FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
After the market close on Monday, Standard & Poor’s took the surprise decision to put 15 Eurozone countries on credit-watch negative. Initially the fear was only the AAA countries would be put on watch but given the ‘systemic risks’ of the current crisis, the ratings agency chose to act on the entire currency union. The timing is interesting and S&P has acknowledged this, and pledged to come to a conclusion as soon as possible after this week’s EU summit. France seems particularly at risk, as it was put into the category of countries that could see more than a 1-notch downgrade. Although the news does not fundamentally alter the markets’ current views on the Eurozone’s standings, explicit downgrades will call into question the efficacy of a host of European mechanisms for crisis resolution and adds a degree of urgency to upcoming discussions. The news has cut short the risk-rally on Monday where investors were hopeful for a comprehensive solution to be presented by France and Germany ahead of the Eurozone summit.
Ahead on Tuesday, US Treasury Secretary Tim Geithner will be meeting Eurozone leaders to give a final push to current talks, and to stress that most economies globally see the Eurozone crisis as the biggest risk to growth. The RBA stressed as much in their decision to cut rates by 25bp overnight. The Bank of Canada will also decide rates today.
In other releases on Monday, the non-manufacturing ISM came in sharply lower than expectations at 52.0 and factory orders showed a larger-than-expected contraction of 0.4% (cons. -0.3%). Swiss CPI will also be a closely-watched release as deflationary signs could encourage further expectations of a higher EURCHF floor. Asian equity markets are soft and European equities are expected to open lower, though not sharply. EURUSD traded in a range of 1.3362-1.3404 and USDJPY 77.60-77.85.
EUR
Standard & Poor’s (S&P) has put the long-term ratings of 15 ratings on Credit Watch Negative. The news was leaked to various news sources earlier during the US sessions, though markets initially anticipated only the ratings of the core AAA countries to be at risk. The move may help the Eurozone redouble efforts to achieve a solution, as any downgrades to either France or Germany would put the EFSF’s ratings at risk.
Greece is not affected by the S&P decision, and Cyprus only saw its short-term debt put on Credit Watch Negative. S&P has said that the review would be concluded as soon as possible after the EU summit scheduled for December 8th and 9th. France is particularly at risk here – S&P said that one-notch downgrades could be limited to Austria, Belgium, Finland, Germany, Holland and Luxembourg, while up to two notches for others.
German Chancellor Merkel and French President Sarkozy agreed on a ‘master plan’ to strengthen the Eurozone. Their proposals, according to press reports, included ‘penalties for governments that fail to keep their deficits under control’ and the early launch of the ESM. French President Sarkozy said the treaty changes would need to be agreed in March and ratified after June.
The leaders have also responded to S&P’s decision, noting that today’s proposals boost stability, competitiveness and growth, and said both countries and European partners are ‘united in their determination’ to take all measures to stabilize the Eurozone.
French Finance Minister Baroin ruled out new austerity measures in the wake of the ratings decision. He said that France would not need to inject new capital into the banking system, and the decision by S&P did not take into account the decisions made on Monday. He said the summit this week would be ‘decisive’.
Italy‘s cabinet announced sweeping austerity measures which would result in new savings of up to EUR30bn. Bond markets cheered the news and the 10-year yield fell to below 6%. The measures would still need to pass the Italian parliament but at present the Monti government appears to enjoy enough support.
Italian PM Monti warned that ‘if Italy were not capable of reversing the negative spiral of growth in debt and restoring confidence’, the survival of the Euro would be at risk.
Although the need for treaty changes have been accepted, Reuters reports that several non-Eurozone states have asked for these plans to be dropped. Stronger fiscal union can be achieved through existing legislation, though this does not appear to be the path Germany and France are pursuing heading into the summit.
Ireland is expected to announce further austerity measures today as the 2012 budget continues to be released.
Eurozone GDP figures are due on Tuesday, we are looking for 0.2%q/q growth, 1.4% annualized.
GBP
Services PMI for November was released at 52.1 (cons. 50.5, prev. 51.3). Although the headline was better than expected, sub-components such as employment and new orders were weaker.
The Bank of England will decide on policy this week. We expect no change in the asset purchase programme, though developments in the Eurozone will have a greater bearing on the UK‘s domestic conditions, from macro to financial stability.
CHF
CPI figures will be due in Switzerland on Tuesday. We expect a 0.1% m/m print but this is a volatile set and a negative numbers would support the notion that deflation risks are rising. We expect a policy floor lift to 1.25 at the December policy meeting.
CAD
The Bank of Canada will decide on policy on Tuesday. Our economists believe the Bank will leave the overnight rate target unchanged at 1.00%. Despite Q3 domestic economic growth which exceeded the Bank’s projections (from October Monetary Policy Report), concern has increased regarding the economic outlook due to external factors, primarily potential fallout from the European sovereign debt crisis.
AUD
The RBA cut rates by 25bp to 4.25% overnight, in line with market expectations. We were looking for an unchanged result. The RBA noted that global growth is moderating, especially Chinese growth, and there was scope for a ‘modest cut’ in the cash rate. Lower commodity prices had taken the pressure off inflation, which has also given the RBA some more room for maneuver. We now expect rates to bottom at 4.0% (vs. 4.25% prior).
In other data releases, the current account deficit narrowed to 1.5% of GDP, broadly in line with expectations. However, weaker demand and exports look set to dampen growth. Our economists note that over the past two days 1.7 percentage points of GDP growth have been ripped from the quarter from inventories and public demand – for which we get no monthly partial data through the quarter.
The upshot is that we have cut our Q3 GDP growth forecast (due tomorrow) to 0.7% from 1.2%, a broadly ‘trend’ pace of growth rather than ‘above-trend’, as previously expected. This would see the y/y pace lift to 1.8% from 1.4%.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BEARISH Focus is on 1.3259, a break here would open the key low of 1.3212. Resistance is at 1.3487.
USDJPY BULLISH Resistance is at 78.29, a move above which would expose 78.83. Support lies at 77.49.
GBPUSD BEARISH Support lies at 1.5526 ahead of 1.5459. Resistance is at 1.5726.
USDCHF BULLISH Resistance is at 0.9252, a clearance of which would expose 0.9331, the key high from Nov. 25. Support lies at 0.9112.
AUDUSD BULLISH Break above 1.0272 would expose 1.0328. Support lies at 1.0151 ahead of 1.0074.
USDCAD NEUTRAL Resistance is at 1.0223 ahead of 1.0364 whereas support lies at 1.0121 ahead of 1.0079.
EURCHF BULLISH Key resistance is at 1.2474; a break above which would be a key bullish event and open 1.2646. Support lies at 1.2226.
EURGBP NEUTRAL The near-term directional triggers are at 0.8620 and 0.8519.
EURJPY NEUTRAL Support lies at 103.34 ahead of 102.49 while resistance is at 105.00 and then 105.70.
SCHEDULE
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