Morning Adviser Americas 9/13/2010 11:14:00 AM
Italy, Greece Auctions
By Geoffrey Yu
Risk appetite has improved steadily after the conclusion of Basel III negotiations at the weekend. The proposals appear slightly less strict than media speculation had suggested, and the timeline for full implementation has also been extended slightly. Better economic data out of China gave sentiment a lift as well. Data releases in the European and US sessions are limited today.
EURUSD traded in a range of 1.2673-1.2834 and USDJPY 83.84-84.43.
As expected, minimum capital requirements have been raised, with the core Tier-1 capital ratio effectively lifted to 7%. Banks will be permitted to allow levels to fall to 4.5%, but doing so will trigger operational restrictions. The new rules will be phased in from January 2013 to January 2019. ECB President Trichet described the agreement as "a fundamental strengthening of global capital standards" while US regulators said it was a "significant step forward" in reducing the incidence and severity of future financial crises.
China economic data for August was broadly stronger than consensus expectations, although the key CPI print was in line at +3.5% y/y (prev. +3.3% y/y). New yuan loans rose by RMB545.2 bn, more than the RMB500 bn consensus forecast. Industrial activity and retail sales were slightly stronger, at +13.9% y/y (cons. +13.0%, prev. +13.4%) and +18.4% y/y (cons. +18.0%, prev. +17.9%) respectively. Our China economist believes that the possibility of a rate hike before year-end should not be ruled out.
Research Spotlight "Equity Swings To Endure" UBS Global Investment Strategy
Equity markets, growth and risk appetite are apt to remain intertwined for the rest of the year, pointing to continued sharp swings in markets. Profitability has already recovered impressively against a relatively modest growth backdrop, suggesting that cost-cutting and productivity gains have done most of the heavy lifting. As firms are likely to have to hire and spend incrementally more, margins will struggle to continue to improve. This need not be negative for markets. Please see the "Equity Swings To Endure" note on www.ubs.com/fx for details.
EUR Targets: EURUSD 1m 1.2800, 3m 1.1500
Greece's Prime Minister Papandreou said the government is not even discussing the possibility of debt restructuring, given that any such move would be "catastrophic" for the economy and could lead to the collapse of the domestic banking system.
ECB Executive Board Member Bini Smaghi said Greece's debt problem is also Greece's biggest incentive to remain within the Eurozone. He described as "absurd" the idea that Greece could exit the euro noting that, were it to happen, "partial default or restructuring would in that case be unavoidable".
The IMF announced it would immediately disburse another ?2.57 bn in bailout loans to Greece on the grounds that, by the end of June, "all quantitative performance criteria" were met and "major structural reforms are ahead of schedule".
On Tuesday, Greece is scheduled to auction ?0.9 bn in 6m T-bills. This will be the third time Greece has returned to the market since the EU/IMF bailout was activated. In July, 3m and 6m T-bills were auctioned with some success. However, Tuesday's effort is to be the first auction of Greece's new monthly T-bill issuance program, which should see Greece returning to the market more frequently in future. Elsewhere, Italy today is aiming to sell up to ?5.5 bn in 2015 and 2040 bonds.
Portugal's finance minister Teixeira said he was confident that the fiscal deficit would be cut to 7.3% of GDP this year, and would fall to 2.8% by 2012.
NZD Targets: NZDUSD 1m 0.74, 3m 0.70
New Zealand's Treasury forecast that the Sept. 4 earthquake would likely shave 0.4% q/q off Q3 GDP. The report put the cost of the recovery effort upwards of NZD4 bn. However, the report also forecast that the rebuilding effort will provide an economic boost in 2011 and 2012. No details have yet been released about whether the earthquake relief fund will be forced to sell some or all of its overseas equities holdings to pay for compensation claims. Overseas holdings were worth approximately NZD1 bn in June 2009, and their sale could give rise to significant NZD inflows.
CAD Targets: USDCAD 1m 1.0200, 3m 1.0200
Bank of Canada Governor Carney said that renewed weakness in the US economy could have "important implications for the Canadian outlook", and that the BoC would have to chart a careful course for monetary policy. Jobs data was fairly mixed. Although the economy added 35.8k (cons. 30k, prev. -9.3k) new jobs in August, the unemployment rate ticked higher to 8.1% (cons. 8.0%, prev. 8.0%).
An oil pipeline that transports approximately 30% of Canada's oil exports to the US remains closed at the time of writing due to the discovery of a leak late last week. Depending on how long it takes to restart the flow, this has the potential to become a CAD-negative event.
SEK Targets: EURSEK 9.35 in 1m, 9.30 in 3m.
The AMV unemployment rate was in line with expectations at 4.8%. The official rate and house price data will be out later in the week. We believe EURSEK downside looks overextended at current levels and favour fading short-term strength.
FX Technicals
EURUSD BEARISH Move below 1.2588 is required for the confirmation of bearish trend. Resistance holds at 1.2933 USDJPY BEARISH Trend is bearish; there is little support till 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 Recovery cleared 1.0239 thus exposing 1.0466. Broader focus is still on the downside with initial support lying at 1.0061 ahead of 0.9918 AUDUSD BULLISH Bullish pressure eyes 0.9389; break of the level would favour another run towards 0.9850. Near-term support is at 0.9171 ahead of 0.9055 USDCAD NEUTRAL 1.0673 and 1.0108 define the next bull and bear triggers respectively. EURCHF BEARISH Sell-off from 1.3924 found support at 1.2766; break of the level would expose 1.2626 ahead of 1.2403. Resistance at 1.3163 EURGBP NEUTRAL Model is neutral; 0.8390 and 0.8142 mark key near-term directional triggers. 0.8068 defines a key support level. EURJPY BEARISH Focus is maintained on 105.44, next support at 100 psychological level. Resistance is at 111.19.
