FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
The euro has managed to avoid further falls overnight but the recriminations will likely continue after yesterday’s alarming bund auction for Germany. Renewed fears about Germany‘s debt situation are undoubtedly justified, but fears over the safety of France‘s AAA rating did not help either. Strikingly, 10y bund yields closed 16bp higher. In fact, the bonds of all AAA core Eurozone countries weakened, while the sell-off of Italian, Spanish and Belgium continued unabated. Given Eurozone equities also closed weaker on the day, it would appear that a broad-based liquidation of Eurozone assets may have begun. The pressure is now on the Eurozone to act with urgency, which unfortunately still appears lacking. Debt problems aside, growth is going to be of increasing concern not just in the Eurozone but globally. Today’s release of Q3 GDP for Germany along with the Ifo index will have a material impact on how investors position themselves heading into year-end based on fundamental allocations. Weak liquidity as the US is on holiday for Thanksgiving is not going to help proceedings, though it is more likely that investors will choose to avoid markets altogether rather than put on fresh shorts. We remain cautious on the euro heading into the Dec. 9 summit, with time and patience starting to run out for another ‘comprehensive solution’. Overnight EURUSD traded 1.3342-1.3384 and USDJPY traded 77.02-77.32. It is Thanksgiving in the US today.
EUR
Reaction to the German auction continued to pour in overnight. ECB Governing Board member Constancio said the incident does not raise any questions about Germany‘s capacity to finance itself. ECB Governing Board member Nowotny said the auction results were ‘alarming’. Canada‘s Finance Minister Flaherty said the poor auction reinforces the need for a quick Eurozone solution. David Beers, head of Global Sovereign Ratings at S&P, said that upward pressure on German yields is quite telling, and might begin to change perceptions. However, the head of Germany‘s debt management agency said the results of the auction should not be over-interpreted.
Fitch warned that an intensification of the Eurozone crisis could put France‘s AAA rating at risk. Moody’s has already warned twice in recent weeks that the outlook on the rating might be lowered to negative from stable, but so far no ratings actions have been taken.
The Euro was also affected news of fresh talks over a new rescue deal for a lender in Belgium and France. The market is worried that France‘s rating could be affected as a result of the bailout, which would damage the overall credit quality of any Eurozone guarantees. These comments were dismissed by the French government, which said that the current deals are not being renegotiated. The French government again called upon the ECB to play a full role in the solidarity of the Eurozone.
Belgium‘s Finance Minister Reynders said he is convinced the ECB will have to play a more prominent role in the Eurozone crisis.
EU Commission President Barroso said that without stronger governance it will be difficult if not impossible to sustain the euro.
The European Banking Authority said the market for medium and long term bank funding is frozen, while noting that European banks need to refinance to the tune of EUR 700 bn in 2012.
The OECD’s chief economist said that Italian PM Monti’s reform programme is very wide and ambitious but absolutely necessary.
Ahead today German GDP figures and the IFO survey is out (UBSe. 105.2, cons. 105.2).
GBP
The UK public sector net balance for October was slightly lower than expected at GBP3.4 bn instead of GBP3.8 bn. UK Prime Minister David Cameron acknowledged that at this stage it is harder to cut the deficit, given the weak growth outlook, but also said ‘there is no letting up’, suggesting the UK will stick to its austerity plan and not shift towards a more growth-oriented strategy.
BoE MPC member Miles released a paper on the UK housing market, noting that the proportion of homeowners in the UK is likely to drop on a permanent basis as a result of the crisis.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BEARISH Support lies at 1.3242 ahead of 1.3146, the key low from Oct. 4. Resistance is at 1.3531.
USDJPY BEARISH Initial support lies at 76.84, a break of which would expose 76.58. Resistance is at 77.58.
GBPUSD BEARISH Focus is on 1.5483 and next support is at 1.5423. Resistance is at 1.5656.
USDCHF BULLISH Initial resistance is at 0.9237, a rise through which would expose 0.9316, the key high from Oct. 6. Support lies at 0.9079.
AUDUSD BEARISH Break of 0.9710 has opened the way towards 0.9622 and then 0.9488. Resistance is at 0.9856.
USDCAD BULLISH Clearance of 1.0477 has opened 1.0572 ahead of 1.0658, the Oct. 4 key high. Support lies at 1.0346.
EURCHF NEUTRAL Near-term resistance is at 1.2354 ahead of 1.2474, a key high from Oct. 19. Support lies at 1.2165 ahead of 1.2123.
EURGBP NEUTRAL Near-term directional triggers are at 0.8665 and 0.8519.
EURJPY BEARISH Decline through 103.23 has opened support at 102.43 and 101.62. Resistance is at 104.39.
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