FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
Risk aversion rose further Monday in New York in response to Standard and Poor’s downgrade late Friday of the US’s long-term credit rating to AA+ from AAA. Concerns over global growth intensified as well. Not helping was Moody’s saying it could downgrade its US rating before 2013 if fiscal discipline turned lax or the economy deteriorated significantly. Neither reports that the ECB was engaged in heavy buying of Italian and Spanish debt nor a G7 statement pledging to take coordinated action where needed over the coming weeks – to ensure liquidity, and to support financial market functioning, stability, and economic growth – eased market concerns. The EuroStoxx50 closed down by 3.72%. The S&P 500 fell by 6.7%. EURUSD traded 1.4129-1.4402, USDJPY 77.05-78.18. Focus now shifts China’s July CPI and the FOMC meeting. We advocate continued caution on risk.
EUR
On Sunday, German and French leaders announced their commitment to the EFSF’s newfound flexibility and called on partners to speed-up fiscal austerity packages. Full ratification of the EFSF’s new powers is not expected until October at the earliest, which leaves the ECB as the only buyer for now. Slovakia’s Government Party Chief, meanwhile, pledged strong opposition to approval of the European bailout legislation in Parliament.
According to a German government spokesman, a change of the EFSF’s volume is not under discussion. Because of the stability fund’s objectives to ease market stress through secondary market intervention, its size is still a key driver of uncertainty. As such, the fund’s ability to ease the risk of contagion is still in question. As of now, we think the fund is inadequately capitalized to sustainably intervene in larger Eurozone debt markets.
Euro upside was limited despite the ECB’s pledge to buy bonds in the secondary market in order to ease the risk of contagion. Yet Italian and Spanish bonds rallied. In an environment of rising uncertainty on global growth prospects and, hence, rising risk aversion, we expect no change to such conditions. We expect the euro to be sold on rallies.
CHF
According to the Swiss government, the economy will slow considerably over the coming quarters, mainly due the firm franc. The government stressed that the currency is “massively overvalued” and that the situation is being monitored continuously. The government also said it would make sure that any currency gains resulting from lower costs of imported products will be passed on to consumers. Altogether, the government’s statement mirrors last week’s comments from SNB Chairman Hildebrand.
JPY
Finance Minister Noda said that confidence in the dollar has not waivered and that there has been no change in the market’s trust in US Treasury securities.
AUD / NZD
We went short AUDUSD at 1.0420 as a trade recommendation overnight targeting a fall to parity on the back of what we expect will amount to widespread risk aversion over the coming days. Our stop is placed at 1.0510
The S&P analyst for New Zealand stated that the US downgrade from AAA to AA+ last Friday could add to the risk of a New Zealand downgrade, citing decreased balance sheet flexibility and possible higher funding costs for Banks.
CAD
Friday’s Canadian employment report was mixed. The headline number was soft at +7.1k, however, the unemployment rate fell to 7.2% (cons & UBSe 7.4%) as fewer people participated in the labour force.
Our economists note that on the plus side full-time employment rose 25.5K, while part-time jobs fell 18.4K and private sector employment surged 94.5K while public sector jobs plunged 71.5K and the number of self-employed fell 15.9K. Most of the job cuts were in health care and education. The Canadian dollar remains solid based on fundamentals but risk aversion would prove problematic at this stage.
TECHNICAL OUTLOOK
EURUSD 1.4055 support.
EURUSD BEARISH The focus is on 1.4055, a break below which would expose 1.4014 ahead of 1.3951. Near-term resistance is at 1.4454.
USDJPY NEUTRAL Resistance is at 79.41, while a decline through 76.97 would resume the downtrend and open the way for 76.25, a key low.
GBPUSD BULLISH A break above 1.6478 is required to reinforce the bull trend and pave the way for gains towards 1.6547. Near-term support lies at 1.6224.
USDCHF BEARISH Support is at 0.7485, a move below which would expose 0.7439, Fibonacci level. Resistance is at 0.7802.
AUDUSD BEARISH Momentum is negative; a break of 1.0289 would signal scope for losses towards 1.0231 ahead of 1.0187. Resistance is at 1.0527.
USDCAD BULLISH The pair continues to extend gains, watch for a break above 0.9913, a key high to open the way towards 0.9974. Support lies at 0.9742.
EURCHF BEARISH The cross has support at 1.0500, a push below this level would open the way towards 1.0319. Resistance is at 1.1205.
EURGBP BEARISH There is scope for further weakness towards 0.8643 ahead of key low from May 26 at 0.8611. Near-term resistance is at 0.8806.
EURJPY BEARISH A move below 108.71, a key low would extend losses towards 106.61. Resistance is at 112.71.
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