By GCI Forex Research
Fundamental Outlook at 0800 GMT (EDT + 0400)
USD
The main risk event ahead is today’s FOMC announcement. Although the prospect of further quantitative easing has been highlighted for this meeting, our analysts do not think that will be the case. They expect little change to the statement language describing the current conditions or the outlook. On the growth outlook, however, our team notes that Fed officials may alter the phrase that near-term growth will be “more modest…than had been anticipated” in order to avoid implying a further downgrade. While there is a possibility that the Fed might signal increased readiness to ease its balance sheet policy further, our analysts do not believe that the medium-term outlook has deteriorated enough to warrant the change. If no further quantitative easing is announced, the USD should be supported as expectations of further quantitative easing being priced in weighed on the USD last week.
EUR
Sovereign bond yields rose across the peripherals in the European session over fears that Portugal may not be able to meet its fiscal targets. Both Portuguese and Irish 10y spreads vs. Germany reached record highs, widening to 375 and 412 basis points, respectively. This followed news on Friday, where a headline in an Irish newspaper warned that Ireland was “perilously close” to calling in the IMF. The government described the article as “a local misinterpretation of a research report”, and the IMF said it does not foresee its assistance being needed in Ireland.
Ahead of today’s Irish bond auction, in an attempt to calm the market, Irish Prime Minister Cowen and Finance Minister Lenihan held a press conference in which PM Cowen said that he had the full support of his colleagues and Finance Minister Lenihan said that bond markets are not influenced by minor political disputes.
Both ECB Governing Council Members Nowotny and Mersch opined on the future of the ECB’s liquidity tenders, a topic that has proven to be a significant driver of the euro in recent weeks. Nowotny noted that some parts of the Eurozone banking system are “addicted” to ECB liquidity, and that the problem should be solved primarily by governments. Mersch said he saw “no need to hold onto full allotment”, noting that “short term rates can be very easily controlled via competitive tenders”.
JPY
With Japan on holiday, USDJPY was relatively quiet and range bound on Monday despite an early dip, suggesting the BoJ has not been active in FX markets since Wednesday.
Speculation is mounting that a bill aimed at incorporating an explicit inflation target into BoJ Law could soon be presented to Japan’s Diet. We are sceptical of claims that a change to the Law is imminent on two counts: first, parliamentary time in the immediate future is likely to focus on agreeing the terms of the budget for the coming fiscal year; second, a change to BoJ Law would require the approval of both the upper and lower houses of parliament. With no party holding a majority in the upper house, at the very least this would likely complicate and delay the passage of any such bill. The next parliamentary session is expected to begin in early October.
GBP
M4 money supply fell by 0.2% m/m, leaving the annual rate at a record low of 1.8%. Mortgage backed approvals in August fell roughly in line with consensus at 45k, an indication that the recent housing market recovery may have been exhausted.
AUD
RBA Governor Stevens offered a relatively hawkish assessment, noting that. “the fall in inflation over the past two years won’t go much further.” However, he did acknowledge that the global growth outlook was uncertain and that although global growth will be “reasonable” next year, it would not be as strong as the current year. Stevens also identified three key risks to Australia: a deeper than expected slowdown in China, a US double-dip, and the return of market turmoil.
CAD
Finance Minister Flaherty said Canada’s fiscal stimulus measures would expire as planned in March 2011.
Ahead today is Canada August CPI. The July CPI had a jump at the headline due to provincial tax changes. The August read in expected to be more subdued and the focus will be on the core CPI read relative to the BoC’s forecast. Our economists expect core CPI to tick up 0.1% m/m leaving the year-on-year rate unchanged at 1.6%.
TECHNICAL OUTLOOK
EURCHF resistance at 1.3391.
EURUSD NEUTRAL Need a break above 1.3334 to trigger bullish trend. Support holds at 1.2919.
USDJPY NEUTRAL Momentum is slowing; while resistance is at 85.93, support comes in at 85.20 ahead of 84.05 retracement level.
GBPUSD BULLISH While support at 1.5297 holds, expect recovery to target 1.5999 with scope for 1.6258 next.
USDCHF BEARISH Clearance of 0.9933/18 would expose 0.9786 next. Near-term resistance comes in at 1.0278 ahead of 1.0466.
AUDUSD BULLISH Expect gains to target 0.9500 ahead of 0.9850. Near-term support is at 0.9309 ahead of 0.9196.
USDCAD NEUTRAL 1.0509 and 1.0108 mark the key near-term directional triggers.
EURCHF NEUTRAL Recovery found resistance at 1.3391 ahead of 1.3482 retracement level. Near-term support comes in at 1.2991.
EURGBP NEUTRAL Trading within 0.8532 and 0.8142 which have now become the key directional triggers.
EURJPY NEUTRAL Break of 114.74 would put odds in favour of positive tone. Next resistance at 116.68. Support holds at 107.73 ahead of 105.44 key low.
Forex Daily Market Commentary provided by GCI Financial Ltd.
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