FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
The BoJ unexpectedly followed in the Fed’s footsteps and effectively set an inflation target of +1% y/y at today’s policy meeting. It also increased its target for asset purchases to help meet this new inflation objective. The asset purchase program was created in October 2010, and the ceiling on its stock of purchases has been raised twice before – but only in increments of JPY5 trn. Today however, the facility’s ceiling rose a further JPY10 trn and the aim is to spend all of this exclusively on JGB purchases before year-end.
Moody’s downgraded six Eurozone sovereigns overnight: Italy, Spain, Portugal, Malta, Slovakia, and Slovenia. The Aaa ratings of France, Austria, and the UK were affirmed but the outlook on each of these ratings was lowered to negative from stable. Cable dropped 60 pips over the course of the Asia session on the back of this news.
EUR
Moody’s downgraded the rating of six Eurozone sovereigns, and lowered the outlooks of two more. Spain was cut two notches, while Italy only fell a single notch and so avoided crossing into Baa territory. Although the outlook on the French and Austrian ratings were cut to negative, this compares favourably with the actual ratings downgrades that both sovereigns suffered at the hands of S&P a month ago. Given France has kept her Moody’s triple-A rating at least, the EFSF’s own Aaa rating seems safe for now.
ECB reported bond settlements under the SMP at EUR59 mn in week to Feb.10. This is the lightest week of ECB activity since the week ended Dec. 23 and the second-lightest week for buying since Italy and Spain were first included in SMP portfolio in August.
JPY
The BoJ unexpectedly set an inflation target of +1% y/y at today’s policy meeting. It also increased its target for asset purchases to help meet this new inflation objective. The asset purchase program was created in October 2010, and the ceiling on its stock of purchases has been raised twice before – but only in increments of JPY5 trn. Today however, the facility’s ceiling rose a further JPY10 trn and the aim is to spend all of this exclusively on JGB purchases before year-end.
This is a significant amount of additional easing, and with the BoJ’s preferred measure of core inflation currently running at only -0.1% y/y investors are bound to expect further bouts of monetary accommodation down the road. USDJPY climbed 30 pips – a relatively energetic reaction to what is usually a mundane BoJ policy announcement. Separately, the BoJ’s long-running Rinban operations were left unchanged and so JGB purchases under that program will continue at a pace of JPY21.6 trn per year.
GBP
Moody’s affirmed the UK‘s Aaa rating, but lowered the outlook to negative from stable. This suggests a one-third chance that the UK may lose its Aaa status in the next 12-18 months. We note that this is not the first ratings action the UK has seen in recent years. On May 21, 2009, S&P also lowered the outlook to negative, only to raise it back to stable over a year later on Oct. 26, 2010. The rating itself was not downgraded during this time. This is however the first time negative aspersions have been cast on the UK‘s rating since the Eurozone debt crisis erupted.
The Bank of England is due to release its quarterly inflation report on Wednesday. The inflation guidance may give a better understanding of policy direction in the coming months, while markets will also take note of the growth forecasts. Our UK economist expects the MPC will acknowledge that conditions have improved since the November report, but also that it stands ready to expand the QE programme should the outlook deteriorate again.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BULLISH Initial resistance is at 1.3322 ahead of 1.3386. Support lies at 1.3156.
USDJPY BULLISH Break above 77.81 would open 78.29, the Nov. 29 key high. Initial support is at 77.02.
GBPUSD BULLISH Resistance is at 1.5886, a move above which would open 1.5947. Key near-term support lies at 1.5730.
USDCHF NEUTRAL Key support lies at 0.9066; a decline through which would expose 0.8961. Resistance is at 0.9201 ahead of 0.9263.
AUDUSD BULLISH Near-term resistance is at 1.0791 ahead of 1.0845. Support lies at 1.0640.
USDCAD BEARISH Initial support is at 0.9926, a break here would open the key low at 0.9892. Resistance is at 1.0052, a prior low.
EURCHF NEUTRAL Support lies at 1.2084, a move below which would expose 1.2053. Key near-term resistance is at 1.2133 ahead of 1.2149.
EURGBP BEARISH Initial support lies at 0.8330 ahead of 0.8283. Key resistance is at 0.8422.
EURJPY BULLISH Next resistances are at 103.29 and 103.98. Support is at 101.66.
SCHEDULE
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