Daily Report: Euro Soft after Italy Downgrade, Greece Talk Continues

Euro remains generally weak after S&P downgraded Italy's credit rating. Also there are rumors that a major China bank has stopped foreign exchange swaps with several European banks in response to recent downgrades. Though, there was some relief as Greece said the country is close to getting the next tranche of bailout funds after a conference call with the international lenders. Dollar is steady on risk aversion and as FOMC will start its two days meeting today. Yen is also firm on news that the Japanese government is going to unveil some measures to cushion the image of its strength. Australia dollar stabilizes a bit as RBA minutes signals that the bank is in no hurry to cut rates.

S&P's cut the credit rating of Italy to A from A+, with a negative outlook, amid concern that deteriorating growth and a 'fragile' government would make the country unable to reduce its deficits. S&P's currently forecasts Italy's GDP to grow +0.7% this year, down from previous estimate of +1.3%. According to the agency, 'the reduced pace of Italy's economic activity to date will make the government's revised fiscal targets difficult to achieve'. Moreover, the 'fragile governing coalition and policy differences within parliament will continue to limit the government's ability to respond decisively to domestic and external macroeconomic challenges'.

There rumors that Bank of China, a major market-maker in China, stopped forwards and swaps trading with some European banks. Those banks include Societe Generale, Credit Agricole and BNP Paribas and recent downgrade by Moody's was cited as one of the major reasons. The bank declined to comment so far. It's believed that another China bank has followed and stopped trading yuan interest rates swaps with European banks too.

Greece Finance Minister Venizelos said that "substantive" discussion was held with EU and IMF officials on securing the EUR 8b installment of the first bailout. While the troika stressed the country should speed up activities in trimming spending and raising taxes, . Bob Traa, the IMF's resident representative in Greece, stated that 'impressive fiscal consolidation has happened' in Greece. The discussion will follow with another conference call today.

The RBA minutes of its September 6 meeting showed that bank is still confident that the boom engulfing the mining sector will continue to support the economy and gave little hints of rate cuts in near term. The minutes noted that "the international outlook had become significantly more clouded since the previous board meeting." But, "members considered that the current setting of monetary policy left the board well placed to respond to evolving global and domestic economic conditions."

It's reported that Japan is going to unveil a string of measures to cushion the impact of yen strength on domestic economy. The measures would likely include subsidies for companies to establish facilities in Japan. Also there will be measures for job creation and support to finances of SMEs. Economy Minister Furukawa said Japan needs to "establish a strong economic structure that won’t be affected by movements in currency markets, whether it’s a strengthening or a weakening in the yen."

The Fed will begin its FOMC meeting today. It's widely expected policymakers will announce something called 'operation twist' -increasing the average maturity of securities holdings by swapping holdings of lower maturities Treasuries with longer ones, after the 2-day meeting. Compared with outright bond purchases (QE3), one advantage of operation twist is that the size of the Fed's balance sheet would remain unchanged and is less unlikely to invoke inflation.

EUR/JPY Daily Outlook

Daily Pivots: (S1) 104.01; (P) 104.75; (R1) 105.55; 

Intraday bias in EUR/JPY remains on the downside with focus on 103.88 support. Break there will confirm resumption of whole fall from 123.31 and should target medium term projection level at 103.42 first. On the upside, above 105.27 minor resistance will turn bias neutral and extend the consolidation pattern from 103.88. Nevertheless, even in case of another recovery, we'd continue to expect upside to be limited by 108.01 support turned resistance and bring fall resumption eventually.

In the bigger picture, the break of 105.42 support indicates that whole down trend from 169.96 has resumed. As noted before, the up trend in weekly MACD is broken and EUR/JPY is possibly building up downside momentum again. Next target will be 61.8% projection of 139.21 to 105.42 from 123.31 at 102.42. And sustained break there will pave the way to 100% projection at 89.52, which is close to 88.96 all time low. On the upside, break of 123.31 resistance is needed to signal trend reversal or we'll stay bearish. 

EUR/CHF  Daily Outlook

EUR/CHF spikes higher to 1.2213 today on rumor that SNB could raise the floor from 1.2 to 1.22, or even 1.25 tomorrow. The break of 1.2190 resistance argue that rise from 1.0061 might be resuming. But we'd prefer to see sustained trading above 1.22 level to confirm. In that case, EUR/CHF should head towards 1.2399 support turned resistance. Meanwhile, if SNB disappoints tomorrow, EUR/CHF could dropped back to prior range but again, SNB has made it clear about their intention to keep a floor at 1.2 and any decline attempt should be contained by this level.

Economic Indicators Update

GMT	Ccy	Events	Actual	Consensus	Previous	Revised
1:30	AUD	RBA Minutes
5:45	CHF	SECO Economic Forecasts Sep
6:00	EUR	German PPI M/M Aug	-0.30%	0.10%	0.70%
6:00	EUR	German PPI Y/Y Aug	5.50%	5.80%	5.80%
6:00	CHF	Trade Balance (CHF) Aug	0.81B	1.97B	2.83B
9:00	EUR	German ZEW Survey (Economic Sentiment) Sep		-45	-37.6
9:00	EUR	German ZEW Survey (Current Situation) Sep		40	53.5
9:00	EUR	Eurozone ZEW Survey (Economic Sentiment) Sep		-42.3	-40
12:30	CAD	Leading Indicators M/M Aug		0.20%	0.20%
12:30	CAD	Wholesale Sales M/M Jul		0.30%	0.20%
12:30	USD	Housing Starts Aug		590K	604K
12:30	USD	Building Permits Aug		590K	597K