DAILY MARKET COMMENTARY
19 April 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 sentiment began to stabilise towards the end of the Asia session as the market fully digested the news of S&P's decision to lower the outlook on the US AAA rating to negative. EURUSD traded 1.4206-1.4247, USDJPY 82.32-82.71. The agency sees a 1-in-3 chance of a downgrade in two years' time. It cited ongoing deficit concerns, particularly that an agreement might not be implemented by 2013 to reduce US fiscal pressures in a meaningful way. Treasurys initially sold off on the news, but soon recovered fully. Regional Fed presidents Bullard, Fisher and Lockhart spoke. Both Lockhart and Bullard said Q1 growth could be softer, in line with our US economists, who shifted their Q1 annualized GDP forecast from 3.0% to 1.0%. Bullard thinks it might make sense to curtail QE2 early and Fisher remained hawkish. Building permits and housing starts are expected to be weaker but risk sentiment remains the main driver, especially with no scheduled Fed speakers ahead of the April 27 FOMC decision..
EUR
Several officials, including a Greek government spokesman and ECB Governing Council member Wellink, denied the possibility of a Greek debt restructuring. Earlier remarks attributed to unnamed German government sources suggested that Greece might not make it through the summer without restructuring its debt. The latest data showed no bond purchases under the ECB's Securities Market Programme.
A 12m and 18m Spanish T-bill auction was poorly received by the market. The 12m T-bill average yield was 2.770% vs 2.128% at the previous auction, while the 18m T-bill average yield was 3.364% vs 2.436% previously.
ECB Governing Council member Bonello urged caution on the pace of policy rate normalisation in light of the debt crisis. Bonello added that the ECB may re-widen the rate corridor `quite soon'. This refers to the fact that the spread between the marginal lending facility and the deposit facility has to widen by 25bp to bring it back to pre-crisis levels. This would be another step towards policy normalisation.
JPY
Japan's economy minister Yosano said US Treasury bonds would remain in demand even if the US was ultimately downgraded, and that short-term Treasury securities are the best debt investment.
AUD
The minutes of the RBA's April 5 policy meeting provided little further insight into the RBA's current thinking. Referring to the recent events in Japan, the board concluded that "the effects on the Japanese economy were likely to be significantly larger than those of the Kobe earthquake" in 1995. But the impacts on "global activity were likely to be relatively limited". This was expected to cause disruption to Australia's exports to Japan in the near term but, beyond this, the reconstruction effort along with greater energy demands "could provide a boost to Australian exports". Our Australian economists stick to their view that the next RBA rate hike is likely to be in August.
CAD
Our analysts expect headline CPI for March to come in at +0.4% m/m, and +2.6% y/y (prev. +2.2%). Bank of Canada core CPI figures are also due and we expect the annualised reading to tick higher to +1.2% y/y. A CPI surprise could bolster rate expectations for the BoC and help the Canadian dollar. However given core CPI is likely to stay well below the midpoint of the BoC's 1-3% target range, we do not think there is a sense of urgency to tighten policy.
A. White
Analyst at Fibosignals.com
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