FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
AUD was the stand-out performer overnight, breaking through 1.08 as the RBA surprised investors and left its cash rate on hold at 4.25%. There was a unanimous consensus for a 25bp cut so the move was very surprising. The board noted that policy was appropriate ‘for the moment’. This suggests the bank still has an easing bias and will ‘adjust the cash rate as necessary to foster sustainable growth and low inflation’. Our analysts continue to see a modest trimming of the cash rate over the coming months given the continued uncertainty around Greece, mixed domestic data and the high AUD.
The currency is now at stretched levels and we would look to fade any move higher from here, in fact on Monday we entered a trade recommendation to go short AUD via a 3m AUD put /USD call option, taking advantage of the recent decline in volatility.
The news wires were quiet on Greece overnight and the EUR managed to recover some lost ground during the US session but the commentary from the Eurozone remains rather gloomy. After talks, German Chancellor Merkel and French President Sarkozy both expressed frustration with the state of PSI and troika talks on Greece, as the Greek PM had to postpone domestic talks on reform to meet the troika’s demands. EU leaders have expressed dismay at the slow pace of implementing changes, but also expressed the view that allowing Greece to default or exit the Eurozone would also be unacceptable.
The focus on Tuesday will be on final headlines from domestic parties in Greece and the various agreements made to obtain support for further troika funding. Details for the PSI and OSI will also be sought, but the IIF and Greece have missed so many deadlines over the past few weeks that markets are not particularly attuned to fresh news on this front, given the mathematics involved have been communicated in advance.
Today, industrial production data out of Germany is due, while policymaker commentary by Thomas Jordan may attract some attention, particularly after his comments last week reaffirming the central bank’s resolve in defending the Eurozone. Fed Chairman Bernanke’s testimony to the Senate Budget Committee should not differ from his House testimony, though a more upbeat tone can be expected in the wake of the latest unemployment report. Overnight EURUSD traded 1.3089-1.3141 and USDJPY 76.50-76.79.
EUR
German industry orders in December rose by +1.7% m/m vs consensus. Our analysts note that the data is driven by foreign orders (+4.3% m/m), while domestic orders declined by 1.4%. The German economy ministry said the Dec orders were not driven by big ticket items. Yet, it probably contained some correction from a very weak November (-4.9%). On total, Q4 order intake was 1.4% down from Q3. So still significant weakening on the cards, but no drop-off as suggested by November data.
Talks between domestic parties in Greece were postponed until Tuesday as the search for an accord before trika negotiations continue. Many parties involved acknowledged that reforms in Greece were behind schedule. However, the Greek EU Commissioner Maria Damanaki said that Greece can ‘stay in euro’ if reforms are implemented and internal devaluation was ‘preferable’ to an outright euro exit. She also called for the ECB to act as a lender of last resort. Greek unions have called a general strike for Tuesday.
The Greek Finance Minister said that negotiations with the troika were very tough and negotiations remain difficult. He warned that new issues were arising despite progress in talks.
According to the PASOK party in Greece, Greek Prime Minister has instructed the country’s Finance Ministry to ‘document the costs’ of a Eurozone exit. So far no top leader in Europe has been willing to countenance a Greek exit. On Monday German Chancellor Merkel warned that Germany ‘would not accept’ a Greek default.
After talks with French President Sarkozy, Merkel remarked that ‘couldn’t understand’ why a few more days were needed and warned that ‘time is running out’. Sarkozy sounded more upbeat, noting that an agreement ‘has never been so close, neither for private nor public creditors’. The mention of public creditors suggests that the ECB will be part of the final agreements.
EU President Van Rompuy acknowledged that solving the crisis was taking longer than expected, and Greek reform implementation was taking longer than expected. However, he said he ‘couldn’t promise’ a solution for the country.
IMF Chief Economist Olivier Blanchard said that the haircut on Greek debt will be ‘very large’, and warned that Greece would not be able to return to financial markets for a long time.
German industrial production data are the key release on Tuesday, though markets will be keen to look for fresh initiatives out of Greece..
AUD
The RBA surprised markets by leaving rates on hold at 4.25%. There was a unanimous consensus for a 25bp cut so the move was surprising and the board noted that policy was appropriate “for the moment”. This suggests the bank still has an easing bias and will “adjust the cash rate as necessary to foster sustainable growth and low inflation”. Our Australian economists continue to see a modest trimming of the cash rate over the coming months given the continued uncertainty around Greece, mixed domestic data and the high AUD.
Australian retail sales were softer than expectations, coming in at -0.1%m/m (cons. +0.2%). Our analysts note the retail trend has clearly weakened, with flat values in the last 3 months, after previously showing some pick-up.
TECHNICAL OUTLOOK at 0800 GMT (EDT +0400)
EURUSD BULLISH As long as support at 1.3026 holds, look for a move above 1.3234, the Jan. 27 key high, to expose 1.3386.
USDJPY BEARISH Two key supports are at 76.04 and 75.35. Resistance is at 77.15.
GBPUSD BULLISH Focus is on 1.5883, a break above which would open 1.5947. Support lies at 1.5699.
USDCHF NEUTRAL Support lies at 0.9115 ahead of 0.9066, the Nov. 30 key low. Resistance is at 0.9339 ahead of 0.9396.
AUDUSD BULLISH Clearance of 1.0794 has opened the way for further gains towards 1.1007 and 1.1081, July 27 2011 high. Support lies at 1.0672.
USDCAD BEARISH Focus is on 0.9892, a decline through this would signal scope for losses towards 0.9725. Resistance is at 1.0034.
EURCHF BEARISH Support lies at 1.2032 ahead of 1.2000 and resistance is at 1.2086.
EURGBP BEARISH Initial support lies at 0.8255 ahead of key low at 0.8222. Resistance is at 0.8344.
EURJPY BULLISH Clearance of 100.89 would open 101.58. Support is at 99.25.
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