FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
The dollar gave back some of yesterday’s gains against the euro, but losses were most pronounced against the New Zealand dollar. Although the RBNZ kept policy unchanged, the policy statement contained a reference to future rate hikes, which propelled NZDUSD about 80 pips higher. EURUSD traded 1.4564-1.4632, USDJPY 79.79-80.30. US Yields remain soft and equities ended the day lower across the board. The Beige Book, which covered activity through May 27, according to our economists offered a very marginally softer tone than the prior report. However, “labour market conditions continued to improve gradually,” another sign that at present growth moderation rather than outright economic contraction is the main theme for the US. Today, the ECB and BoE are due to hold policy meetings, and although benchmark rates are expected to remain unchanged for both, the ECB is expected to signal a hike in July, which has largely been priced in. We believe current EUR levels are hard to justify given the economic and implementation risk in crisis resolution.
EUR
Further comments surrounding Greece put downward pressure on the euro earlier during the US session. Details emerged from ‘sources’ about the proposed new Greek rescue package. The EU/IMF is expected to lend Greece around EUR40 bn and calls for up to EUR30 bn from privatisations, and about EUR30 bn from private bondholders. The EUR30 bn private sector involvement could be bad news for the market as it could provoke ratings downgrades.
The European Commission/IMF/ECB troika finally released details of their assessment on Greece and the country’s current predicament is clearly troubling. In no uncertain terms, the current adjustment programme was deemed insufficiently funded, and Greece would not be able to return to markets to finance itself next year.
The report also warned that current uncertainty was aggravating tension in international markets, and warned of a lack of consensus within Greece’s political establishment. Although the lack of domestic accord on further austerity is not though to be a deal-breaker, it is desired by the troika as implementation risk would remain strong without broad cross-party consensus.
German industrial production in April was softer at +9.6% y/y vs +10.0% consensus, a further sign of a slowdown Our European economists note that IP is still well above its long-term average 2.4% growth, and expect it to stay above it for at least the rest of the year. Eurozone Q1 GDP was unrevised at 0.8% q/q and 2.5% y/y, in line with expectations
The ECB decision is the focus of the day and the market has broadly priced in a hike for July, which would be signalled with “vigilance” as usual. Our analysts note that the market continues to underprice the risk of aggressive tightening by the ECB, but if Trichet doesn’t signal a continuation in the cycle the EUR risks reacting adversely in the same manner as a month ago, while sovereign concerns are arguably more severe.
GBP
The BoE decides on policy today but the market is anticipating no change in policy. Nor should Ben Broadbent’s presence on the MPC change the vote balance too much. June data on growth and price pressures will be crucial as the MPC weighs the necessity of a near-term move to pre-empt inflation expectations.
Sterling came under pressure after an interview with a Moody’s analyst hit the wires. The analyst was quoted as saying that weak growth and fiscal slippage could see UK lose its AAA status. However, these are not official comments from the ratings agency and indeed it is not a warning from Moody’s that it’s thinking about a downgrade. The comments do not tell us anything new and are referring to the issue of policy implementation. We remain cautious on sterling however and look to sell at these levels.
AUD
In Australia, labour market data disappointed again, and the AUD took the news badly dropping approximately 50 pips.
NZD
The RBNZ kept rates on hold at 2.50%, as expected. The overall assessment was cautiously optimistic as the central bank noted recovery in the economy is continuing, but rates should be “on hold for now”. Although the statement noted that hikes in the next two years are needed to counter inflation, there isn’t a pressing case as stimulus is needed. Nevertheless the NZD got a strong boost from the policy statement.
RBNZ Governor Bollard, speaking later before a parliamentary committee declared that the market’s interpretation of the policy statement was ‘over-hawkish’, and added that he can be patient on rates. He said the kiwi strength overnight was an over-reaction and that the NZD should be significantly lower that where it is.
TECHNICAL OUTLOOK
EURUSD BULLISH The pair is stalled ahead of 1.4711; a break here would open 1.4900. Initial support lies at 1.4500.
USDJPY BEARISH Focus on the key support at 79.57 where a break would open 78.83. Resistance is at 80.40.
GBPUSD BULLISH Recovery through 1.6473 would expose 1.6496 and 1.6547 next. Near-term support lies at 1.6286.
USDCHF BEARISH Downside pressure is held above 0.8300, break below this would leave little support till 0.8165. Resistance lies at 0.8453.
AUDUSD NEUTRAL Near-term directional parameters defined at 1.0775 and 1.0441.
USDCAD BULLISH Violation of 0.9852 would expose 0.9910, while support comes in at 0.9697.
EURCHF BEARISH Focus is on the downside with initial support at 1.2161 ahead of the key low at 1.2054. Near-term resistance is at 1.2318.
EURGBP BULLISH Momentum is positive; a break above 0.8976 would expose 0.9000. Support lies at 0.8884.
EURJPY BULLISH Break of 117.90 would open 118.38/52 resistance zone. Near-term support lies at 115.77.
SCHEDULE
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