FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
Overnight price action was relatively subdued but risk sentiment remains broadly soft as the market prices in further economic weakness after last week’s string of worrying data out of the US. USDJPY remains the focal point as investors wonder when the MoF will instruct the BoJ to intervene as the yen tests record highs against the dollar. In what may prove to be a pivotal week for policy expectations in general, Fed Chairman Bernanke’s delivery at Jackson Hole could reveal whether the Fed is on the path towards further easing, even though inflation conditions are markedly different compared to 2011 and opposition within the FOMC is expected to be stronger. Mindful that macro forces may favour further USDJPY downside, Japanese Finance Minister Noda warned that moves were becoming ‘one-sided’ and did not rule out coordinated intervention, though given the lukewarm reception to the last blast of USDJPY buying by its G7 partners, Japan may yet find itself alone in entering markets. There are very few data releases on Monday though policy developments on both FX and broader fiscal issues across the Eurozone will be monitored as governments struggle to find away out of returning economic difficulties. USDJPY traded 76.53-77.16, EURUSD 1.4355-1.4392.
EUR
Germany’s Chancellor Merkel and Finance Minister Schaeuble restated their opposition to eurobonds over the weekend. Schaeuble said that, until deeper integration is achieved, different yields for different countries are needed to provide “the incentive to run a solid economy, or the punishment if you are not running it properly.” Speaking on national television, Merkel said that “eurobonds are exactly the wrong answer to the current crisis – they lead us to a debt union and not to a stability union”. France’s Prime Minister Fillon also expressed reservations, claiming that a move to eurobonds could push up the cost of servicing France’s debt and perhaps cast doubt on France’s AAA rating.
On Monday Morning Schaeuble noted that there has been a recent re-pricing of optimistic expectations, but again said that the EUR was a strong currency, and developments in the German labour market were positive. He also noted that Switzerland currently faced a ‘situation of isolation’ and why the country was ‘considering a euro peg’.
ECB’s Nowotny said that he feared Eurozone governments would not be able to complete the agreed EFSF adjustments by October.
ECB Executive Board member Stark said that the ECB’s SMP bond buying program is a temporary measure designed to buy time. Later on Monday, the ECB is due to announce the value of bond purchases that settled last week under the SMP. ?22 bn settled the week before, marking the highest level of activity since the program began in May 2010.
Dow Jones newswires reported that the French and German finance ministers are due to meet on Tuesday.
CHF
The SNB is due to release the August edition of its “Monthly Statistical Bulletin”. This will provide the latest snapshot of the SNB’s balance sheet as at the end of June. Unfortunately, this predates the introduction of extraordinary measures designed to weaken the CHF, and so the precise balance sheet impact will not be known for another two months. Separately, the amount of sight deposits held by Swiss institutions at the SNB is also due for release. This is a far more current statistic, depicting the state of play as it was on Friday evening. The SNB’s stated ambition is to raise sight deposits to CHF200 bn so this data will provide a useful measure of how much progress there has been toward this objective.
SonntagZeitung reported that 63% of the Swiss public would support SNB intervention, and that 27% are in favour of setting an exchange rate target.
GBP
BoE MPC member Weale said he is now less optimistic on UK growth, but that now is not the time for more quantitative easing. Weale had been calling for a rate hike for several months but both he and fellow serial-dissenter Dale reversed course at the August policy meeting, and voted in line with mainstream opinion.
The UK’s public finances show that, for the four months to July, the cumulative deficit was only GBP40.1 bn compared with GBP43.1 bn during the same period in 2010. Our analysts note these numbers are better than expected.
JPY
USDJPY fell to new record lows again on Friday evening, soon after Vice Finance Minister for International Affairs Nakao reportedly said that he does not intend to intervene frequently. Over the weekend, the Nikkei newspaper reported that intervention could be imminent, citing an unnamed MoF official that “we’ll make a decision after looking at the market at the start of the week.”
Japanese Finance Minister Noda said on Monday that coordinated intervention could not be ruled out and called current yen price action ‘one-sided’. Several press reports indicated the MoF was considering intervention but no action has been witnessed so far.
CAD
BoC Governor Carney struck a dovish note, observing that “considerable external headwinds” are now blowing even harder over the Canadian economy and that consequently Q2 growth would likely be minimal or even negative. He added that persistent CAD strength is compounding the problem of sluggish demand from overseas. Nevertheless, he held the door open to future rate hikes, insisting that the BoC could hike even if the Fed does not (“we do not outsource monetary policy to the Fed”). However, he conceded that the BoC would be “prudent” in any possible tightening of monetary policy. Coming late on Friday, there was no currency reaction to his remarks.
TECHNICAL OUTLOOK
USDJPY defines new low at 75.95.
EURUSD BULLISH A move above 1.4536 would open the way for gains towards 1.4697. Support lies at 1.4226.
USDJPY BEARISH The pair defined a new low at 75.95, a move below which would expose the psychological level at 75.00. Initial resistance is at 77.31.
GBPUSD BULLISH The pair clears 1.6592; Initial resistance is at 1.6618 ahead of 1.6661. Support lies at 1.6421.
USDCHF NEUTRAL Initial resistance is at 0.8017 and support lies at 0.7744 ahead of 0.7549.
AUDUSD BEARISH A fall through 1.0315 would expose 1.0246. Initial resistance is at 1.0559.
USDCAD BULLISH A clearance of 0.9939 would open the way for 0.9969. Near-term support lies at 0.9799.
EURCHF NEUTRAL The cross has key resistance at 1.1555 and support lies at 1.1046.
EURGBP BEARISH Key support lies at 0.8643, a break here would expose 0.8611. Initial resistance is at 0.8797, a Fibonacci level.
EURJPY BEARISH A break below 108.93 would expose 108.03, the key low from Aug 11. Initial resistance is at 111.25.
SCHEDULE
Please visit GCI’s Economic Calendar for a schedule of market news and events.
