FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
Risk appetite took a knock during Asian hours as Japan was downgraded by Moody’s. The step was merely catching up to other ratings agencies, but nonetheless reminded markets the stakes of the fiscal adjustment faced by many developed countries. Growth worries are the other recurring theme and investors have clearly started to see each weak incoming release as providing further incentive for Fed Chairman Bernanke to give a nod towards QE3 at Jackson Hole on Friday. We remain sceptical however, and our US economists do not expect another round of balance sheet expansion given the current price/activity setup. EURUSD traded 1.4385-1.4442, USDJPY 76.51-76.87. The Nikkei is currently trading close to 1% lower and other bourses in Asia are broadly soft. The Richmond Fed manufacturing index fell to -10 (cons. -5) taking it down to a two-year low. This, together with last week’s soft Philly Fed survey, suggests the upcoming ISM manufacturing reading will likely have slipped into contraction (sub 50) territory. Our US economists are looking for a strong durable goods report on Wednesday. In Germany, the Ifo release is due while investors will also be keeping an eye out for potential developments in Switzerland.
EUR
The euro lost 50 pips after former Fed Chairman Greenspan said that “the euro is breaking down”. The selling continued after Finland’s Prime Minister Katainen said Finland might abandon plans to participate in a second rescue of Greece if Finland’s collateral demands are not met.
The deputy leader of German Chancellor Merkel’s parliamentary party said it would be useful if Italy chose to sell some of its gold reserves rather than rely on fresh borrowing to fund the fiscal deficit.
The German ZEW survey was very soft. The current index was 53.5 (cons. 85.0), and economic sentiment was -37.6 (cons. -26.0). Our European economist notes that the poor ZEW reading should not be over-interpreted. Sentiment in financial markets heavily influences the survey, and the pass-through to the real economy is likely to be limited.
German PMIs for July were mixed. Manufacturing came in at 52.0 (cons. 50.6), while the service reading was 50.4 (cons. 52.9).
Today we expect a dip in the IFO print to 109.7 (cons. 110). Any surprise to the downside could see growth expectations in the Eurozone adjust further and undermine risk..
CHF
Each Wednesday for each of the past 3 weeks, at approximately 7am GMT, the SNB has announced new measures intended to weaken the Swiss franc. So far the central bank has focused on flooding the money market with liquidity, in a bid to drive down CHF money market rates.
However, these liquidity measures appear to be approaching their natural limit: 1m and 2m CHF Libor are already fixing in negative territory and 3m Libor – the SNB’s policy rate – fixed just above zero on Tuesday (at +0.0075%). Another round of liquidity injections could risk turning the policy rate negative, a step the SNB may be unwilling to take, especially given the stated intention is to set the policy rate “as close to zero as possible”. As such, investors will be on watch for any updates.
JPY
Japan was downgraded by Moody’s to AA3, outlook stable. This was not unexpected as Moody’s was catching up to other agencies and was approaching the end of its review period, which the agency had flagged well in advance.
In its release the agency noted that the build-up in debt since the 2009 recession was a problem, while frequent changes in the governing administration have prevented implementation of long-term strategies. The country’s self-funded nature was considered positive.
NZD
New Zealand trade numbers came out better than expected, the goods surplus for July was N$129m vs. N$125 deficit consensus. The 12m to July run rate is also ahead of market expectations at N$1.31bn.
TECHNICAL OUTLOOK
USDCHF 0.8017 resistance.
EURUSD BULLISH A break above 1.4500 would open the way for 1.4578 ahead of the key high at 1.4697. Support lies at 1.4259.
USDJPY BEARISH A fall through 75.95 would expose the psychological 75.00 level. Initial resistance is at 77.31.
GBPUSD BULLISH A rise through 1.6573 would pave the way for gains towards 1.6618 and 1.6661. Near-term support lies at 1.6421.
USDCHF NEUTRAL The key upside trigger is at 0.8017 and support lies at 0.7744.
AUDUSD NEUTRAL The near-term directional triggers are at 1.0602 and 1.0315.
USDCAD BULLISH A clearance of 0.9939 would expose 0.9969. Near-term support lies at 0.9826.
EURCHF BULLISH A move above 1.1555 would confirm the bull trend and expose 1.1663. Support lies at 1.1165.
EURGBP BEARISH A decline through 0.8697 would open the way towards 0.8643, a key low from Aug 5. Resistance is at 0.8797, a key Fibonacci level.
EURJPY NEUTRAL The cross has resistance at 111.25 ahead of 111.83 while support lies at 109.02.
SCHEDULE
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