Morning Adviser Americas 9/9/2010 11:02:00 AM
Risk Resilient
By Manuel Oliveri
Risk sentiment stayed supported in Europe. Official comments, better-than-expected data from Australia, and the German IFW research institute upgrading its growth forecasts for Germany all factored. Most European stock market indices are trading in the black, with the EuroStoxx50 up by 0.50%. EURUSD traded 1.2665-1.2736 and USDJPY 83.49-83.79. US data today includes jobless claims and the trade balance. Canada reports trade data, too.
Research Spotlight "Ireland Needs Growth, ECB" UBS Global Economics, Fixed Income Strategy
Ireland is in focus once again: sovereign spreads have widened and CDS have come under pressure as market attention has returned to the Irish banking sector and public finances. Ireland enjoyed a major credit boom until 2007, and the aftermath wil likely be long and painful. The government has responded decisively to the crisis, but in order to avoid debt-deflation, Ireland, more than any other country, requires a global economic recovery - and continued support from the ECB. Please see the "Ireland Needs Growth, ECB" note on www.ubs.com/fx for details.
EUR Targets: EURUSD 1m 1.2800, 3m 1.1500
At 0.0% m/m (cons. 0.0%, prev. 0.3%) and 1.0% y/y (cons. 1.0%, prev. 1.2%) the final reading on CPI for August was released in line with previous estimations. EU harmonized CPI was released at 0.1% m/m (cons. 0.0%, prev. 0.3%) and 1.0% y/y (cons. 0.9%, prev. 1.2%), slightly above consensus. Elsewhere, the German IFW institute raised its 2010 growth forecasts for Germany from 2.1% to 3.4%. For 2011 the forecasts was changed to 1.7 from 1.2%, previously.
Ireland sold EUR 150.1mln February 2011 T-bills at an average yield of 1.925% and a b/c ratio of 9.4. In addition they sold EUR 250mln April 2011 T-bills at an average yield of 2.19 % and a b/c ratio of 5.4. Overall average yields fell as compared to the previous auction. Only the minimum of the targeted range was reached. The planned target range reached from EUR 400mln to 600mln.
ECB Governing Council member Mersch said, that there are first signs of a broad-based recovery in the Eurozone, and that the next discussion on exit from non-traditional measures will likely occur at the December meeting. Governing Council member Liikanen highlighted that global growth momentum slows down. On a different note he said that Basel III rules will not overly limit banks' ability to lend.
Yesterday, Ireland's government changed its plans for the bank, announcing it would be split into a "good" bank and an asset recovery bank. The "good" bank will retain lender deposits while the recovery bank will run down its loans gradually. The arrangement has been sent for European Commission approval and new capital requirements are expected to be announced in October. This helped the euro as it removed some uncertainty on possible write downs and deposit withdrawals even though more capital is likely needed.
We remain skeptical of rallies in EURUSD and look for more euro downside, in particular versus USD and CHF.
JPY Targets: USDJPY 1m 85.00, 3m 95.00
Finance Minister Noda said that simulated interventions are being conducted, implying that preparations are underway to test Japan's readiness for FX intervention. He also referred to data showing that China is buying Japanese T-bills, saying he felt is was "unnatural" that Japan could not buy Chinese bonds in return. This could be the first indication of official concern over China's apparent decision to invest in Japanese government securities. BoJ Governor Shirakawa said that the BoJ will guide policy with an eye on the yen's rise, and on stock market volatility. He said that the recent extension to the BoJ's liquidity operations was not aimed at dealing with FX matters.
AUD
Targets: AUDUSD 1m 0.9000, 3m 0.8500
The employment report was stronger than expected overnight, with the economy adding another +30.9k jobs (cons. +25.0k, prev. +25.0k) in August. The mix between full-time and part-time employment was also very healthy, pointing to a robust economic recovery. Full-time jobs increased by +53.1k, faster than at any time since July 2008, and part-time jobs fell by -22.1k. Our economists have penciled in a hike in November.
GBP Targets: GBPUSD 1m 1.50, 3m 1.35
At GBP-8.667bn (cons. -7.45bn, prev. -7.40bn) the global goods deficit in August widened more than expected.
Investors' focus will shift now to the BOE announcement. Recent data has been soft, and our economist agrees with the MPC that there is only a negligible chance of a material inflation overshoot in the medium-term. The overall recovery is still not a done deal and as such we do not expect any changes. Should that occur, the BoE is unlikely to release an explanatory statement.
SEK Targets: EURSEK 1m 9.35, 3m 9.30
At 0.0% (cons. 0.1%, prev. -0.3%) and 0.9% y/y (cons. 1.0%, prev. 1.1%) CPI for august was release slightly below expectations. Overall the slight drop will unlikely have any impact on the Riksbank's stance on monetary policy.
CAD Targets: USDCAD 1m 1.0200, 3m 1.0200
Yesterday, the BoC raised the policy rate by 25bp, which surprised investors and boosted the Canadian dollar as consensus was split with only 13 out of 20 economists surveyed calling for a hike. The language again sounded somewhat cautious, though perhaps less so than many had feared. Officials were cautious both on domestic economic activity and on external growth. The statement noted that further reductions will have to be "carefully considered in light of the unusual uncertainty surrounding the outlook."
FX Technicals
EURUSD BEARISH Recovery held below 1.2933 thus bringing our focus back on 1.2588. Break of the level would expose next support lying at 1.2434 Fibonacci level. USDJPY BEARISH With the clearance of 83.60 bearish trend remains intact. Next support is at 79.75 key level. Short-term resistance is defined at 85.23 GBPUSD BEARISH Currently holds support at 1.5297; a break here would expose 1.5125/15 ahead of 1.4906. Near-term resistance lies at 1.5565 ahead of 1.5731 USDCHF BEARISH Still has room to go for 0.9918 ahead of 0.9786. On the upside resistance holds at 1.0239 ahead of 1.0466 AUDUSD BULLISH Following the recovery through 0.9222, the pair now targets 0.9389 ahead of 0.9850. Near-term support defined at 0.9055 ahead of 0.8771 key low USDCAD BULLISH Momentum is positive; expect a bullish run towards 1.0673 and 1.0853 next. Support holds at 1.0248 ahead of 1.0108 EURCHF BEARISH Next support at 1.2501 ahead of 1.2403. Resistance at 1.3163 EURGBP BEARISH Clearance of 0.8249 has exposed 0.8142 and 0.8068 next. Near-term resistance is defined at 0.8390 ahead of 0.8532 EURJPY BEARISH Bearish pressure eyes 105.44, scope for next support at 100 psychological level. Resistance is at 111.19.