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Morning Adviser Europe 9/7/2010 6:08:00 AM

BoJ, RBA Stand Pat

By Gareth Berry

Risk appetite wobbled during the Asia session as an article in the WSJ pointed to flaws in the design of the European bank stress tests, the results of which were released on July 23. Specifically it was claimed that the sovereign debt holdings of some banks may have been understated as a result. The euro fell sharply, taking the aussie lower too, but the fallout was relatively contained. Asian equity markets for example are only slightly weaker at the time of writing. EURUSD traded 1.2787-1.2883, and USDJPY was range bound between 84.05 and 84.26. Elsewhere, as expected, policy decisions by the RBA and the BoJ produced no change in policy.

EUR

Targets: EURUSD 1m 1.2800, 3m 1.1500 ECB Governing Council member Nowotny said that the ECB will wait until December before discussing how to implement the next phase of the ECB's exit strategy. Nowotny was only referring to how ECB liquidity operations could be further normalised, and was not suggesting that policy rate hikes might be on the agenda. The ECB remains in the market as a buyer of Eurozone sovereign debt. Last week, ?173 mln worth of bonds were settled under the ECB's Securities Market Program, marking a slight increase from the ?142 mln reported the week before. According to press reports, discussions are continuing between the Irish Finance Ministry and the EU Commission over how best to wind down key parts of the Irish banking system that have been nationalised. A decision is expected over the coming weeks. The announcement, when it comes, could reawaken concerns over the health of the Eurozone banking system which have faded into the background since the release of stress test results in July. EU finance ministers met yesterday, chiefly to continue discussions on how macroeconomic surveillance should be implemented within the Eurozone, and how the terms of the Stability and Growth Pact could be better enforced. No final agreement was reached but EU Council President von Rompuy is due to provide a progress update at the EU Summit scheduled for September 16.

JPY

Targets: USDJPY 1m 8500, 3m 95.00 As expected, the BoJ decided to keep monetary policy unchanged after today's policy meeting. Attention will now focus on Governor Shirakawa's post-meeting press conference later today, and in particular whether he will keep the door open to further monetary easing. Any comments suggesting his opposition to accelerated JGB purchases is beginning to wane would likely be seen as yen-negative.

AUD

Targets: AUDUSD 1m 0.90, 3m 0.85 In line with market consensus, the RBA decided to keep monetary policy unchanged at its latest policy decision today. Our Australia economics team noted that the RBA retains its positive medium term view on Australia, and they see room for one more 25bp hike before year-end, and for the cash rate to reach 5.5% by mid-2011. Three key independent lawmakers have announced which of the major parties they will support. This could pave the way for the formation of a government, putting an end to two weeks of uncertainty which began with the elections on August 21.

CHF

Targets: EURCHF 1m 1.30, 3m 1.30 The seasonally-adjusted unemployment rate for August came in slightly higher than expected at 3.8% (cons. 3.7%).

FX Technicals

EURCHF focus back on 1.2852 EURUSD NEUTRAL 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 Clearance of 83.60 trend low would confirm extension of bearish trend towards 79.75 key support. Short-term resistance is defined at 85.91 GBPUSD BEARISH Stalled above 1.5324; break here would expose 1.5125. Near-term resistance lies at 1.5584 ahead of 1.5742 USDCHF BEARISH Momentum is negative; expect extension of bearish trend towards 0.9918 ahead of 0.9786. On the upside resistance holds at 1.0265 ahead of 1.0466 AUDUSD BULLISH The gains are expected to move towards 0.9222 with scope for 0.9389 next. Only a move below 0.8856 would hurt the positive tone. USDCAD NEUTRAL Model has turned neutral with 1.0680 and 1.0108 defining the next bull and bear trigger respectively. EURCHF BEARISH Focus is back on 1.2852 trend low with next support below the level lying at 1.2403. Resistance at 1.3163 EURGBP NEUTRAL 0.8532 and 0.8142 define the key near-term directional triggers EURJPY NEUTRAL While resistance is at 111.19, break of 105.44 would expose 100.00, psychological round number support level. *NOTE: The trend for each currency pair as defined in the table is determined by our proprietary model and is independent of our discretionary interpretation of price action