– Greece needs extra financing… hardly a surprise
Greece’s international lenders have agreed to grant the country two more years to make the cuts demanded of it but the euro zone and IMF clashed over a longer-term target date to shrink the country’s debt pile. While finance ministers gathering in Brussels did not releasese more aid to the debt-ridden country and by granting a request from Athens for more time, face an extra funding bill of around 33 billion euros, according to a document prepared for the meeting. In European headlines, a draft Troika report on Greece said the country may need 32.6B euros of additional financing through 2016. The exact mechanisms of filling the budget gap remain unclear at this point, but the relatively positive ‘noises’ from the Eurogroup finance ministers’ meeting hint that a solution will probably be reached during this month. European officials also said they will address the issue of the 5B euro Greek bill redemption due on November 16. EUR is likely to remain vulnerable until there is a least a tentative resolution to the current multitude of uncertainties (Greece, Spain, US fiscal cliff). That said, we would not chase EURUSD lower at this point, and still expect the pair to rebound late in the year in response to the Fed’s aggressive QE3 stance. As the market begins to relax over Greece as the funds are released, the EUR should rebound.
– GBPUSD hones in on technical support at 1.5851
GBPUSD has fallen to a two-month low driven by general USD strength and caution ahead of Wednesday’s Bank of England Inflation Report. The government unexpectedly announced on Friday it would use proceeds from the BoE’s bondbuying programme to reduce short-term borrowing, a decision mooted by BoE Governor Mervyn King as “moderate loosening” of policy. Markets will scrutinise the BoE’s quarterly report on Wednesday, especially the latest growth and inflation projections, for indications on the outlook for the economy and monetary policy. Our UK economists forecast a recovery in UK GDP to 1.1% in 2013 and 1.7% in 2014 while prospects for further balance sheet expansion under the QE program have receded significantly. GBPUSD is trading close to its 200 day moving average at 1.5851. This level should provide support. We remain very bullish for GBPUSD, targeting a move to 1.68 in combination with more aggressive Fed easing to be announced at the December 12 FOMC meeting.
– USDJPY moving nicely lower, next stop 78.00
Jittery markets have been positive for JPY over the past week, and we maintain our USDJPY short trade, initially entered at 79.65 and targeting 77.00. Assuming that the full fiscal cliff scenario is avoided, Fed’s QE3 should still re-emerge as a key market driver. Our current favoured USDJPY indicator – the 2 year US-Japan yield spread – has also turned lower and is now signalling further downside. Finally, our measure of market positioning also shows JPY shorts reaching clearly overextended levels last week, reinforcing the view that further downside is likely for the Japanese currency. Our Positioning analysis suggests that investors are currently holding broadly neutral USD positions. This provides scope for short USD positions to be established as the market builds expectations for the Fed pulling the trigger on outright Treasury purchases.
BNP Paribas