FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
The IMF meetings are in full swing in Washington, with the focus on how the wider G20 can contribute to resolving the sovereign debt crisis in the Eurozone. So far messages have been mixed: Russia has dismissed the prospect of joint BRIC aid for the Eurozone, and the G20 statement made no mention of direct support. However, the bloc noted that an increase in the flexibility of the EFSF was planned and it appears that Eurozone officials have become more agreeable to leveraging the EFSF, though details are lacking. The meetings will extend into the weekend and more decisions are possible, though this should not detract from the Eurozone’s own commitments as Greece works to secure fresh funding from the Troika and adopt new austerity measures. In another blow to the Eurozone’s fiscal situation, Slovenia was downgraded to AA3 by Moody’s overnight on the back of concerns over its banking sector and the prospect of government support. The country may not be alone in this predicament should conditions deteriorate.
EUR / CHF
The BRIC countries seem to be talking to each other, along with the G7 and G20 on boosting the IMF to help the Eurozone though messages are mixed at this stage. The BRIC communiqu? today made no direct mention of buying European debt, but PBoC governor Zhou Xiaochuan said the meetings in Washington will explore the issue of additional financing for the IMF. The Russian deputy finance minister however said there was no mechanism for coordinated support, and that it was not needed, though later he noted Russia was interested in investing in the EFSF but there was no need to force the process. Japan also expressed an interesting in helping, as Finance Minister Azumi said the country could lend to the IMF to help with the sovereign debt issue in Europe.
Slovenia was downgraded by one notch to AA3 by Moody’s. The agency warned that non-performing loans within the country had risen and the prospect of state help for the banking sector had grown. Moody’s also downgraded eight Greek banks upon completing a general review.
The Financial Times reported that the EU is planning to recapitalise 16 of the weakest European banks and that further measures in this regard are being studied. The FT article notes that no French banks are among the 16 mentioned, which will likely mean that most investors may seen the move as falling well short of what may be required.
EU’s Rehn said the EU need to look at leveraging the bailout fund. This was an idea floated by Geithner and would help the banking sector with its funding requirements considerably if implemented, although plans for this will likely be at an early stage. Similar comments were echoed by French Finance Minister Baroin.
Rehn also said that the impression that an orderly restructuring of Greek debt can be done in a neat way is somewhat illusory and Eurobonds would become junk bonds without greater European economic policy coordination.
JPY
Japans Finance Minister Azumi gave further intervention rhetoric. He said he wants yen to be at appropriate levels, reflecting Japan’s economy and Japan will take decisive steps against excessive yen rises. He also said buying EFSF bonds is possible, later mentioning the possibility of lending to the IMF to help with the situation in Europe.
CAD
We have gone long a 3m USDCAD call spread with strikes at 1.0317 and 1.0969, for 1.8636% notional with spot at 1.0330. The US dollar’s safe-haven appeal remains, and given widespread market risk aversion, the dollar rally should continue. With cross-asset market correlations rising significantly, our bearish view centres on the high-beta risk currencies. In particular, we look for further USDCAD upside with the BoC cautious and Canada exposed to the US.
TECHNICAL OUTLOOK
AUDUSD breaks 0.9706.
EURUSD BEARISH Fall through 1.3356, a Fibonacci level, would expose 1.3245. Near-term resistance is at 1.3797.
USDJPY BEARISH Focus is on the key low of 75.95, a break below which would open the psychological level of 75.00. Resistance is at 77.00.
GBPUSD BEARISH Decline through 1.5297 would pave the way towards 1.5192, a Fibonacci level. Resistance is at 1.5520.
USDCHF BULLISH Initial resistance is at 0.9183 ahead of 0.9340. Near-term support lies at 0.8951.
AUDUSD BEARISH Sharp sell-off through 0.9706 has opened 0.9625 ahead of 0.9537. Resistance is at 1.0080.
USDCAD BULLISH Clearance of 1.0380 would open the way for gains towards 1.0512. Support lies at 1.0052.
EURCHF BULLISH Strong resistance is at 1.2346/1.2403 area. Break above this would expose 1.2646. Support lies at 1.2051.
EURGBP NEUTRAL Support lies at 0.8710 ahead of 0.8671. Resistance is at 0.8842.
EURJPY BEARISH Initial support is at 102.02, a break below which would open the way towards 100.00, psychological level. Resistance is at 104.38.
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