FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
It was a relatively quiet Asia session with Australia on holiday. This allowed the euro to stabilise after Friday’s heavy fall. But the euro is clearly not out of the woods yet. Even if fresh cash for Greece is forthcoming concern is running high over how ratings agencies will respond to any private sector involvement. Whether the ECB may be forced to exclude Greek bonds as eligible collateral is another unknown. Finally there is continued anxiety over whether a credit event might be triggered accidentally. EURUSD traded 1.4300-1.4358 and USDJPY 80.19-80.69.
The NZD fell sharply after Christchurch was struck by another large aftershock which Prime Minister Key announced would ‘almost certainly’ qualify as a new insurance event. The dollar strengthened moderately on Friday after the New York Fed published its latest monthly “tentative” plan for outright Treasury purchases, confirming that QE2 purchases are due to end on June 30. We note however that this schedule is subject to change before then should the FOMC issue new instructions – an outcome that our US economists do not anticipate. New York Fed President Dudley stuck to the view that the US economic recovery will likely pick up speed in the second half of the year, but that it would appear to be “painfully slow” for the unemployed. Referring to fiscal matters he said that “aggressive” near-term spending cuts or tax increases could also lead to slower growth, but that “a credible plan for long-term fiscal consolidation is sorely needed”.
EUR
Although key elements of a new rescue package for Greece seemed to be slowly falling into place over the weekend, much uncertainty remains over the reaction of the ratings agencies to any private sector involvement. There is doubt too over whether the Greek parliament will approve another package of austerity measures – and parliamentary approval is a prerequisite for additional financial assistance. We expect the euro to remain under downside pressure while all this uncertainty persists.
Signs are emerging that some private sector holders of Greek sovereign bonds might be willing to participate in a new rescue program for Greece. Saturday’s Financial Times reported that French banks have agreed in principle to rollover any Greek sovereign bonds as those bonds mature, on condition that other bondholders do the same. Meanwhile, Managing Director Kemmer of Germany’s bank association (BdB) described the desire for private sector involvement in a further Greek rescue as “not unreasonable”, adding that “our members would also participate”.
ECB Executive Board member Stark said it is “not very likely” that a “totally voluntary” scheme would see a “substantial involvement of the private sector”. Stark added that it is pretty clear that a credit event or a “selective default” rating would prevent the ECB from accepting Greek bonds as collateral. In our view, any decision by the ECB to exclude Greek bonds as collateral would be highly euro-negative.
Echoing comments made by ECB President Trichet on Thursday, Bundesbank President Weidmann said the ECB would not rollover its stock of Greek debt purchased under the Securities Markets Program, as to do so would transform the program from a temporary measure into a “lasting institution”.
Eurogroup Chairman Juncker repeated his preference for “voluntary, soft restructuring” but cautioned that he would not push for private sector participation against the wishes of the ECB.
The ECB issued a statement on Friday clarifying its position on private sector involvement in Greece noting its opposition to any schemes that “are not purely voluntary or have any element of compulsion, that entail any credit event or that entail any default or selective default”.
On the subject of monetary policy, Stark went on to strike a hawkish note. Consistent with Trichet’s remarks on Thursday, he said it was a “high probability” that the ECB would hike again in July but that the decision would ultimately be conditional on “the developments of the next three to four weeks”.
S&P said that France’s AAA credit rating would likely be downgraded by 2020 unless reforms are implemented.
The German parliament voted in favour of Germany’s participation in a new rescue for Greece provided “adequate participation” of private sector creditors would also occur. The vote is symbolic but strengthens Finance Minister Schaeuble’s negotiating position as he pushes his European counterparts for private sector involvement that goes above and beyond a rollover of maturing debt.
The EFSF announced its intention to issue two bonds in support of Portugal’s financial assistance program: a €5bn 10y bond “later this month, subject to market conditions”, to be followed by a €3bn 5y bond “before the summer break”. The EFSF last came to market in January to raise funds for Ireland’s assistance program, and the €5bn 5y bond issued then saw exceptionally strong demand. Further successful placements could be seen as marginally euro positive especially if international reserve managers publicly declare their intention to take a share of the issue.
A Bundesbank report issued on Friday sees German GDP expanding by +3.1% in 2011 and by +1.8% in 2012. German CPI for May was in-line with consensus expectations.
TECHNICAL OUTLOOK
EURGBP 0.8793 support.
EURUSD NEUTRAL Pull back through 1.4308 has turned the model to neutral and exposed support at 1.4248. Resistance lies at 1.4500.
USDJPY BEARISH While resistance at 81.01 holds, look for weakness towards 79.97, a break of which would open 79.57.
GBPUSD BEARISH Focus is on initial support at 1.6173, break of this level would open up 1.6132. Initial resistance lies at 1.6384.
USDCHF BEARISH Support is at 0.8327, break below this level would open 0.8300 next. Resistance lies at 0.8500.
AUDUSD BEARISH The pair targets 1.0510, break of which would confirm the bear trend and expose 1.0441 next. Near-term resistance is at 1.0664.
USDCAD BULLISH Break through 0.9821 would open key resistance at 0.9852. Initial support lies at 0.9712.
EURCHF BEARISH Initial support is at 1.2053, intraday low, break below this would expose 1.2000. Near-term resistance is at 1.2234.
EURGBP BULLISH While support at 0.8793 holds, potential for a climb towards 0.8919 and 0.8976 next.
EURJPY BEARISH Move below 115.21 has exposed support at 114.47. Near-term resistance is at 116.87.
SCHEDULE
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