FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
The post-summit risk rally continued throughout theUSsession, and was stoked further by an article in the Financial Times claimingChinais “very likely” to offer financial assistance toEurope. EFSF CEO Regling is inBeijingmeeting senior Chinese leaders over potential contributions to the EFSF. Comments hit the wires overnight, Regling said ‘we all knowChinahas a particular need to invest surpluses’ and the EFSF can be a good product for its investments needs. The Vice Finance minister inChina, Zhu confirmed that talks are under way.
SolidUS economic data provided further grounds for optimism. The euro topped out at 1.4247 before settling back a little as the session drew to a close and remained range bound inAsia. EURUSD traded in a range of 1.4160-1.4247 and USDJPY at 75.81-76.00.
Global equities performed very well yesterday- the S&P 500 closed up 3.4%, and the CAC 40 and the DAX finished over 6% and over 5% ahead respectively. Eurozone bond markets seemed underwhelmed however – Italian 10y yields closed only 3bp lower, although rising bund yields led to a welcome 20bp of spread compression.US Q3 GDP was inline with consensus at a 2.5% annualized rate, while initial jobless claims were only slightly higher than expected.
While there are many doubts given the lack of detail in the summit agreement, we think that risk currencies, including the euro, will likely continue to perform in the very short term. Given that USDJPY has failed to react positively in the post-summit environment, we consider the risk of Japanese FX intervention to be elevated, even though there was no action overnight.
EUR
EFSF CEO Regling is inBeijingmeeting senior Chinese leaders over potential contributions to the EFSF. Comments hit the wires overnight, Regling said ‘we all knowChinahas a particular need to invest surpluses’ and the EFSF can be a good product for its investments needs. The Vice Finance minister inChina, Zhu confirmed that talks are under way.
The ECB’s Nowotny warned that banks could cut credit in order to recapitalize, as they choose to reach the target s through asset sales rather than tapping the market for fresh capital.
French President Sarkozy loweredFrance’s 2012 growth forecast to 1% from 1.75%, and announced that a package of new austerity measures worth EUR 6-8 bn would be unveiled shortly. Defending the decisions taken at the EU Summit he said he had no choice given that “if the euro had exploded on Wednesday night, all ofEurope would have exploded”.
Bundesbank President Weidmann said it is not yet possible to judge the summit outcome, given that some details are unclear. Weidmann said thatGreece’s haircut cannot be allowed set a precedent for other countries in the Eurozone. We note that the rationale cited for previous ratings downgrades ofPortugal andIreland included the possibility that both countries might one day follow the private sector participation template laid down byGreece’s experience.
S&P cut the long-term sovereign rating ofCyprus one-notch to BBB, outlook negative. The euro did not react.
EFSF CEO Regling is due to spend Friday inChina, and the Financial Times reports that his intention is to meet “with senior Chinese leaders on whether and how muchChina might contribute”.
JPY
Given USDJPY has failed to react positively in the post-summit environment, we consider the risk of Japanese FX intervention to be elevated from Friday onward. Finance Minister Azumi continued his rhetoric but there was no action overnight.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BULLISH A clear break above 1.4202, the former trendline support that now marks resistance, would expose 1.4288 and then 1.4386. Support is at 1.3970.
USDJPY BEARISH The pair continues to move lower; our focus is on 75.00, the psychological level. Resistance is at 76.49.
GBPUSD BULLISH Recovery through 1.6104 has exposed 1.6203. Near-term support lies at 1.5955 ahead of 1.5891.
USDCHF BEARISH The break below 0.8647 has exposed support 0.8540 and 0.8458. Resistance is at 0.8825.
AUDUSD BULLISH The focus is on 1.0765; a break here would open the way for extension of gains towards 1.1007. Support lies at 1.0486 ahead of 1.0382.
USDCAD BEARISH The pair is testing a former trendline resistance drawn off the May 2010 high, now support, intersecting at 0.9894 today. A break here would open 0.9766. Resistance is at 1.0051.
EURCHF NEUTRAL Near-term directional triggers are at 1.2474 and 1.2123.
EURGBP BULLISH A move above 0.8842 would open 0.8886 next. Support lies at 0.8769.
EURJPY BULLISH Clearance of 107.68 has exposed 109.30. Support lies at 105.68.
SCHEDULE
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