FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
The past few trading sessions have provided investors enough headlines to anticipate the broad outcomes of this week’s Eurozone summit. There are plans on the table, which are not mutually exclusive, and the debate has shifted back to private sector participation in reducing Greece‘s liabilities. It is somewhat reassuring that no official calls for coercive restructuring have yet been made. Nevertheless, indications are that a 60% NPV reduction may now be on the cards, and achieving sufficient participation for such a plan on a voluntary basis could be a challenge.
Sentiment is still largely euro-negative, although there is little appetite to add to euro shorts here given the risk that a batch of euro-positive headlines could materialize only two days from now. Our FX Flow monitor published yesterday showed the euro was sold against a host of currencies last week but the marginal risk:reward to fresh positions to the downside is very weak. Meanwhile, growth concerns should continue to dominate proceedings, especially after yesterday’s weak PMI readings out of Europe. We don’t expect a recession in any of the world’s major economies, especially if momentum out of the US manages to carry the rest of the world through, and a generally robust earnings season so far has helped consolidate economic expectations.
Overnight, EURUSD traded in a range of 1.3831-1.3907 and USDJPY in a range of 76.18-76.46, having rebounded from record lows last Friday Ahead today, German and Eurozone activity indicators are out but investors will continue to monitor Eurozone headlines ahead of Wednesday’s summit. Flash China PMI rebounded to 51.1 overnight, a positive result for markets fearful of a hard landing in emerging markets.
EUR
The Financial Times reported that bondholders of Greek debt could be asked to take a 60% reduction in the “face value” of their bonds. It is not clear if the article was referring to haircuts on principal, or a combination of lower coupons and longer maturities. Either way, a 60% NPV reduction would be at the extreme upper end of market expectations. Elsewhere, Eurogroup Chairman Juncker said that bondholders of Greek debt may face losses of 50-60%, but he stressed that a coercive restructuring was ruled out.
A Greek government source told Reuters that the new private sector involvement proposal would cover all Greek sovereign bonds maturing out to 2035. We note that this goes far beyond the original plan, where only bonds maturing before 2020 were eligible to participate. If so, to us this suggests that Greece intends to buy itself additional breathing space by kicking future bond redemptions several decades into the future.
Bank of France Governor Noyer said it is now clear that Greece was not ready to enter the Eurozone when it joined in 2002. We note however that this is not a reason for Greece to leave now.
Noyer added that French banks would need no more than EUR 10 bn in fresh capital as part of the proposed recapitalization drive. French Finance Minister Baroin said that French banks are unlikely to need public funds, which if true we note would help France keep its AAA rating.
Norway‘s Finance Minister Johnsen said that Norway has not been approached to help leverage the EFSF. The denial came after suggestions that sovereign wealth funds might be encouraged to participate in a special purpose investment vehicle designed to hold Eurozone sovereign debt.
News reports indicate that the entire German parliament will be given the right to vote on leveraging the EFSF on Wednesday. German Chancellor Merkel has already indicated that Wednesday’s summits will not begin until 1600GMT.
European PMIs were much softer than expected, helping to build the case for a rate cut at next week’s ECB meeting. The composite PMI came in at 47.2 (cons. 48.8) and manufacturing was soft at 47.3 (cons. 48.0). German numbers were distressing, as the manufacturing sector showed a contraction to 48.9 (cons. 50), for the first time since July 2009.
SNB’s Hildebrand noted overnight that the SNB would defend the CHF limit with full determination, and the SNB would expect the franc to fall gradually on its own.”
GBP
Bank of England MPC member Weale said he would not be surprised if UK GDP contracted in Q4. BoE’s King and Bean will testify before the Treasury Committee today at 8:45 GMT.
The UK Parliament rejected last night a motion calling for referendum on European Union membership..
CAD
All 27 economists surveyed by Bloomberg expect the Bank of Canada to leave the policy rate unchanged at Tuesday’s meeting, and our economists agree. We would not be surprised if the bank completely abandons its implied tightening bias, shifting back to an explicitly neutral policy stance. This would be consistent with recent remarks by Governor Carney who indicated that rates have room to fall, but that he would not be “trigger happy” on the issue.
In addition to the decision, Canadian retail sales are due. The market is looking for a headline print of 0.3% and also a core print of 0.3%.
AUD
CPI for Q3 came in much softer than expected at only +0.4% q/q (cons. +0.7%) and +4.6% (cons. 4.9%). Although still elevated, the 30 pip drop in NZDUSD it provoked suggests the FX market now thinks the RBNZ may avoid hiking interest rates for a while longer.
RBA’s Battelino noted overnight that there was no urgency to lower the RBA’s benchmark rate. He noted that recent Chinese data was solid and demand for Australian commodities was holding up. However, as inflation outlook is less concerning, he repeated there was scope for policy support to the economy if needed..
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BULLISH Near-term resistance is at 1.4013, a break above which would expose 1.4100. Initial support lies at 1.3704.
USDJPY BEARISH Support lies at 75.82, a break below which would open 75.00, the psychological level. Resistance is at 76.92.
GBPUSD BULLISH Momentum is positive; initial resistance is at 1.6083, a break through this level would open 1.6203. Near-term support lies at 1.5754.
USDCHF BEARISH Pressure is on 0.8786, a move below which would expose 0.8647. Resistance is at 0.8952.
AUDUSD BULLISH Break of 1.0478 has opened the way for extension of gains towards 1.0666 and 1.0765. Initial support lies at 1.0203.
USDCAD BEARISH Focus is on 1.0000, a break through which would open 0.9885 next. Resistance is at 1.0188.
EURCHF NEUTRAL Near-term directional triggers are at 1.2474 and 1.2123.
EURGBP NEUTRAL Initial resistance is at 0.8733, a rise through which would open 0.8767. Support lies at 0.8632 ahead of 0.8583.
EURJPY BULLISH Resistance is at 106.54, a move above this level would open the way for gains towards 107.68. Key support lies at 104.78..
SCHEDULE
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