14th of January 2011 - Fundamental Forex Market Overview

DAILY MARKET COMMENTARY
14 January 2011 – 8:00 GMT
Friday

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Market Analysis Desk
Foreign Exchange Research: www.fibosignals.com/5585/resources.html
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FUNDAMENTAL ANALYSIS at 0800 GMT

USD

The lack of newsflow during the Asia session ensured the price action was fairly subdued. Yesterday's powerful euro advance has finally come to a halt, and the euro weakened slightly as the session wore on. EURUSD traded 1.3323-1.3373, USDJPY 82.49-82.86. Fed Chairman Bernanke, speaking at an FDIC forum on small business lending, said the risk of deflation has "receded considerably". A disappointing U S jobless claims print helped the dollar claw back some ground against the Canadian dollar. Initial jobless claims jumped unexpectedly to 445k but claims data can be especially volatile around this time of year, reflecting huge seasonal swings as well as the impact of inclement weather. So a hint of caution may be needed with this latest weekly print, despite the slight pick-up in the key 4-week average. In other data releases, the nominal trade deficit was little changed at $38.3bn, but our analysts acknowledge some resulting upside risk to their 3.5% Q4 real GDP estimate.

Today's CPI report for December will provide the latest verdict on the efficacy of the Fed's QE program. Our analysts are in line with the consensus, and expect the core print to fall to +0.7% y/y (prev. +0.8%). Retail sales, industrial production and University of Michigan confidence are also due, and our US economists are above consensus for all three reports. We expect the dollar will continue to respond favourably to improving US economic figures

EUR

The euro's stronger rally yesterday led us to close out our short EURUSD trade recommendation, but we retain our bearish view on the currency.

ECB President Trichet's comments at the policy press conference were slightly hawkish, suggesting that the ECB's governing council is growing more concerned about inflationary pressures inside the Eurozone. This was not entirely surprising given that December's initial CPI estimate came in above the ECB's medium-term target of "below, but close to, 2%". The final CPI estimates for December are due for publication today, and any upward revisions are likely to be euro-supportive.

Trichet acknowledged the risk that the ECB could revise up its inflation outlook, but said that stronger inflation has so far not impacted the ECB's assessment. He stressed that inflation expectations are still anchored, but sounded a vigilant note saying that the ECB "are never precommitted not to move interest rates" and reminded the audience that the ECB hiked in July 2008.

ECB Executive Board member Stark did not appear to be in any hurry to tighten monetary policy. Referring to yesterday's ECB meeting he said "we will monitor developments closely and the question is whether the upside risks that we spoke of today will materialise&we must wait and see." ECB Governing Council member Liikanen added that Eurozone interest rates are appropriate in the current situation.

French President Sarkozy said he believes EURUSD is too high. There were further comments from Eurozone policymakers regarding the rescue fund, with a German government spokesperson stating that increasing the size of the EFSF is "not on the agenda". German Finance Minister Schaeuble said any extension of the current rescue mechanism would send the wrong signal and said the German government continues to oppose a Euro-bond proposal. He also said the Eurogroup meeting next week is unlikely to yield any results and the goal is to get a permanent safety net by March.

JPY

Prime Minister Kan has reshuffled his cabinet. Kaoru Yosano takes over from Kaeida as Minister for the Economy and Fiscal Policy. Our JGB rates strategist notes that Yosano lies on the hawkish side of the fiscal debate, and is not an advocate of further monetary easing. Noda stays on as Finance Minister, which implies no change in FX intervention policy.

GBP

There was no change in MPC policy and we will wait for the minutes on Jan. 26 to see if sustained inflation levels are affecting MPC policymaker thoughts.

Industrial production was slightly softer than expected at +0.4% m/m.

A. M. Negrin Bautista, CFA

Chief Analyst at Fibosignals.com

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