Data Confirms Europe's In A Double Dip Recession

News and Events:

Heading into today's critical ECB meeting, economic data out of Europe confirms that the region is in the grip of a double dip recession. Euro-Zone Q3 GDP -0.1% q/q vs -0.1% exp, -0.1% prior read; -0.6% y/y vs -0.6% exp, and from -0.6% prior. This confirmation of contraction will put further pressures on the ECB to cut rates and focus the market's attention on the forecast for 2013 growth. We suspect that Draghi will remain overly optimistic on the Eurozone recovery by underestimating of the negative effect that the crisis has had on consumers-a fact clearly highlighted by yesterday's drop in retail sales by -0.08 as austerity measures and worries over a deeper crisis has caused consumer to delay purchases. While it seems nearly universal that the ECB will hold there has been some market chatter of a surprise rate cut today. NZDUSD rose to 0.8305 RBNZ and left the overnight cash rate at 2.55 as anticipated. RBNZ Governor Wheeler stated that monetary policy was appropriate as the global outlook remained soft but less threatening. Overall the statement was unexpectedly balanced. AUDUSD spiked from 1.0440 to 1.0480 as Nov employment +13.9k, unemployment fell to 5.2% vs. 5.5% ex. We remain constructive on the AUD as we suspect that the market has exaggerated expectations of RBA dovishness, overlooked the recovery in China and decrease in risk aversion. In other news S&P credit agency downgraded Greece to 'selective default' from CCC. The timing of today's downgrade indicates that the recent debt buyback program failed to relieve the country of ‘distressed' conditions. Interestingly the market failed to react perhaps withholding reaction till it sees the ISDA credit event determination but it also suggests that the private sector has all but written off Greece. In Switzerland, unemployment rose to 3.1% from 2.9%. But the big news was that Swiss prices on m/m basis shifted into deflationary territory as CPI fell -0.3% vs. 0.0% exp (0.01% prior read). While the yearly read has already been negative, today's read will increase speculation that the SNB will become more active in flight with the deflationary pressure throughout the CHF. As for today, we have the Bank of England and the European Central Bank's policy meetings. For the BoE PMC meeting it's generally excepted that despite the soft data, policy will remain constant, with Bank Rate left at 0.5% and the stock of asset purchases unchanged at £375bn. While comments have been mildly dovish in recent weeks, as highlighted in the November Inflation Report, MPC members were broadly content with the current policy setting. We don't see any sudden shifts at this meeting. As for the ECB, it is generally expected that Draghi will keep its benchmark (refi) interest rate on hold at 0.75%. Markets will be focused on any clues that the lower inflation trend and softer economic data (recessionary territory) will push the ECB to signal future interest rate cuts.

Today Key Issues:

• 2012-12-06T09:30:00 GBP Oct trade bal - global, GBP8.8 bln def exp; prior GBP8.37 bln def.
• 2012-12-06T09:30:00 GBP Oct trade bal - non-EU, GBP4.2 bln def exp; prior GBP3.97 bln def.
• 2012-12-06T09:50:00 EUR France E3-4 bln 4.25/3.75/2.75% 2018/19/27 OAT auctions
• 2012-12-06T10:00:00 EUR Q3 GDP - revised, -0.1% q/q, -0.6% y/y exp; prelim -0.1%, -0.6%.
• 2012-12-06T11:00:00 EUR GER Oct industrial orders, +0.9% m/m exp; prior -3.3%.
• 2012-12-06T12:00:00 GBP BoE MPC policy announcement,no change exp in 0.5% repo rate, QE.
• 2012-12-06T12:30:00 USD Nov Challenger job cuts
• 2012-12-06T12:45:00 EUR ECB policy announcement,no change exp in 0.75% refi rate.
• 2012-12-06T13:30:00 EUR ECB Pres Draghi press conference.
• 2012-12-06T13:30:00 USD initial jobless claims, 380k exp,; prior 393k.
• 2012-12-06T14:00:00 EUR ECB Asmussen speech in Frankfurt.

The Risk Today:

EURUSD has corrected lower to 1.3044 indicating we could see a period of consolidation before the bull mount a solid challenge to 1.3144. That said, with Mondays break of topside resistance at 1.3021 and momentum indicating further bullishness, upside test of 1.3144 should come shortly. However, there is short term event risk today. Should Draghi hint of a rate cut, watch for a significant unwind and 1.3021 support to come into play. The first level of resistance are located at 1.3144 (17th Oct high), 1.3284 (1st may high) then 1.3387 (27th Mar High). The next supports are eyed 1.3021 (30th Nov high), 1.2901 (30th Nov low), 1.2878 (7th Nov reaction high), 1.2797 (200d MA), 1.2722 (13th Nov pivot high), 1.2630/62 (3rd July high & 100d MA), 1.2463 (31st Aug low), and 1.2386 (14th & 17th Aug high).

GBPUSD Technical & view remain unchanged today. GBPUSD flag pattern breakout has peaked at 1.6130 and the pair is now consolidating gains. Momentum indicators are trending upwards suggesting that recent sideways activity is over and target of 1.6179 looks manageable. However, the aggressive price action has place us above UBB which could usher in a slight corrective pause before pressing higher. Watch for next resistance to come into play at 1.6059 (27th Nov high), 1.6083 (downtrend top), 1.6179 (1st Nov high), 1.6310 (21st Sept high) and 1.6454 (29th Aug '11 top). The support zone is located at 1.5958 ( 28th Nov. low), 1.5921 (100d MA), 1.5826 (15th Nov low) 1.5745/53 (30th July pivot), 1.5665 (uptrend channel floor), 1.5564 (8th Aug low), 1.5656 (intraday low),1.5458 (26th July low), 1.5405 (8th June low), 1.5390 (6th June low), then 1.5266 (13th Jan low).

USDJPY technical's have not really changed today with the pair consolidating between 81.68 and 82.84. We remain optimistic (granted less so) that the recent bearish sentiment was merely corrective pause (getting comfortable to these higher levels) rather than a reversal (and our view to reload longs). Momentum indicators feel marginally overstretched and this week unwind should clear the way for an extension rally to 84.17. Above us, solid resistance remains at 82.84 (22th Nov high), 82.99 (3rd April high), then 84.17 (15th March high). On the downside, some support is eyed at 81.50/69 (15th Nov. high & 28th Nov. low), 81.00 (16th April pivot), 79.06 (9th Nov low), 78.75 (8th Oct high), 77.94 (Symmetrical triangle floor), 77.12 (13th Feb low) then 76.03 (3rd & 17th Jan low).

USDCHF sell-off has paused at 0.9055 support and we expect a period of sideways consolidation as MACD has flat-lined. A closing break below 0.9211 would be a short term negative and would signaling extension bearish momentum to 0.9211 minor support then a wide gap till 0.9041. The first levels of support should be located at 0.9255 (27th Nov pivot low), 0.9211 (17th Oct low), 0.9194 (7th & 11th May low), 0.9100 (11th May high) then 0.9041(1st may low). The next levels of resistance are located at 0.9299 (5th Dec high), 0.9325 (28th Nov high), 0.9457 (21st Sept high), 0.9515 (13th Nov high & uptrend top), 0.9610 / 20 (26th Aug high), 0.9810 (10th Aug high & uptrend channel), 0.9900 (2nd Aug high), and 1.0000 (psychological resistance).