FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
Rising commodity prices and stronger equity markets gave risk appetite a boost during the Asia session. The combined effect was powerful enough to keep AUDUSD largely supported, despite some rather mixed Chinese data for April. Higher oil prices in particular helped the euro to recover some ground recently lost to the dollar, although speculation that a new Greece rescue package may eventually be announced also helped embolden euro bulls. EURUSD traded 1.4350-1.4423, USDJPY 80.72-81.09. Richmond Fed President Lacker, a 2012 FOMC voter, said it is too soon to determine whether the Fed should pause or rush to tighten after QE2 ends, but he did say that it is better to be ahead of the curve on inflation. US economic data releases were again minimal yesterday, but three Fed speakers are due later today, along with US trade data.
EUR
French Finance Minister Lagarde said it is difficult to envisage Greece returning to markets in 2012. This should be seen as an admission that Greece will likely need further financial assistance, as the original plan agreed in May 2010 assumed Greece would issue fresh debt from 2012. However, Lagarde stressed that no decision has yet been taken on the amount, or indeed the nature, of any supplementary aid for Greece. She also ruled out a restructuring of Greek debt “in all its forms”.
EU Commissioner Rehn said any speculation on a new aid package for Greece is premature, though he did expect some discussions and decisions on the matter over the coming weeks. German Finance Minister Schaeuble reportedly said there would not be a decision on further Greek aid until the EU/IMF/ECB issue their latest quarterly assessment which is due to be published in June.
According to Reuters, an unnamed German government source said EU finance ministers are discussing a re-profiling of the Greek rescue loan. Slovakian Prime Minister Radicova said some form of debt restructuring is inevitable at some point for Greece.
Moving to Portugal, Rehn said he expects the interest rate applied to Portugal’s rescue package would be between 5.5-6.0%. This is similar to that already charged on Ireland’s loan agreement. Rehn added that he expects EU finance ministers, including the representative from Finland, to give their approval to a Portuguese program next week. A clearing house raised margin requirements on Portuguese sovereign bonds to 45% from 35% for long positions.
GBP
The BoE’s quarterly inflation report is due. Our UK economist expects the MPC to lower its GDP growth forecast, to raise its forecast for inflation, and to keep alive the possibility of an August rate hike. However, the currency reaction is more likely to be driven by Governor King’s interpretation of the report at this morning’s press conference. In the past, his verbal assessment has tended to be more dovish than the projections in the report imply, and this has previously led to sterling weakness.
Chancellor Osborne said the government’s fiscal strategy gives the BoE more leeway “to keep rates lower for longer,” which caused a brief pullback in cable.
AUD
The AUD was briefly hurt by the latest batch of Chinese economic data, which showed April CPI a little stronger than expected at +5.3% y/y (cons. +5.2%). Investors took the view that this raises the risk of further policy tightening from the PBoC, potentially reducing the demand for Australian exports.
NZD
RBNZ Governor Bollard said the NZD is undesirably strong and that a fall in its value would assist in rebalancing the economy. Clearly the RBNZ remains wary of NZD strength, although the bank and the Finance Ministry have stopped short of threatening to take any corrective action.
TECHNICAL OUTLOOK
EURGBP 0.8714/00 support.
EURUSD NEUTRAL Initial resistance is at 1.4442, while support comes in at 1.4205 ahead of 1.4158.
USDJPY BEARISH A break below 80.00 would expose 79.57 and 78.83 next. Resistance is at 81.28.
GBPUSD NEUTRAL While resistance at 1.6464 holds, focus on initial support at 1.6271.
USDCHF BEARISH The pair remains heavy below 0.8893, keeping our focus on the downside. Initial support is at 0.8677 ahead of 0.8554.
AUDUSD BULLISH Break above 1.0878 would expose 1.0953 next. Support lies at 1.0697.
USDCAD NEUTRAL Initial resistance is at 0.9654, while support lies at 0.9505.
EURCHF BEARISH The cross bounced back through 1.2653 to expose 1.2748. Initial support lies at 1.2485.
EURGBP BEARISH Support is at 0.8714/00 zone, break of which would open 0.8655. Near-term resistance is at 0.8818.
EURJPY BEARISH Break through 114.80/16 area would signal scope for further downside towards 113.56. Initial resistance is at 117.60.
SCHEDULE
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