FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
Investors still appear willing to engage in some tactical risk-on during the Asia session as several points of clarification gave investors reason to be less risk-averse. Firstly, it is now clear that France is still a AAA country and second, Greece now has a technocratic government, with strong hints that Italy could follow. Former ECB vice-President Lucas Papademos said Greece’s continued membership of the Eurozone would facilitate Greece’s adjustment program, although he acknowledged it would also cause some difficulties. German Chancellor Merkel seemed to downplay press speculation that planning is underway to set up a two-tier Eurozone. She said Germany has only one goal and that is to stabilise the Eurozone in its current form. However, several reports have circulated throughout the week suggesting that the CDU meetings in Germany up ahead may prove less accommodative to struggling Eurozone countries and we expect strong headline risk to remain. Otherwise, the focus is still on growth and this is where the biggest structural challenges may lie, especially in southern Europe. The Italian upper chamber will vote today on debt-reduction measures and the lower-house is expected to approve the measures by the end of the week, paving the way for a new government to execute the plans and hopefully reassure markets. Ahead today, several ECB and Fed speeches are due, it is a holiday in the US.
EUR
Confusion reigned over France’s AAA status for about an hour. What looked like an official communication was circulated, and it seemed to announce a sovereign ratings action had just been taken against the French sovereign. The spread of 10y French over German sovereign bonds hit a new 20 year high of 167 bp in the confusion which followed, and the euro also saw some temporary slippage. S&P later affirmed France’s AAA, outlook stable, and said it is investigating the cause of the error.
ECB Governing Council member Knot stuck to the official line that the ECB has already done enough and that it is now up to governments to remove doubts about their sovereign bonds. ECB Executive Board member Stark said the ECB will not allow any monetization of public debt.
Bini-Smaghi is to resign from the ECB’s Executive Board, and is due to take up a post at Harvard’s Center for International Affairs on Jan. 1. His term of office was not due to end until May 2013. His early departure should facilitate a rebalancing of the Executive Board, which included two Italians but no French policymaker since Trichet’s departure in October.
Former ECB Vice-President Papademos was formally chosen to be acting prime minister of an interim Greek government. Papademos said Greece’s continued membership of the Eurozone would facilitate Greece’s adjustment program, although he acknowledged it would also cause some difficulties.
Portugal’s prime minister said the ECB must go beyond narrow mission interpretation and act as a lender of last resort. He said this would ‘end the crisis for Portugal’. Such comments would be highly unwelcome to the ECB whose key officials continue to fiercely resist such a step.
German Chancellor Merkel seemed to downplay press speculation that planning is underway to set up a two-tier Eurozone. She said Germany has only one goal and that is to stabilise the Eurozone in its current form.
An Italian 12m bill auction was reasonably well received by the market. The average yield was 6.087% vs 3.570% in the previous auction, which is high but reasonable given where the paper was trading yesterday. The bid:cover was 1.989 times but Italian b:c ratios tend to be more stable than with other countries, due to the nature of the Italian dealers system.
GBP
The BoE made no adjustment to its policy settings. It left the policy rate and the asset purchase target unchanged. The target had been raised to GBP 275 bn at the October policy meeting and, by Friday Nov 3, the stock of purchases to date had only reached GBP 218.7bn. The Bank of England estimates that it will take another 3 months of gilt buying to reach their target.
NOK
Governor Olsen said Norges Bank was prepared to be the lender of last resort to the Norwegian banking system if lending dries up due to the Eurozone debt crisis. However he stressed that the funding situation in Norway is still much better than it was in 2008.
TECHNICAL OUTLOOK
USDCAD 1.0273 resistance.
EURUSD BEARISH Support lies at 1.3484 ahead of 1.3406. Resistance is at 1.3871.
USDJPY NEUTRAL Resistance is at 77.89 ahead of 78.10. Support lies at 77.44 ahead of 76.95.
GBPUSD NEUTRAL Clearance of 1.5877 has opened 1.5825 ahead of 1.5754. Near-term resistance is at 1.6031 ahead of 1.6131.
USDCHF BULLISH Near-term resistance is at 0.9151, a break above which would open the way towards the key high of 0.9316. Support lies at 0.8923.
AUDUSD BEARISH Support comes in at parity ahead of 0.9909. Resistance is at 1.0398.
USDCAD BULLISH Focus is on 1.0273, a move above which would expose 1.0365. Support lies at 1.0055.
EURCHF BULLISH Key resistance is at 1.2474, a clearance of this level would open 1.2646. Support lies at 1.2281.
EURGBP BEARISH Support lies at 0.8486, a break below which would open 0.8456. Resistance is at 0.8612.
EURJPY NEUTRAL Support lies at 104.73; a break below which would signal scope for weakness towards 104.02. Initial resistance is at 107.65 ahead of 108.25.
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