FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
With China, Hong Kong, Korea and Taiwan on holiday, and the G10 economic calendar light, FX markets were range bound during the Asia session. EURUSD traded 1.4608-1.4658, USDJPY 80.17-80.40. The news vacuum allowed the dollar to stabilise after Friday’s payrolls report came in much weaker than expected. Friday’s selling intensified after the EU/IMF/ECB boosted risk appetite by confirming their intention to release the next quarterly tranche of aid to Greece. The S&P 500 closed down -1.0% on the day. US 10y Treasury yields again broke below 3.0% putting USDJPY and USDCHF in particular under renewed downward pressure. Non-farm payrolls came in well short of expectations, adding only +54k in May (cons. +165k). The unemployment rate also unexpectedly rose to 9.1% (cons. 8.9%). These are just the latest in a series of disappointing economic data releases from the US – last week’s releases alone showed that the ISM manufacturing survey fell to a 21-month low in May and US house prices made a new post-crisis low in March. Weaker economic data means Tuesday’s speech by Fed Chairman Bernanke on ‘The Economic Outlook’ is likely to be a key focus for markets this week.
EUR
The EU/IMF/ECB announced on Friday that the latest quarterly review of the Greek aid program has ended, and that the next tranche of aid will likely become available in early July. The announcement significantly reduces the risk of a Greek default over the next month or two, and should be considered a short-term euro-positive.
However, the release of the next tranche of aid is not a foregone conclusion. No details have yet been announced on how to fund Greece after August 2012. Significantly, Friday’s statement appeared to confirm speculation that unless this matter is resolved, the next tranche may not be forthcoming. Final approval is also still needed from both the IMF’s Executive Board and the Eurogroup of 17 Eurozone finance ministers.
Looking beyond the next tranche of aid, Eurogroup Chairman Juncker sounded optimistic that the Eurogroup would agree to provide “additional financing” to Greece over the long term but that this would come with “strict conditionality” attached, including “private sector involvement on a voluntary basis”. A weekend Wall Street Journal article reported that “tentative” agreement has already been reached on a new financing plan for Greece, and that bondholders will be invited to roll over up to ?30 bn of debt as part of the plan. The next scheduled meeting of the Eurogroup is due to take place on June 20, and will likely be a significant risk event for the euro given the uncertainty over how ratings agencies will interpret any attempt to involve private sector bondholders.
A more near-term risk to the euro is whether the Greek government can obtain parliamentary approval for the new package of austerity and privatisation measures agreed last week with the troika. Media reports suggest the measures could be put to a vote later this week, or early next week.
A general election was held in Portugal on Sunday. Caretaker Prime Minister Socrates accepted defeat and resigned as leader of his parliamentary party.
JPY
Finance Minister Noda said there is no specific timescale for Prime Minister Kan to step down, and that there are many things left for the current government to address before the prime minister resigns.
Moody’s said that Japan’s revolving-door leadership is a negative for the credit rating.
TECHNICAL OUTLOOK
EURUSD BULLISH Momentum is positive; the pair targets 1.4711, break above this would open up 1.4900. Initial support lies at 1.4451.
USDJPY BEARISH Pressure on initial support at 80.00, key level; move below this would expose 79.57. Resistance is at 81.01.
GBPUSD BULLISH Break of 1.6418 has exposed resistance at 1.6496 ahead of 1.6547. Near-term support lies at 1.6286.
USDCHF BEARISH Decline through 0.8300 has exposed support at 0.8228, intraday low ahead of 0.8200. Resistance lies at 0.8453.
AUDUSD BULLISH Move above 1.0758 has paved the way for gains towards 1.0794 and 1.0877. Near-term support is at 1.0587.
USDCAD BULLISH Upside potential; focus on initial resistance at 0.9852 ahead of 0.9910. Initial support is at 0.9745.
EURCHF BEARISH Resistance at 1.2318 holds, focus on support at 1.2108, break of this would open 1.2054.
EURGBP BULLISH Watch resistance at 0.8941, break above this would pave the way towards 0.9000. Support is at 0.8846.
EURJPY BULLISH Break above 117.80 is required to confirm the bull trend and expose 118.38. Initial support lies at 115.93.
SCHEDULE
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