahead of 103.90. Resistance is at 108.00.
SCHEDULE
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