Fitch warns on Italy, as Greek PSI talks continue
Comments by ratings agency Fitch that it didn’t expect to cut France’s credit rating this year saw markets push higher, however this was tempered by comments about the likelihood of an Italian downgrade by the end of the month. The agency stated that “the future of the euro will be decided at the gates of Rome” suggesting that any further action on ratings could well be determined by the end of January.
Yesterday’s comments by Fitch of course don’t exclude the possibility that ratings agency peer Standard & Poors will deliver on its threat, prior to last months EU summit to downgrade France anyway, as it did with the US last year.
Today we see more meetings of European leaders; this time German Chancellor Merkel meets Italian PM Mario Monti in Berlin, while it is President Sarkozy’s turn to meet IMF chief Lagarde after Merkel’s meeting last night, where the two discussed a range of subjects pertaining to Greece, growth and employment.
The subject of haircuts for Greek bondholders remains a contentious topic with EU officials warning that private bond holders would be forced to take haircuts in the event no agreement is reached. Time remains pressing with a bond rollover of €14.5bn due by March 20th.
These bondholders, aside from resenting the fact that the IMF, governments and the ECB are excluded from taking haircuts, such an action by EU officials would trigger the CDS insurance and initiate a default, the consequences of which would be difficult to assess.
As such there is a fear that the private bondholders may hold out against taking haircuts in the hope that they can trigger the insurance and get paid out rather than take the losses.
In economic data due out today German real GDP growth for 2011 is expected to slip back from 3.6% to 3%, highlighting the damage done by the debt crisis on German economic growth.
In a week that has seen Germany sell short term bills at negative yields, and longer term paper has under whelmed somewhat recently, we will get to see how the demand is for 5 year notes, with the auction of €4bn worth today.
In the UK the latest trade balance numbers for November are expected to rise slightly after October’s surprise improvement. The November deficit is expected to come in at -£8.35bn, up from October’s -£7.6bn. This would still keep the numbers within the Chancellor’s fiscal targets for 2011.
EURUSD – the 1.2850/70 barrier remains the key obstacle to further upside after this week’s 16 month low at 1.2665.
The risk remains for the move towards the August 2010 lows at 1.2590 which also equates to a 76.4% retracement of the up move from the 2010 lows at 1.1880 to last years highs at 1.4940. It would need a break below 1.2480 and the July 2010 lows to open up the 1.2000 level.
If the 1.2850/70 area were to break any overspill should be contained by the 1.3080 area.
GBPUSD – the December lows at 1.5360 and trend line support at 1.5375 from the 2011 lows at 1.5270 remain the key support areas. While above these lows the risk remains for a move back towards the 1.5570 area.
Only below the 1.5270 lows in October targets the 1.5190 61.8% retracement of the 1.4230/1.6745 up move.
The pound needs to get back above the 1.5570 area to retarget the 55 day MA at 1.5740.
EURGBP – the 0.8300/10 area has contained the rally in the single currency thus far, with a only a break above re-targeting 0.8370.
The September 2010 lows at 0.8200/05 remain the key obstacle to further declines towards the 2010 lows at 0.8065.
This should continue to provide support initially, and we could well see range trading between these levels for the next few days.
USDJPY – still in the range here with support around the 76.50 area and resistance at the 55 day MA at 77.50. A move back above the 55 day MA targets the trend line resistance at 77.80 from the 2007 highs at 124.15.
The key support remains around the November 2011 lows at 76.50 which prompted last week’s pullback. Only a move and close below 76.50 opens up the all-time lows at 75.30.
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