DAILY MARKET COMMENTARY
22 February 2011 – 8:00 GMT
Tuesday
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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
Risk appetite declined sharply during the Asia session as tensions in Libya increased, New Zealand was struck by another powerful earthquake, and Moody's lowered the outlook on Japan's sovereign rating from stable to negative. Sentiment was not helped by a sudden (but brief) 30-pip spike in USDJPY as the Asia session got underway. EURUSD has traded 1.3563-1.3685, and USDJPY 82.84-83.54. Asian stocks are down about 1-2%, and US stock futures are also pointing lower. After first breaking above $1410/oz, gold slipped as the risk-averse mood took hold, and is trading back below $1400/oz at the time of writing. Signs of growing unrest in the Middle East kept the price of crude elevated, despite the risk-off backdrop. In the US, Minneapolis Fed President Kocherlakota, often seen as a reluctant supporter of QE2, is due to speak later today. Our US economists are broadly in line with the consensus and expect February consumer confidence to come in virtually unchanged. They also expect the latest S&P/Case-Shiller survey to register a further fall in US house prices.
EUR
Portugal's Finance Minister dos Santos said the country already has enough cash to cover two-thirds of the bond redemptions due in April and June. He added that 70% of this cash came from overseas investors, and that 10% of this cash was of Chinese origin.
ECB Executive Board member Stark said that, although inflation expectations are still well anchored, the ECB is prepared to act "quickly and decisively" on inflation if necessary. He said the key question now is to decide whether Europe is facing a temporary inflation "hump", or a more protracted period of inflation. He warned too that if second-round effects do materialize, the current monetary policy setting would put the ECB behind the curve.
Stark dismissed the idea that last week's surge in emergency ECB lending might influence the ECB's decision on whether to phase out non-standard liquidity provision. He described the sharp increase in usage of the ECB's marginal lending facility as a "very short-lived event mainly due to developments in Ireland".
Stark went on to say that the EFSF, and its proposed successor (the ESM), should be allowed to purchase bonds in the secondary markets, but that this would not necessarily mean an end to ECB bond purchases, given that the latter is a monetary policy decision. These comments suggest that the ECB's Securities Markets program could remain in place for quite some time to come, although Stark did add that the program should not continue any "longer than absolutely necessary". The ECB settled €711 mn worth of bond purchases last week, after three weeks of inactivity.
Greek Prime Minister Papandreou described as "unsustainable" the interest rates charged on rescue loans to Greece. He repeated that Greece would not default on, or restructure, its debt. He added that it is not an option for individual member states to leave the Eurozone as it would be negative for everyone.
Outgoing ECB Governing Council member Weber compared the process of fiscal consolidation to marathon running and predicted that the hardest part of the journey lay ahead for fiscally vulnerable member states. Weber sensationally added that fiscal austerity measures "have shaken and fundamentally damaged the foundations of monetary union." He also voiced his opposition to the concept of fiscal union at least for now, stressing that "the crisis mechanism should not become the gateway for institutionalised transfer payments within the currency union".
JPY
Moody's lowered its outlook for Japan's sovereign rating to negative from stable, citing "heightened concern that economic and fiscal policies may not prove strong enough to achieve the government's deficit reduction target and contain the inexorable rise in debt". Moody's went on to say that a JGB funding crisis is unlikely in the near to medium term, and that it sees no immediate change in JGB investor behaviour.
Before the outlook change, Economy and Fiscal Reform Minister Yosano pointed to an advantage of a strong yen, noting that it provides some insulation against the rise in oil prices.
GBP
BoE MPC member Weale noted the UK is at risk of stagflation, and again made the case for an early rate hike, predicting that a small rise now would reduce the need for an even larger hike later. Both Weale and MPC member Sentance voted for a 25bp rate hike at the January meeting, and the market continues to speculate about whether another hawkish MPC member has since come forward to cast his vote. Hence, the release of the minutes of the Feb. 10 policy meeting will be key for sterling on Wednesday.
MPC member Posen, who voted for an expansion of Gilt purchases in January, is due to speak at 1700 GMT. Any indication that he is reconsidering his stance would be seen as further evidence of a hawkish shift in thinking on the MPC, and would likely be sterling-positive.
NZD
The NZD sold off heavily after another strong earthquake hit Christchurch. Extensive destruction was reported. Fitch said that the impact of the earthquake by itself is not expected to lead to a sovereign downgrade.
A. M. Negrin Bautista, CFA
Chief Analyst at Fibosignals.com
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