17th of January 2011 - Fundamental Forex Market Overview

DAILY MARKET COMMENTARY
17 January 2011 – 8:00 GMT
Monday

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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 dollar strengthened during a quiet FX session in Asia as Shanghai equities fell by approximately 3% in the aftermath of Friday's surprise reserve ratio hike by the PBoC. But the Nikkei-255 was unaffected and is unchanged at the time of writing. EURUSD traded 1.3310-1.3415, USDJPY 82.68-83.01. Friday's batch of US economic data was mixed, which contributed to a volatile session. Retail sales grew by only +0.6% (cons. +0.8%), and the University of Michigan confidence reading fell unexpectedly to 72.7 (prev. 75.5). However, industrial production rose by +0.8% in December, well ahead of the +0.5% consensus. Crucially, core CPI for December was stable at +0.8% y/y (cons. +0.7%). As a result of the data, our US economists see no reason to change their Q4 GDP forecast, and continue to expect a +3.5% annualised pace. Fed Governor Tarullo said he sees no reason to either increase or decrease the size of the Fed's $600 bn program of asset purchases. Boston Fed President Rosengren seemed to agree saying "there will be a time when these aggressive actions need to be reversed, but first we need to get the economy on a much more solid footing". Richmond Fed President Lacker, an FOMC voter this year, said he was "very concerned" that trouble in the municipal bond markets could cause "broader distress". Tarullo added that the Fed will look closely at the exposure of banks to municipal bonds. Treasury Secretary Geithner called on China to allow the yuan to appreciate more rapidly, noting that this would help to contain Chinese inflation. The US is on holiday today, and there are no US data releases scheduled.

EUR

Fitch cut Greece's sovereign debt rating to BB+, outlook negative, from BBB- on Friday, citing its "heavy public debt burden" which renders "fiscal solvency highly vulnerable to adverse shocks". All three of the main ratings agencies now rate the sovereign as sub-investment grade. Greek Finance Minister Papaconstantinou repeated that Greece will not restructure its debt. Slovak Finance Minister Miklos repeated his opposition to the Greece rescue package which was activated in May, saying that "debt restructuring would be a better solution for Greece".

ECB President Trichet urged European governments to make "enormous efforts to bring down their debt". He said that Ireland and Greece must respect the programs they committed to. He repeated his view that a credible strong dollar is in the world's interest.

German Finance Minister Schaeuble noted that there were practical limitations to the value of loans the European Financial Stability Facility could provide, and that the headline figure of €440 bn "cannot be fully utilised". (This has long been the view of our European rates strategists). Schaeuble said "we have to and will solve this problem". Chancellor Merkel did not seem to be in favour of a quick fix without additional conditions, and instead insisted that if Europe's financial rescue infrastructure is to be enhanced, then this should be done as part of a "complete strategy that must absolutely include closer economic coordination". French Finance Minister Lagarde said that several dimensions of the problem are currently being looked into, including the size of the facility, the transition from the current temporary facility to the permanent one in 2013, as well as "the possibility of acquiring bonds on the secondary market". Portugal's Prime Minister Socrates said that a "joint response" to the debt crisis is being prepared, and suggested it may be ready in time for the next EU Council meeting in February.

ECB Governing Council member Nowotny said that member states may need to refinance about €924 bn this year, and that given markets are "nervous" this issuance could lead to some "uncertainties" in Q1.

The final German CPI estimate for December was confirmed at +1.2% m/m and +1.9% y/y. In a weekend article in a German newspaper, ECB President Trichet said the ECB "are always concerned if inflation rises and are following developments very closely" but he said that the higher inflation figures for December can be largely accounted for by rising energy prices. Trichet went on to say that interest rates are currently at the right level, but that the ECB will always take the decisions necessary to ensure price stability. ECB Governing Council member Weber said that CPI risks in the Eurozone are now "broadly balanced" but that these risks "could well move to the upside".

JPY

Finance Minister Noda said that Prime Minister Kan has ordered him to watch FX markets carefully and to cooperate with the BoJ. He said he is ready to act decisively on FX if needed.

Newly appointed Minister for the Economy and Fiscal Policy, Yosano, said that Japan could lose international trust, and long-term rates could rise, if bond issuance continues to exceed revenues. Yosano went on to say that it is inappropriate for cabinet ministers to comment on the yen's level, and that Japan should not rely excessively on BoJ monetary easing to end deflation.

CHF

SNB Chairman Hildebrand said that FX policy is still unchanged at the SNB, despite valuation losses incurred as a result of currency movements. He also agreed with earlier assessments that Swiss franc strength would negatively affect growth, echoing the conclusions of a currency summit in Switzerland on Friday.

SNB Vice-Chairman Jordan said it is the job of the SNB to ensure price stability and that it "will do everything in its power to fight deflation or inflation".

CAD

Prime Minister Harper said that his government remains concerned about the growth in household debt. The Bank of Canada is due to announce its policy decision on Tuesday, and the consensus expects no change to the policy rate.

A. M. Negrin Bautista, CFA

Chief Analyst at Fibosignals.com

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