FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
In a typical prelude to aUSpayrolls release, FX markets traded in very tight ranges in Asia until newswires reported speculation of a nuclear incident inNorth Korea. Officials in Seoul and Tokyo later rejected the idea, but not before EURUSD broke to new 15-month lows, and AUDUSD dropped 20 pips. Expectations for a buoyant payrolls report are still running high after the December ADP employment report came in strongly above expectations at +325k. Our analysts note though that the figures may not be a forward indicator of stronger official BLS payroll numbers today, and they keep their forecast for private payrolls unchanged at +150k (headline +125k).
End-of-year reconciliations of payroll records typically result in an artificially high ADP estimate. That was the case last year, and appears to have been the case this year as well. Caution is therefore clearly warranted. St. Louis Fed President Bullard noted that the Fed may choose to adopt inflation targeting this year. Given the Fed’s current stance, this could suggest targeted asset purchases until headline CPI or core PCE reaches a certain level. Given that zero rates are here to stay until 2014 or so (according to current pricing), it is clear that any inflation target in the medium term will be calibrated through quantitative balance sheet targets rather than interest rates. Elsewhere, Eurozone concerns remain amid reports that the IMF had pushed back its payment schedule forGreece, and the Eurozone financial sector remains under scrutiny. Ahead on Friday, in addition to the unemployment report, Canadian jobs numbers are out and Swiss CPI will be released. EURUSD traded 1.2764-1.2799 and USDJPY 77.07-77.26.
EUR
Francesold a total of EUR7.96 bn in a four-way auction, towards the upper end of supply expectations. In general the result was treated as decent, though this failed to arrest the euro’s decline. The Euribor fixing coming in lower than expected minutes afterwards did not help the euro’s cause either.
Italian 10y yields closed above 7% again yesterday and the spread over the German 10-year has now widened to well over 500bp. Our euro rates strategists expect Italian bonds to remain under selling pressure intoItaly’s first auction of the new year on Friday, Jan. 13.
German data were disappointing. Retail sales for November came in at -0.9% m/m (cons. 0.2%). Eurozone figures were weak as well: industrial new orders grew by 1.6% in October.
Reuters reported that due to a delay in payment for the latest tranche from the troika, the aid payment schedule forGreece will be delayed by 3 months. This could complicateGreece’s efforts to meet major bond redemptions in March, although the intention remains to replace the initial rescue program with a new one once the terms of the private sector participation plan are agreed.
CHF
Swiss inflation numbers for December are due. The SNB has already revised lower CPI figures in the wake of growth headwinds and a still-overvalued currency, but declined to raise the floor in EURCHF at their December meeting. The market is expecting a -0.5% print (UBSe. -0.7%), which doesn’t appear to meet the definition of massive deflation that would need to be met to justify additional measures, such as raising the floor..
GBP
UKservices PMI surprised to the upside for December, coming in at 54.0 vs. 52.1 prior.
Latest data showed that Gilt purchases by institutional investors in October and November were the largest on record, according to the Financial Times. We believe the move was in part driven by such investors rethinking their previous policy of diverting from periphery debt into the Eurozone AAA core. Now, it appears, Gilts are serving as an alternative safe haven, although we would caution against buying sterling purely for this reason given theUK’s own challenging fiscal position.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BEARISH Support lies at 1.2642, today’s intersection of the bottom of the trend channel drawn off Nov. 14 high, ahead of key low at 1.2588. Resistance is at 1.2947.
USDJPY BEARISH Near-term support lies at 76.61, a break here would expose 76.33. Resistance is at 77.50.
GBPUSD BEARISH Initial support is at 1.5402, a break here would open the key low of 1.5362. Resistance is at 1.5629.
USDCHF BULLISH Pressure is on the key high of 0.9548, a clearance of which would open the way towards 0.9784 with interim resistance at 0.9602. Support lies at 0.9413.
AUDUSD BULLISH Resistance is at 1.0387, a move above this level would open 1.0447 next. Support is at 1.0127.
USDCAD BEARISH Support lies at 1.0104 ahead of the key support at 1.0052. Resistance is at 1.0269.
EURCHF NEUTRAL Initial resistance is at 1.2254 ahead of 1.2398. Support lies at 1.2126 ahead of 1.2051.
EURGBP BEARISH Focus is on 0.8202, a decline through this level would open the way for 0.8142, the August 2010 low. Resistance is at 0.8289.
EURJPY BEARISH The cross is testing 98.66, a clear break below which would open 97.65. Resistance is at 100.31.
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