FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
The dollar recovered some ground against the Swiss franc and the yen on a combination of healthy US data, better corporate earnings and potential progress on the debt ceiling. President Obama warmed to the “Gang of Six” deficit reduction plan and senior lawmakers in the Senate intimated that the measure could pass with relative ease. However, the House is a much tougher proposition and it remains to be seen whether comprehensive legislation can be passed and signed into law before the Aug. 2 deadline. In another sign of the potential consequences of failure to achieve a deal, Moody’s warned that five states could also lose their AAA rating due to their reliance on federal revenue. In the Eurozone, Reuters reported that French President Sarkozy would meet with German Chancellor Merkel ahead of the Thursday EU Summit. On the data front, US housing starts and building permits surprised to the upside. EURUSD traded 1.4109-1.4182 and USDJPY 78.89-79.32.
EUR
A Eurozone policy options paper suggested that European officials are looking at three broad options for the private sector role in Greek debt. The first is bond buybacks and credit enhancements (which the ratings agencies would likely see as a selective default). The second is based on the French plan proposed last month and the third plan involves a financial sector tax, lower rates and longer maturities on Greek EFSF loans. We haven’t heard a great deal about the third option, but it is believed that this is the least likely of the three so far.
Greek PM Papandreou said the EU summit can be “make or break” for the region. He said that there are systemic issues in the EUR which must be dealt with, and that Greece has done and will do all it must do. He again called for joint Eurobonds, but several German lawmakers were also on the wires expressing firm opposition to any such move.
German Chancellor Merkel said Europe’s fiscal crisis could not be solved in one go, and cautioned against expectations of a major deal at this week’s summit, saying ‘there won’t be one spectacular step’. There remains a lot of confusion regarding Thursday’s agenda, with Irish PM Enda Kenny noting it had not been decided.
French President Sarkozy’s staff confirmed that both he and Merkel are due to meet today to prepare for Thursday’s summit.
JPY
Finance Minister Noda again expressed his dissatisfaction with where the yen is trading. He said current levels do not reflect Japan’s economic fundamentals, and yen strength is being driven by worries about European and US sovereign debt. He warned that the government will take decisive steps on FX if necessary, and that there has been no change in the government’s policy of intervening when FX rates move excessively or in a disorderly fashion. These comments qualify as a rhetorical escalation in our view, although there was no FX reaction.
GBP
The BoE minutes to the July policy meeting are due on Wednesday. We continue to expect a 7-2 vote on a rate hike, but an 8-1 vote on new asset purchases. A new vote in favour of the latter, or further shift in the direction of the MPC towards more easing will hurt sterling.
CAD
The Bank of Canada kept policy rates on hold. The only notable change in language was its signalling that stimulus is “to be withdrawn” rather than “eventually withdrawn”, which all but confirms the bank is in full normalisation mode. This is probably a nod to the elevated inflation pressures seen of late, but the BoC acknowledges that significant risks lie ahead. The BoC warned that persistent CAD strength is harming exports. The BoC’s MPR is due on Wednesday.
TECHNICAL OUTLOOK
EURCHF 1.1752 resistance.
EURUSD BEARISH Focus on initial support at 1.4069, a break which would expose 1.4014 ahead of 1.3951. Resistance holds at 1.4295.
USDJPY BEARISH Decline through 78.82 would extend weakness towards 78.44 ahead of 76.25, a key low. Resistance is at 79.61.
GBPUSD NEUTRAL Key upside trigger is at 1.6194, a break above which would develop bullish conditions. Initial support lies at 1.6006.
USDCHF BEARISH As long as resistance at 0.8398 holds, bearish trend remains intact. Look for a break below 0.8152 to expose 0.8033.
AUDUSD BULLISH Break above 1.0802 is required to confirm the bull trend and target 1.0889 next. Support lies at 1.0598.
USDCAD BEARISH Sharp sell-off through 0.9513 has paved the way for losses towards 0.9446 ahead of 0.9400. Resistance is at 0.9602.
EURCHF BEARISH Initial support is at 1.1515, a move below which would reinforce the bearish conditions and expose 1.1374. Resistance is at 1.1752.
EURGBP BEARISH Support lies at 0.8705, a break of which would expose 0.8657. Resistance is at 0.8847.
EURJPY BEARISH Violation of 111.18 would signal further downside move towards 110.66 ahead of 109.58. Resistance is at 112.95.
SCHEDULE
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