FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
The market remains in a state of suspended animation given the relative lack of news, the dearth of economic data releases, and the uncertainty around what may emerge from Thursday’s EU summit. Nevertheless there is a palpable sense of foreboding as Spanish and Italian yields continue to climb. The euro staged a modest recovery during the US session, but this is unlikely to last. After all, the upswing only got underway when European sovereign bond markets closed for the evening, which put a temporary stop to the flow of euro negative headlines on the plight of Eurozone sovereign bond markets. In Asia, the minutes of the RBA’s July 5 policy meeting show that the bank has shifted decisively to a neutral policy stance. EURUSD traded in a range of 1.4084-1.4136 and USDJPY 78.97-79.15. Gold traded up to a new record high, briefly touching $1607.45/oz. The S&P 500 fell 0.8%. European equities earlier closed about 2% lower, after Eurozone-negative press reports impacted sentiment. US housing data is due and our US economists are broadly in line with consensus.
EUR
Greek Finance Minister Venizelos said that Greece has not yet accepted that a ‘selective default’ rating is inevitable. He said that if the ECB is no longer in a position to support Greek banks, liquidity could be made available via the EFSF or via the wider system of national central banks. This suggests that the possibility is being explored of using an emergency liquidity facility operated by the Greek central bank to help fund Greek banks if the ECB finds itself unable to do so.
ECB Governing Council member Nowotny said a Greek default would have very grave consequences. He added that a range of options still has to be studied, and that some of these proposals are intended to manage the aftermath of a short-term selective default rating.
ECB Executive Board member Bini-Smaghi repeated the ECB’s opposition to imposing actual losses on private sector bondholders, arguing that doing so could cost taxpayers even more. He said that, given the Greek banks “would collapse” in this case, the EU would have to bail out both the Greek economy and the Greek banks which would be “a much more expensive proposition”.
ECB President Trichet indicated there has been no softening of the ECB’s position on Greece. He repeated that any solution for Greece has to avoid both a credit event and a selective default, and that it is the responsibility of governments to come up with a solution. He said he does not expect the debt crisis to cause another recession.
The ECB did not settle any bond purchases under the Securities Markets Program last week. Allowing for settlement lead times, this implies that the ECB had conducted no purchases as of the European close on Tuesday. The program has now been dormant for 16 weeks, but could be restarted without warning.
A German government spokesman said that Germany seeks to send a clear signal to markets at the EU summit planned for Thursday.
AUD
The minutes of the July 5 policy meeting show that the RBA has shifted decisively to a neutral policy stance, noting that “the flow of recent information suggested both that there was more time to assess the likely strength of inflationary pressures in Australia and that it would be prudent to use that time”. The upcoming inflation report on July 27 is likely to be a key determinant of near-term policy.
CAD
Our analysts are in line with consensus, and expects the base rate to be kept unchanged at today’s policy meeting. As far as the policy statement is concerned, we would not be surprised to see mildly hawkish overtones seep into the text, given that CPI in May showed a significant increase.
TECHNICAL OUTLOOK
USDCAD 0.9669 resistance
EURUSD BEARISH Break below initial support at 1.4014 would pave the way for losses towards 1.3951 ahead of 1.3837, while resistance at 1.4295 holds.
USDJPY BEARISH Violation of initial support at 78.44 Fibonacci level would open 76.25, a key low. Resistance is at 79.61.
GBPUSD NEUTRAL Resistance is at 1.6194, while a decline through 1.5987 would resume the bear trend and expose 1.5939.
USDCHF BEARISH Watch for a break below 0.8033 to signal weakness towards 0.7800, a channel lower drawn off Feb 11 high. Resistance is at 0.8276, a previous low.
AUDUSD NEUTRAL Resistance is at 1.0746, while support lies at 1.0526.
USDCAD BEARISH While resistance at 0.9669 holds; focus on initial support at 0.9513, a key low ahead of 0.9446.
EURCHF BEARISH Decline through 1.1342 would open the way to 1.1106. Initial resistance is at 1.1650.
EURGBP BEARISH Initial support lies at 0.8705, a break of which would expose 0.8657. Resistance is at 0.8847.
EURJPY BEARISH Breach of 110.66 would signal further downside move towards 109.58 ahead of 107.99. Resistance is at 112.95.
SCHEDULE
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