By GCI Forex Research
Fundamental Outlook at 0800 GMT (EDT + 0400)
USD
The dollar continues to trade on a soft note as a variety of investors have found adverse December trading conditions to be no barrier to enter fresh longs, though there is still enough event risk to induce plenty of intra-day volatility. The main focus is on the FOMC later in the day but the Eurozone also has much to clear, including a Spanish bill auction and a confidence vote in Italy, whose result continues to hang in the balance. EURUSD traded overnight in a range of 1.3374-1.3417 and USDJPY 83.38-83.55, largely due to a lack of drivers during the Asia session. In the US, while the recent pick-up in yields may have raised some concerns for the upcoming FOMC meeting, we do not think the Fed will adjust QE2 at the current juncture. Our economists also note that the expectation of a likely larger than expected fiscal package would argue for an unchanged Fed, as the September FOMC minutes cited fiscal policy uncertainty as one reason for lowering FOMC Members’ forecasts. Elsewhere, Moody’s said the recent US tax proposal increases the likelihood of a negative outlook on the US AAA rating over the next two years as the negative effects are likely to outweigh the positive effects of higher growth. Retail sales data is due ahead of the FOMC decision.
EUR
The euro drifted higher during a quiet session with few surprises on the Eurozone front. German officials continued to remain outspoken on the notion of a common Euro Area bond while the ECB announced it completed EUR 2.67bn of bond purchases settled in the previous week to December 10, versus EUR 1.97bn. The increase in the figures was expected given the reported buying the same day as the December 2ECB policy rate decision. Meanwhile, Spain announced it would sell EUR 6bn on Tuesday and Thursday of this week. The press reported that about 2-3bn would consist of the 2020 and 2025 bonds set for Thursday’s auction.
The one item to note was the report that Eurozone central bank sources are considering requesting a rise in capital. Further details were limited but this likely refers to ECB capital subscriptions, which are updated very 5 years and is done according to share of total EU population and EU GDP. This could have been viewed as euro negative but the euro shrugged off the headlines.
The ZEW and IFO releases are due in Germany and investors will be keen to assess whether the country’s economic momentum can be maintained. Also, the Italian Premier Berlusconi faces a no-confidence vote in both chambers of parliament
JPY
BoJ Governor Shirakawa again raised the possibility of further JGB purchases if the economy slows down faster than expected.
Industrial production figures in Japan confirmed a 2% monthly decline (4.3%y/y), while capacity utilization registered a 2.3% decline in October. The data underscore the need for the BoJ to maintain current policy and relative policy differentials.
The BoJ will be closely on watch for any sign of further dovish comments on the part of the Fed as they would need to respond in kind with their own rhetoric or policy to ensure policy gaps stay remain conducive to JPY weakness. The Q4 Tankan survey is the major release this week.
GBP
The Rightmove house price index showed a 3% monthly decline, another soft reading after the prior -3.2%m/m print. Annualised prices were up only 0.4%y/y.
CPI figures are due in the UK and the BoE will be closely watching whether headline prices will remain stubbornly high amid a still-challenging growth outlook. Deputy Governor Charles Bean, who has been fairly reserved in voicing his concerns of late sounded slightly more hawkish than usual, repeating the comments of other members that inflation is likely to persist in the near term.
CAD
BoC Governor Carney again said he is watching the Canadian dollar closely and the risk of a stronger currency on growth is now being partly realized. Carney reiterated the limits of divergence between the US and Canadian economies and also said Canadian household debt levels are unprecedented. He said Canadian banks should not be complacent on lending and this dovetailed with Finance Minister Flaherty’s comment that he would tighten mortgage rules again if needed.
TECHNICAL OUTLOOK
EURCHF 1.2766 support
EURUSD NEUTRAL Following the recovery yesterday, model has turned neutral. Initial resistance at 1.3471, support at 1.3337
USDJPY BULLISH Break of 83.45 exposes 82.34, but broader focus is on the upside with resistance defined at 84.41
GBPUSD NEUTRAL Push through 1.5892 exposes 1.5965. Support at 1.5720
USDCHF BEARISH Decline through 0.9726 opened up the way towards 0.9548. Resistance at 0.9727
AUDUSD BULLISH Break of 0.9965 exposes 1.0031. Support holds at 0.9833, yesterday’s low
USDCAD BEARISH Look for a break below 0.9978/31 support zone for confirmation of bear trend. Resistance at 1.0141
EURCHF BEARISH Break of 1.2933 exposes 1.2766. Resistance at 1.3100
EURGBP BEARISH Sudden recovery cleared 0.8429 exposing 0.8528, but overall focus is on the downside at 0.8335/31 support zone.
EURJPY NEUTRAL Choppy action holding support at 109.57 ahead of 108.35. Resistance at 112.07.
Forex Daily Market Commentary provided by GCI Financial Ltd.
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