FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
The dollar continued to weaken during the Asia session as yesterday’s risk-averse mood prompted by escalating tensions in Egypt subsided. The RBA kept both its policy rate and policy stance unchanged. EURUSD traded 1.3663-1.3730, USDJPY 81.76-82.15. Asian equities are moderately stronger at the time of writing after the S&P 500 finished 0.77% ahead. Crude continues to hold at elevated levels however, with Brent having broken above $100/bbl while WTI is steady just above $92/bbl at the time of writing. US consumer data improved but manufacturing reports were mixed. Personal spending increased more than expected and personal income rose as anticipated in December, with some upward revision for November. The Chicago PMI beat expectations while the Milwaukee PMI and the Dallas Fed’s current activity index declined. But ISM Manufacturing is due next, and should remain at a relatively solid level, consistent with a good pace of manufacturing activity.
EUR
The euro continues to strengthen on the back of January’s higher than expected Eurozone CPI estimate which came in at 2.4% y/y. This has led the market to expect further hawkish commentary from Thursday’s ECB press conference.
Bank of Portugal Board Member Cardoso warned that Greece’s rescue program is “not working”, given that the conditions imposed and the assumptions made were not realistic.
While more headlines are likely ahead of the Feb. 4 EU Summit, during which the current sovereign crisis is expected to be discussed, we do not expect a resolution to emerge, and believe March is a more likely timeframe for a comprehensive solution. We retain our fundamental bearish view on the euro though we acknowledge near-term headline risks.
JPY
Finance Minister Noda said he is closely watching the market impact of turmoil in Egypt. Economy Minister Yosano said he doubts the negative impact on stocks will last long.
Prime Minister Kan noted that the market has reacted calmly to last week’s S&P downgrade of Japan, and that long-term rates have not increased.
AUD
The RBA kept policy unchanged, and did not signal a change in stance as a result of the extensive flooding. The board noted the effect on economic activity would be ‘temporary” and expressed a willingness to “look through these short term events”. The board judged that the reconstruction effort is “unlikely to have a major impact on the medium-term outlook for inflation”. Our analysts note that the RBA is now as close to neutral as is possible for the first half of 2011, given the upbeat medium-term view.
CAD
Finance Minister Flaherty said the economy is performing well as November GDP increased above consensus. He said there are modest hopeful signs in the US economy, though a weak US recovery and European instability pose the biggest risks to Canada’s economy. Flaherty interestingly did not mention a strong Canadian dollar as a risk but he did caution that Canada will have a challenge with respect to employment numbers. Employment data is due this Friday and consensus is at 10.0k after an upward revised 30.4k previously.
TECHNICAL OUTLOOK
GBPUSD clears 1.6059.
EURUSD BULLISH Recovery has stalled at 1.3758, break above this would expose 1.3786/1.3825. Initial support lies at 1.3541.
USDJPY BEARISH Pullback eyes 81.61 with scope for 81.23 next. Resistance at 82.93.
GBPUSD BULLISH Break of 1.6059 has exposed 1.6183/1.6214 resistance zone. Support at 1.5752 holds.
USDCHF BEARISH Violation of 0.9390 has exposed 0.9327 next ahead of key support 0.9301. Initial resistance is at 0.9523.
AUDUSD BULLISH Focus is on resistance 1.0077 ahead of 1.0149 while support zone lies at 0.9833/04.
USDCAD BULLISH Upside potential; break of 1.0031 has exposed 1.0067 ahead of 1.0116. Near-term support at 0.9934
EURCHF BULLISH As long as support at 1.2774 holds, expect gains towards 1.3002 and 1.3069.
EURGBP BULLISH Push through 0.8672/91 resistance zone would open up the way towards 0.8777. Initial support lies at 0.8493.
EURJPY BULLISH Pullback seen as correction; break of 114.01 would confirm the resumption of bull trend and aim for 114.94 ahead of 115.68. Support lies at 111.28.
SCHEDULE
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