7th of January 2011 - Fundamental Forex Market Overview

DAILY MARKET COMMENTARY
7 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 dollar continued to grind higher during the Asia session, as guarded optimism builds over the upcoming payrolls report, and the strength of the US recovery in general. EURUSD traded 1.2968-1.3029, USDJPY 83.14-83.56. Asian equities were fractionally higher, after the S&P 500 finished down -0.2%. Press reports mentioned that US Treasury Secretary Geithner has written to Congress to urge that the US debt limit be raised, preferably before the end of March. Initial jobless claims rose in line with expectations in the week ended Jan 1 to 409k.

Our analysts upped their estimate for nonfarm payrolls following the better data earlier this week. They forecast private payrolls rose +190k (cons: +170k) and total payrolls increased +160k (cons: +150k). The dollar has recently started to behave increasingly like a growth currency but today's payrolls release, and Fed Chairman Bernanke's testimony, will be a good litmus test for whether this trend can be sustained. Although we look for modest dollar strength in 2011, ongoing uncertainty on the recovery, coupled with the possibility of policy errors, is expected to keep FX volatility elevated.

EUR

The newswires carried comments from China's PBoC. The Bank said the euro is an important part of its FX reserves investment, adding that Eurozone sovereign debt offers reasonable returns.

According to newswires, the EU Commission has put forward a blueprint for imposing haircuts on senior bondholders of European banks. The same reports suggest the measures could become law by 2013.

A Spanish newspaper, citing an unnamed government source, said that China has committed to purchase €6 bn of Spanish sovereign debt. This represents a relatively small portion of the €90 bn in Spanish supply our European rates strategists expect for 2011. The newspaper added that China's Vice Premier Li has committed to buy as much Spanish debt as the combined holdings of China's Greek and Portuguese bonds.

Eurozone consumer confidence came in softer than estimates at -11.0, down from November's print of -9.4. However, German factory orders for November were much stronger than consensus, rising by +5.2% m/m and +20.6% y/y.

GBP

The UK services PMI disappointed, recording a figure of 49.7. Our UK economist notes that this is largely a blip in the trend due primarily to the adverse weather conditions experienced over the previous month, and the index should recover in January.

CHF

CPI for December was firmer than expected at +0.5% y/y, a significant rise on November's print of +0.2%. This reading helps dampen expectations of renewed SNB intervention, especially as consumer surveys show inflation expectations are already picking up, suggesting upside CPI risks in 2011.

A. M. Negrin Bautista, CFA

Chief Analyst at Fibosignals.com

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