FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
WORLD
A cautious tone prevailed in Asia, with the commodity currencies starting on the back foot amid broad-based declines across the major equity indices. AUDUSD was initially pressured by the weaker-than-expected 0.4% q/q Australian GDP print for Q4 2011 – which significantly undercut the 0.8% q/q consensus estimate – but managed to stabilise later in the session as equities pared early declines. While our analysts team still believes the RBA will stay on hold over the balance of this year, a rising unemployment rate would certainly elevate the risk of a rate cut – magnifying the focus on Thursday’s employment data for February. We expect an unchanged jobless rate of 5.1% vs the 5.2% consensus. Still looming on the horizon is Thursday’s Greek PSI deadline, with uncertainty about the degree of participation fostering fears of a postponement or even a disorderly default, a risk scenario that could produce contingent liabilities of over EUR1 trn according to a leaked IIF report. Such concerns conspired to limit the upside for the euro.
Nonetheless, at this stage, it looks as if there will be sufficient involvement to reach the quorum required to make the vote on the amendments to the existing bonds embodied in the CACs valid. Consent from two-thirds of these participants would open the door for the Greek authorities to actually invoke the CACs – likely triggering a credit event by early next week, an outcome that is well discounted in the market. Apart from the Greek PSI drama, a number of central bank meetings will enter the spotlight on Thursday, with decisions due from the RBNZ, BoE, ECB and Bank of Canada. All are expected to deliver ‘no change’ verdicts. In fact, such views were uniformly expressed by all participants surveyed by Bloomberg for the RBNZ, BoE and Bank of Canada, while only 2 out of 58 respondents are predicting a 25bp ECB rate cut. Overnight, EURUSD traded 1.3111-1.3151 and USDJPY traded 80.59-80.94.
EUR
An article in the Financial Times quoted the Greek debt management agency as saying ” [the agency] does not contemplate the availability of funds to make payments to private sector creditors that decline to participate in PSI”. Other headlines from sources close to the matter said that the government expects to activate the CACs, but participation could reach 75-80%
Japan bought just 4.7% of Tuesday’s EFSF debt sale, around half of the take-up at the previous auction. This provided further evidence of the cautious Japanese stance towards Eurozone debt.
EU Commissioner Rehn said that the Commission supports the combination of the EFSF and ESM to build a stronger European firewall..
AUD
Q4 GDP growth came in well below expectations at 0.4% q/q, with the y/y pace easing to 2.3% from 2.6% in Q3. Growth in the quarter came from a rebound in public demand, net exports and non-farm inventories – as well as below-trend growth in consumption. In contrast, business capex paused and dwellings slumped, while the production and income (wages and profits) sides of the accounts proved softer in the quarter.
Our analysts still expect the RBA to remain on hold for the remainder of this year, given the improving global outlook and limited CPI downside (even though there was no obvious inflation pressure in the GDP accounts). That said, the door would be open for a rate cut at some point if the unemployment rate starts to rise.
RBA member Lowe served up a bullish outlook for AUD, saying the strong currency is playing a stabilising role in the economy. He said industries that are affected by the currency strength need to adapt. He also said that rates would be flexible in the face of a currency overshoot. It seems clear that the RBA views a strong AUD as a positive in terms of keeping inflation stable against the backdrop of a booming mining sector. However, if the currency overshoots, the RBA would likely take action by cutting rates, and one indicator to watch here is the overall unemployment level. This suggests AUD can outperform other pro-risk currencies if the ‘risk off ‘ theme continues, especially those where the central banks have taken an explicitly negative view of FX strength.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BEARISH Decline through 1.3056 would expose 1.2974. Resistance is at 1.3241.
USDJPY BULLISH We view the recent sell-off as correction; resistance is at 81.59, a move above which would expose 81.87. Support lies at 80.24, a prior high.
GBPUSD BULLISH Our focus remains on upside with resistances at 1.5883 and 1.5993, the year-to-date high. Key support lies at 1.5645.
USDCHF NEUTRAL Resistance is now at 0.9213 ahead of 0.9300, the February rejection high. Support lies at 0.9106 ahead of 0.9022.
AUDUSD NEUTRAL Support is at 1.0476 ahead of 1.0428. Resistance is at 1.0598 ahead of 1.0691.
USDCAD BEARISH Pair is approaching 1.0052; as long as this resistance holds our outlook would remain bearish. Supports are at 0.9937 and 0.9886.
EURCHF NEUTRAL Resistance is at 1.2084 and support is at 1.2041.
EURGBP NEUTRAL Support lies at 0.8311, the trendline support drawn off the Jan. 9 low, ahead of 0.8265. Resistance is at 0.8383 ahead of 0.8410.
EURJPY BULLISH Resistances are at 108.04 and 108.74 next. Support is at 105.44.
SCHEDULE
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