FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
Asian indices mirrored the rally late in Europe and theUSon Wednesday. Key markets are up, with Hong Kong gaining over 5.5% as the combination of central bank liquidity injection andChinaeasing spurred a risk recovery. The news helped offset a very poor manufacturing PMI inChina.Brazil, another key emerging market, joined the party by announcing an interest rate cut of 50bp to 11%.
In a surprise but much-needed move, the ECB, in coordination with the Fed, Bank of Canada, BoJ, BoE and SNB have decided to cut the cost of the existing temporary US dollar liquidity swaps from OIS + 100bp to OIS + 50bp. Bilateral cross-currency swap lines will also be established and the operations will now be extended into 2013. To alleviate the situation further, the ECB has also cut the margin on the 3-month operations from 20% to 12%. The EUR rallied back to 1.35 from 1.33 after the release, and the dollar has fallen across the board.
The move came in a context of broad ‘risk on’, which was further supported by strong employment data in theUS as the ADP print came in at +206k, significantly above consensus. OurUS economists now look for 150k in Friday’s nonfarm payrolls (consensus 120k, after 80k) and a 175k rise in private payrolls (consensus 146k, after 104k). Both forecasts are 25k higher than their earlier estimate. Chicago PMI for November was also strongly above consensus at 62.
In the short term, we believe the rally will continue as further short positions are squeezed and expectations for political developments inEurope remain intact. However, we question its sustainability in the longer term, particularly for EURUSD, as none of the underlying problems have changed. Market focus will shift to the Dec. 9 meeting, but scope for disappointment remains high. Ahead today bond auctions are due inSpain andFrance, and some key purchasing manager surveys are out in the Eurozone,UK and US.
EUR
In a surprise but much-needed move, the ECB, in coordination with the Fed, Bank of Canada, BoJ, BoE and SNB have decided to cut the cost of the existing temporary US dollar liquidity swaps from OIS + 100bp to OIS + 50bp. Bilateral cross-currency swap lines will also be established and the operations will now be extended into 2013. To alleviate the situation further, the ECB has also cut the margin on the 3-month operations from 20% to 12%. For further details, please see “Cheaper Funding Boosts Euro” on www.ubs.com/fxweb.
Italy’s PM Monti said it is important to be together withFrance andGermany in making proposals. He added that Sarkozy and Merkel will make important announcements on European politics in the next couple of days. We believe that anticipation of announcements will keep risk assets in demand in the short term.
The Italian Treasury said it will launch auctions to lend or borrow “significant amounts” of cash using the Treasury’s account at Bank of Italy. It said that it will normally offer overnight maturities with credit limits via auctions, and hold morning or sometimes, afternoon auctions. It is largely an operation to help the treasury optimize its cash management.
German Finance Minister Schaeuble said the country is open to extending the IMF’s resources through bilateral loans. However, he stressed that the debate needed to be centered around IMF instruments, implying that Germany was not yet ready to pursue aggressive options involving using the ECB to lend to the IMF to extend aid to at-risk Eurozone countries yet.
Ahead todayFrance will auction EUR4.5bn in auctions, whileSpain has EUR3bn on offer.France’s Q3 jobless rate has been pushed up to 9.7%.
European Economics Commissioner Rehn warned that ‘we are now entering a crucial period of 10 days to complete and conclude the crisis response of the European Union’. Alluding to the summit on the 9th, given that central banks have probably done what they could/want the pressure is now on politicians to deliver.
CHF
The Swiss KOF leading indicator for November came in weaker than expected at 0.35 vs 0.65 consensus. The previous number was revised down slightly to 0.75. Our Swiss economist notes that the little details provided suggests that the main categories, with the exception of the construction sector, are edging lower. From a qualitative point of view, the index, however, corroborates with the slowing business sentiment indicators, but not necessarily the activity indicators such as trade of late.
Swiss Q3 GDP has also come in lower than expected, with a yearly increase of 1.3%, 0.2%q/q. The figures will likely add to the pressure on the SNB to act amid weakening external conditions and we continue to target a raising of the EURCHF target floor in December.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BEARISH Initial support lies at 1.3259 ahead of 1.3212, the Nov. 25 key low. Resistance is at 1.3607.
USDJPY BULLISH Resistance is at 78.29 ahead of 78.83. Support lies at 77.10.
GBPUSD BEARISH Support is at 1.5526, a break below which would expose 1.5423, the Nov. 25 key low. Key resistance is at 1.5883.
USDCHF BULLISH Near-term resistance is at 0.9252, a clearance of which would expose 0.9331. Support lies at 0.9066.
AUDUSD NEUTRAL Resistance is at 1.0337 ahead of 1.0447 while support lies at 1.0000 ahead of 0.9943.
USDCAD NEUTRAL Support lies at 1.0124 ahead of 1.0055. Resistance is at 1.0364 ahead of 1.0474.
EURCHF BEARISH Support lies at 1.2226 ahead of 1.2208. Key resistance is at 1.2474.
EURGBP BEARISH Two key supports to watch for are at 0.8519 and 0.8486 while resistance is at 0.8620.
EURJPY NEUTRAL Resistance is at 105.97 while support lies at 103.34.
SCHEDULE
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