9th of February 2011 - Fundamental Forex Market Overview

DAILY MARKET COMMENTARY
9 February 2011 – 8:00 GMT
Wednesday

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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

US Treasury yields continued to advance during the Asia session, helping to push yield-sensitive pairs like USDJPY and USDCHF even higher. EURUSD traded 1.3613-1.3669, USDJPY 81.92-82.51. US Treasuries are still feeling the effects of yesterday's weak auction and the 10y yield finally breached 3.75% overnight. Although the S&P 500 finished 0.42% ahead, Asian equities are marginally weaker at the time of writing as China's latest rate hike weighs on sentiment.

Regional Fed Presidents Fisher (2011 voter), Lacker (2012 voter) and Lockhart (2012 voter) made public appearances. Fisher and Lacker again sounded relatively hawkish. Fisher said he expected QE2 to run its course until June, but reiterated his opposition to an additional round of asset purchases thereafter. Lacker said that although he would not support an imminent end to QE2, the question of cutting the program short is something to consider at each FOMC meeting. Lacker said he thinks core inflation has bottomed out, though he acknowledged the risk of rising headline inflation. Lockhart said there is a high bar to raising the current target for asset purchases, but he also stressed now is not the time to adjust the program. Fed Chairman Bernanke is due to testify at Congress and the head of the New York Fed Markets Group Brian Sack is scheduled to speak on QE2.

EUR

Although no agreement has yet been reached on enlarging the effective capacity or widening the scope of Europe's rescue mechanism, finance ministers continue to express their preferences on how a reformed mechanism should look. Dutch Finance Minister De Jager said he opposes using the EFSF to buy sovereign bonds in primary and secondary markets, and even objects to countries buying back their debt using funds provided by the EFSF. Although he supports extending the maturity of Greece's rescue loans so that they match those offered to Ireland, he is opposed to lowering the interest rate charged to either country.

German industrial production for December was slightly softer than expected at +10%y/y, and the monthly figure surprisingly contracted at -1.5%. But the overall outlook for the German industrial sector remains strong and the ECB is on alert for leakage into additional inflationary pressures. A major German car producer announced a pay deal for its workers and further events of this kind across Germany could see the ECB Governing Council up its rhetoric on second-round effects.

JPY

Moody's said it would not take action on Japan's sovereign rating today, but warned that the rating could come under pressure in future if the government's fiscal reform agenda does not succeed. The agency added that the current rating is being supported by affordability of debt servicing, as well as Japan's ability to refinance its debt.

A. M. Negrin Bautista, CFA

Chief Analyst at Fibosignals.com

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