FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
Risk appetite was generally subdued during the Asia session, after an article speculated on the likelihood of a hard landing for the Chinese economy. USDJPY broke below 80.00 again to hit a one-month low. EURUSD traded 1.4644-1.4697, USDJPY 79.75-80.28. Fed Chairman Bernanke struck a rather negative tone, clearly voicing his displeasure with the labour market situation, but we doubt they pointed to fresh stimulus. He noted that ‘until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established’. The end of QE2 in June was once again confirmed but he stressed accommodation was needed until employment returned to acceptable levels. We also note that strong deflation risk is one of the bars for renewed QE, and his comments suggested that despite soft core inflation, the Fed’s goal of guarding against deflation ‘has been accomplished’. On current high headline inflation, he maintained the view that this would be transitory but the FOMC would ‘respond as necessary’ should they err in this assessment. On the positive side, he expected the second half of the year to be stronger and still considers recent weakness attributable to one-off factors.
EUR
Germany’s Chancellor Merkel and US President Obama held a joint press conference at which the Eurozone sovereign debt crisis was discussed. Obama said there would be “disastrous” consequences if there is an “uncontrolled spiral and default” in Europe. He added that “America’s economic growth depends on a sensible resolution of this issue” and that the Eurozone crisis “cannot be allowed to put the global economic recovery at risk”.
Merkel implied that the current crisis was not just a debt crisis, but that it also had consequences for the euro. She noted that “if a country is in danger and therefore endangers the euro as a whole, it is in each and every country’s vested interest to see to it that this common currency area is not endangered.”
RBA Board Member McKibbin said he expects a two-tier euro currency to develop.
German Finance Minister Schaeuble warned that the Eurozone was not yet in the clear, as he saw Greece as the risk of a “first disorderly default” in the Eurozone, and stressed that a second package is still needed.
Eurozone GDP data, German trade and industrial production are due on Wednesday. Growth, rather than sovereign concerns, will probably matter more to the ECB’s policy path in the near term and have negative consequences for the euro should data surprise to the downside
JPY
USDJPY broke below 80.00 again during the Asia session. Cabinet Secretary Edano said he was watching FX markets carefully, echoing remarks by Finance Minister Noda yesterday.
AUD
House loans in April surpassed expectations, rising +4.8% (cons. 2.8%). The currency reaction was minimal. Our Australian economics team sees today’s data as another positive print that may, over time, build the case for higher interest rates over the coming months. They stick to their view that the next RBA hike will likely come in August.
NZD
The RNBZ is expected to keep rates on hold. Our economists note this is the bank’s first full post-quake assessment following the somewhat abridged March MPS. The focus will be on any sense of concern about high headline inflation (i.e. inflation expectations) and/or probable Christchurch reconstruction price pressures, along with comments linking policy moves to evidence of recovery in the economy. We believe recent NZD moves are overdone and the RBNZ may seek to temper optimism in the currency given soft macro conditions.
TECHNICAL OUTLOOK
USDJPY 79.57 support.
EURUSD BULLISH The pair eyes 1.4711; break of this would open 1.4900. Initial support lies at 1.4557.
USDJPY BEARISH Break of 80.00 has shifted focus to 79.57, the key low from May 5. Resistance is at 81.01.
GBPUSD BULLISH Rise above 1.6496 would expose 1.6547. Near-term support lies at 1.6286.
USDCHF BEARISH The pair has scope for further weakness towards 0.8300, break below this would expose 0.8165. Resistance lies at 0.8453.
AUDUSD BULLISH Initial resistance is at 1.0775 ahead of 1.0877. Support lies at 1.0587.
USDCAD BULLISH Recovery through 0.9817 would expose 0.9852, 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 Move above 0.8946 would pave the way for further gains towards 0.9000 and 0.9043. Support is at 0.8846.
EURJPY BULLISH A break above the 118.38/52 resistance zone would expose 119.54. Near-term support lies at 116.59.
SCHEDULE
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