FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
FX price action was relatively subdued in Asia except for a very brief spike higher in USDJPY on the break of 77.00. The pair promptly settled back down, and the absence of rhetoric from Japan afterwards suggests the move was not particularly noteworthy. The AUD also got a brief boost after the RBA minutes from the Oct. 31 meeting revealed that the board seriously considered not cutting the policy rate, but eventually decided to do so. This suggests no hurry on their part to follow through with further cuts. We lowered our EURUSD and cable forecasts overnight, and also raised our EURCHF forecasts, given the risk that the SNB will raise the floor in EURCHF to 1.25 at the Dec. 15 policy meeting.
The tricky process of government formation continues in Italy, but the selloff of Spanish bonds on Monday suggests the market may already be broadening its gaze to include other at-risk sovereigns. Up to EUR23 bn in Eurozone bond supply is due to be auctioned this week with key countries such as France and Spain all tapping the markets. Investors’ ability to absorb this supply in a challenging environment will be crucial to the euro’s fortunes. The data calendar is heavy on Tuesday, with German and GDP due, and inflation numbers out of the UK. In the US, advance retail sales and the empire manufacturing index are scheduled for release. EURUSD traded 1.3594-1.3644 and USDJPY 76.98-77.70.
EUR
Italy’s PM-designate Monti said his government should be able to last until the end of legislature in 2013, but that would depend on maintaining the confidence of parliament. He said that he was willing to have politicians in his government but parties must decide. As it stands he commands overwhelming support in the lower house.
Greek opposition leader Samaras said that he would not agree to any new austerity measures, or sign any binding agreement, which was demanded by the European Union.
Spanish banks announced that they borrowed EUR86.2 bn from the ECB in October, up from EUR79.4 bn the previous month..
Italy held a 5-year bond auction, with yields coming in at 6.29% vs. 5.32% for the previous 5-year; the bid to cover ratio was 1.469.
In Germany, the CDU held its annual congress and a resolution allowing Eurozone exits was passed. Finance Minister Schaeuble noted that one ‘can’t force anyone to stay in or leave the Eurozone’. The resolution allows members to leave the Eurozone without leaving the European Union.
ECB’s Mersch said that President Draghi’s comments that ‘the ECB’s bond-buy programme is limited’ reflects the ‘opinion on the ECB Governing Council’. At this stage it is clear that the ECB is not willing to compromise on its position against acting as the lender of last resort for governments.
German Chancellor Merkel said she wanted a change in the EU charter earlier than scheduled – by the end of 2012 rather than mid-2013. Reuters reported a limited amendment to the Treaty was needed to allow ‘greater influence over states that bust budget rules and agreed obligations on stability and consolidation’.
New Greek Prime Minister Papademos again highlighted the Dec. 15 deadline to receive the next tranche of aid from the troika. He also said that remaining in the Eurozone is the only solution for Greece.
CHF
Our analysts have the opinion that conditions are beginning to align in favour of the SNB lifting the EURCHF floor to 1.25 from 1.20, and we therefore raise our forecasts accordingly. The SNB itself, through its recent communication, has explicitly determined that the franc remains overvalued. Political support is holding and calls from industry are growing. An initial shift towards 1.25 is likely at the upcoming policy assessment in December amid deteriorating inflation prints.
GBP
October CPI is due and we expect a 5.1% annualized print. This is well above target but less relevant at this stage given the BoE has already commenced a new round of quantitative easing.
The November inflation report on Wednesday is the key release of the week, and we expect a dovish outcome which will continue to weigh on GBP sentiment.
AUD
The AUD got a brief boost after the RBA minutes from the Oct. 31 meeting revealed that the board seriously considered not cutting the policy rate, but eventually decided to do so. This suggests no hurry on their part to follow through with further cuts, and supports the view of our analysts who think only one more rate cut is likely, and not until Q1 next year.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BEARISH Momentum remains negative; a push through 1.3578 would expose 1.3484. Resistance is at 1.3814.
USDJPY BEARISH Near-term support lies at 76.34 ahead of 76.00. Resistance is at 77.68.
GBPUSD NEUTRAL The focus is on 1.5869; a break below this level would trigger a bear trend opening 1.5825 next. Initial resistance is at 1.6096 ahead of 1.6167.
USDCHF BULLISH Clearance of 0.9151 would expose the key high of 0.9316. Near-term support lies at 0.8953.
AUDUSD BEARISH A push below 1.0106 would expose the key low of 1.0052 from Nov 10. Resistance comes in at 1.0350.
USDCAD BULLISH Initial resistance is at 1.0232 ahead of the tough resistance at 1.0273. Support lies at 1.0077.
EURCHF BULLISH Key resistance lies at 1.2474; a break above which would signal scope for gains towards 1.2646. Support lies at 1.2321.
EURGBP BEARISH Decline through 0.8529 would expose 0.8486, the key low from Nov. 10. Resistance is at 0.8612.
EURJPY BEARISH Downside pressure persists and the cross targets the key support at 104.73 ahead of 104.02. Resistance is at 105.57.
SCHEDULE
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