FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
Risk currencies got off to a good start overnight with most of Asia returning from the holiday season. A strong non-manufacturing China PMI helped to keep risk sentiment supported, although the rise in FX was already underway. This latest data print complements China‘s manufacturing PMI released over the weekend which was also surprisingly firm. AUD, the chief beneficiary, briefly touched 1.0300 having spent the past three weeks trading below, and NZD is firmly back above 0.78. EURUSD also reached higher ground, trading in a range of 1.2922-1.2989.
In contrast with the good news from China, Eurozone growth remains sluggish. Yesterday’s pan-Eurozone December PMI was confirmed at only 46.9, and with many member states either embarking on or accelerating their austerity programs, all the signs are that 2012 will be difficult year. Italian and Spanish sovereign debt auctions are not due until next week, allowing investor attention on US economic data in the interim. ISM manufacturing is due today, and in contrast to Europe further output expansion is expected in the US (cons. 53.4, prev. 52.7).
The political scene is particularly active this year globally, and the Iowa caucuses are also due to be held today, kicking off the US‘ electoral race in earnest. The economy is expected to dominate popular concern, and the FOMC will also chime in with its own view as the minutes of the last meeting are released. We went long EURCHF overnight, taking advantage of recent weakness in the cross – we look for a move up to 1.25 over the coming weeks.
EUR
German manufacturing PMI came in at 48.4 for December. This was stronger than the previous month’s 48.1 print but still showed contraction in output. However, Tuesday’s employment figures are expected to provide for more pleasant reading.
Germany and France have consolidated their presence within the ECB as Joerg Asmussen and Benoit Coeure replaced Juergen Stark and Lorenzo Bini-Smaghi on the ECB’s Executive Board. These were expected appointments though investors will now watch carefully to see if the central bank will be more willing to compromise on acting as a lender of last resort to governments.
German Chancellor Merkel and French President Sarkozy will meet in Berlin next Monday to consult on further steps to resolve the Eurozone debt crisis. Key topics of discussion may include the agenda for the first EU leaders’ summit of 2012, where growth is expected to feature prominently on the agenda, as well as implementation of the December summit’s agreements.
The ECB settled EUR462 mln in bond purchases last week, a significant step up from EUR19 mln the week prior but still well short of last year’s highs.
CHF
Overnight, we went long EURCHF at 1.2155 targeting a move up to 1.2500, with a stop at 1.1990. On Sept. 6, 2011, the SNB imposed a floor under EURCHF at 1.20 and pledged to buy ‘unlimited quantities’ of foreign currency to enforce it. Four months of success has boosted the credibility of the floor, and we doubt the 1.20 level will be allowed to give way.
On Friday, December CPI is due, and a weak print is likely to reinforce market opinion that the SNB could eventually raise the currency floor, both to ward off deflationary pressures and to boost Swiss economic activity. Our Switzerland economist is below consensus and expects CPI to drop to -0.7% y/y (cons. -0.6%). Thin trading conditions over the holiday period have allowed the cross to settle back down to levels last seen almost two months ago, presenting an attractive opportunity to get long for a gradual push higher over the weeks ahead.
Swiss PMI is due on Tuesday, we expect a better reading of 46.7 (cons. 45.4) but it is clear the Swiss economy is suffering and pressure on the SNB to act will remain strong. PMI figures are also due in the UK and Norway.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
USDCAD 1.0126 support
EURUSD BEARISH The pair is undergoing correction; decline through the key low of 1.2858 would open the way for losses towards 1.2600. Resistance is at 1.3119.
USDJPY BEARISH Initial support lies at 76.33 ahead of the key low of 75.35. Resistance is at 77.17.
GBPUSD BEARISH Support lies at 1.5469, a break below which would open 1.5402 next. Resistance is at 1.5572 ahead of 1.5728.
USDCHF BULLISH Resistance is at 0.9470, a clearance of which would expose the key high of 0.9548. Support lies at 0.9307.
AUDUSD BULLISH Momentum is positive; our focus is now on 1.0380, a move above which would open 1.0447. Support is at 1.0196.
USDCAD BEARISH Pressure is on 1.0126, a break below this would open 1.0052. Resistance is at 1.0220.
EURCHF BEARISH Initial support lies at 1.2126 ahead of key low at 1.2012. Resistance is at 1.2254.
EURGBP BEARISH Focus is on 0.8303, a push below which would expose 0.8285, January 2010 low. Resistance is at 0.8426.
EURJPY BEARISH Initial support lies at 98.66 ahead of 97.89. Resistance is at 100.00.
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