FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
The Eurozone’s finance ministers’ conference call managed to secure fresh resources for the IMF, though again there was a distinct lack of unanimity. Only four non-Eurozone nations agreed to participate. It had been hoped that the fund’s resources could be boosted to EUR200 bn but instead only EUR150 bn was pledged. The IMF said it ‘welcomed’ the ‘substantial’ boost to its resources, though there are some strict conditions attached to prevent the impression that the funding lines via Eurozone national central banks is simply debt monetization by stealth. The Eurozone financial leadership yet again failed to agree upon an expansion in resources for the combined EFSF and ESM, which still stands at EUR500bn amid stiff German opposition. The RBA minutes produced little in the way of surprises. The Japanese government again announced plans to boost its FX intervention capacity, but there was no currency reaction. EURUSD traded 1.2988-1.3020 and USDJPY 77.92-78.06. The Riksbank policy decision is due.
EUR
The Eurozone’s 17 finance ministers agreed to provide EUR150 bn for the IMF, while the CzechRepublic, Denmark, Sweden and Poland will also provide supplementary financing. The allocations will go into the IMF’s general fund, and may in principle be used to fund future IMF rescues, though not exclusively those inside the Eurozone.
The Bundesbank said Germany is set for a long upswing as the expansive monetary policy should support growth.. It sees inflation at 1.8% in 2012 and 1.5% in 2013.
ECB member Noyer said that the restoration of confidence will be a difficult and lengthy task. He said it is important the ECB continues to ensure price stability, and that its interventions relate only to the preservation of medium-term price stability. Large-scale government bond purchases are seen as well beyond the ECB’s role as lender of last resort however.
In his testimony before the European parliament ECB President Draghi affirmed his belief in the euro, and said he had ‘no doubts whatsoever over its strength, its permanence and irreversibility’. He again clearly underlined opposition to monetary financing, while warning that banks are not only short of funding but also capital. Investors will be watching the take-up of Thursday’s three-year LTRO closely to see whether fresh ECB funding for banks may be large enough to alleviate sovereign stress.
ECB Executive Board member Bini-Smaghi said the ECB had never been ‘dogmatic’ about interest rates. He also said that the size of bond purchases needs to be determined from ‘time to time’, but acknowledged the need for financial stability, as without it there wouldn’t be any price stability.
On Tuesday the German IFO survey is out. The market is looking for a slight decline in the business climate print to 106.0, from 106.6 last month. We are below consensus and look for a dip to 105.5 The GfK survey and producer price numbers will also be released.
GBP
UK consumer confidence rebounded in November off October’s record low. Although it came in above expectations at 40 (cons. 36), sterling was slow to benefit.
BoE MPC member Fisher said that downside risks to the UK economy arising from the Eurozone are bigger than those due to inflation. He said the situation is potentially more dangerous than in 2008. He also said that deflation is also a bigger risk than inflation staying high.
The Bank of England will likely remain dovish in its December MPC meeting minutes due on Wednesday. We expect the vote on both policy decisions to remain unanimous.
Rightmove housing prices showed another sequential decline, of 2.7%m/m. However, prices remain 1.5% up on an annualised basis.
JPY
Finance Minister Azumi announced plans to increase Japan‘s FX intervention firepower by raising the amount of bill issuance that can be used to fund intervention operations. The newly-proposed ceiling is JPY 195 trn, up from JPY 165 trn currently, although parliamentary approval will be needed before the change can take effect. If successful, this will be the third time since 2010 that the limit has been raised. The latest move suggests Japan has every intention of continuing its policy of sporadic FX intervention, although the yen did not react to the announcement.
Azumi added that Japan intends to diversify some of its FX reserves into CNY bonds, noting that there are advantages to both Japan and China if they hold each other’s bonds. The Nikkei newspaper had earlier reported that Japan intends to buy up to $10 bn worth of CNY bonds, on a phased basis. We note that this amounts to less than 0.1% of Japan‘s total FX reserves, and we agree with Azumi that these purchases are not likely to affect the USD.
AUD
The minutes were released from the Dec. 6 RBA policy meeting where the cash rate was cut by 25 bp. The Board seemed anxious about the sovereign debt crisis in Europe, and were extremely uncertain over how it would be resolved. Our Australian economists think the RBA is in a ‘wait and see’ mode as far as the need for further rate cuts is concerned, and they stick to their view that a further 25 bp cut will likely materialize in February.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BEARISH Pair is consolidating above 1.2946; a move below this would open 1.2867, the Jan. 10 key low. Resistance is at 1.3146.
USDJPY NEUTRAL Pair is trading sideways with directional triggers at 78.29 and 77.49.
GBPUSD BEARISH Initial support lies at 1.5465 ahead of key low at 1.5409. Resistance is at 1.5630.
USDCHF BULLISH Tough support lies at 0.9331; as long as this level holds, watch out for a break above 0.9548 to expose 0.9602.
AUDUSD BEARISH Key support lies at 0.9861; a break below this would expose 0.9833. Resistance is at 1.0045.
USDCAD BULLISH Key resistance is at 1.0424, a violation of which would open 1.0474. Support is at 1.0298.
EURCHF BEARISH Momentum is negative; two key supports to watch are at 1.2123 and 1.2012. Resistance is at 1.2254.
EURGBP BEARISH Key support area is at 0.8373/56; a break below this would expose 0.8332 next. Resistance is at 0.8426.
EURJPY BEARISH The cross is consolidating above 100.76; a break below this would open the psychological level of 100.00. Resistance is at 102.49.
SCHEDULE
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