FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
The Eurozone just might be able to stay out of the limelight later today as the Fed decision is due. Our base case remains for some form of ‘Operation Twist’ but we do not believe this will have the dollar debasement effect that QE2 had. Our analysts also note that given the unusual level of dissent within the FOMC, investors should not expect any form of action as a given. More data is needed and the Eurozone crisis and the potential disruption to financial markets has probably factored into the Fed’s overall assessment. In the Eurozone, the Greek Finance Ministry has expressed confidence in obtaining the next tranche of aid as Troika members are expected to return to the country soon. However, developments in other Eurozone countries are still worrying as respective political processes may delay implementation of the July 21 agreements. Elsewhere today, BoE minutes many show another voter for QE in the UK and Norges Bank should give a cautious outlook while keeping rates on hold. EURUSD traded 1.3745-1.3594 overnight and USDJPY 76.41-76.76. Apart from the FOMC decision, existing home sales are due in Europe.
EUR
The Slovenian cabinet lost a confidence vote in parliament. Our rates strategists note that the government will now have 30 days to find a new leader and assemble a parliamentary majority. If this can’t be achieved, then parliament will be dissolved and elections will take place, with 4th December being the earliest election date. This potentially complicates ratification of the EFSF changes agreed by EU leaders on 21 July. All 17 eurozone states must ratify the changes before the new EFSF capabilities can become operational. Earlier, the Slovakian vote on the amended EFSF should be tied to a vote of confidence in the cabinet, according to the finance minister, to apply pressure on the junior coalition partner, the Freedom and Solidarity party (SaS). Slovakia has indicated previously that it will wait for all other Eurozone states to implement the proposals before voting.
The Greek government announced the heads of the troika are due back in the country next week.
ECB’s Nowotny said that European banks can get ‘vast amounts’ of ECB loans, and have plenty of eligible collateral available. He says that the sooner the ECB scales back bond purchases the better
The IMF described the downside risks for the global economy as ‘growing’. They advised the ECB to cut interest rates if debt tensions persist, and to keep intervening ‘strongly’ in debt markets. The IMF now sees global growth at 4% this year, down from 4.3% in June.
Standard and Poor’s downgraded its ratings on Italy by one notch to A/A-1 and kept its outlook on negative. In a release dated Sept. 19, S&P said the cut reflected its view of Italy‘s weakening economic growth prospects. The euro performed well in European trading however, despite the announcement.
The German ZEW survey was weak. Current situation index was +43.6 vs +45.0 cons, economic sentiment at -43.3 vs -45.0 consensus. While the ZEW survey results are at levels last seen in 2008, they were slightly better than consensus, and thus had limited market impact.
The Financial Times reported that a German industrial group withdrew some of its money from a French bank and put it at the ECB. Partly this was because of concerns about the future financial health of the bank and partly to benefit from higher interest rates paid by the ECB, a person with direct knowledge of the matter said.
JPY
Prime Minister Noda said Japan is open to buying more EFSF bonds to help stabilize European markets. He also said the Government and BoJ share the same view over the strong yen and there is no change in policy to take decisive steps against excessive currency moves.
GBP
Bloomberg via BBC reports that UK ministers are in discussions on GBP5 bn ‘boost’ for the economy.
The BoE Minutes from the September meeting are due and there is a chance that we will see another voter for further asset purchases. Such a change in stance would likely weigh on sterling, particularly against the dollar.
CAD
BoC’s Carney remained dovish. He said rates can stay low ‘after economy recovers’, and repeated that CAD strength is a headwind for exports.
Ahead today Canada CPI is due markets are looking for a stronger headline print of 2.9% but the core print is expected to remain unchanged at 0.2%m/m, 1.6%y/y.
AUD
The Australia Leading Index came in at 0.5%y/y in July, 3.1%y/y, better than the previous month’s print.
NZD
New Zealand’s Q2 current account deficit was much weaker than expected at NZD$920mln. Our analysts note the figures were not comforting in terms of direction but sufficiently low for the time being to keep the country off the radar as far as ratings are concerned.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BEARISH Initial support lies at 1.3587, a break below this level would expose 1.3495. Resistance is at 1.3787 ahead of 1.3937.
USDJPY BEARISH Focus is on 75.95, the key low from Aug 19. A move below this level would open the psychological level of 75.00. Resistance is at 77.00.
GBPUSD BEARISH Decline through 1.5633 would expose 1.5583. Initial resistance is at 1.5797.
USDCHF BULLISH Clear break of 0.8928 would open the way towards 0.9012 and 0.9105. Near-term support lies at 0.8700, the intraday low.
AUDUSD BEARISH Watch for a move below 1.0126, the Fibonacci level, to expose 0.9928, while resistance holds at 1.0399.
USDCAD BULLISH Rise through 0.9977 would expose 1.0027, a key high from Sep.12. Initial support lies at 0.9766.
EURCHF BULLISH Break above 1.2191 has turned the model bullish and opened resistance at 1.2346 ahead of 1.2469. Support lies at 1.2051.
EURGBP BEARISH Fall below 0.8671 would expose 0.8639, followed by 0.8596. Resistance is at 0.8791.
EURJPY BEARISH Pressure is on 103.90, a key low from Sep 12. A break below this level would expose 102.02. Resistance is at 106.00.
SCHEDULE
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