Tuesday, May 03, 2011

3rd of May 2011 - Fundamental Forex Market Overview

DAILY MARKET COMMENTARY
3 May 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
The price action during the Asia session was choppy and stop-loss driven. The RBA's policy statement was slightly more hawkish than the previous one, but there was not enough of a rhetorical shift to materially affect AUDUSD. EURUSD traded 1.4772-1.4882, USDJPY 80.98-81.29. Risk appetite was more or less unchanged. The Nikkei-225 was closed for the Golden Week holiday, but US stocks closed fractionally lower. Manufacturing ISM edged down slightly to a still better-than-expected 60.4. The survey components that most directly indicate output trends remained strong, on balance, although were down slightly from March. Our analysts think the strong reading reinforces their view that the economy is not losing momentum, despite the slower Q1 GDP report. As a result of recent dollar underperformance and the Fed continuing with QE2 through June, we lower our short-term dollar forecasts. We now see EURUSD at 1.48 in 1m and at 1.40 in 3m, up from 1.40 and 1.30, respectively. Our 1m USDCHF target drops to 0.89 and the 3m falls to 0.96. We mark to market our 1m commodity currency forecasts, putting USDCAD at 0.95, AUDUSD at 1.10 and NZDUSD at 0.81. We keep our USDJPY and EURCHF forecasts unchanged. Our UK economist recently revised his forecast for the first BoE rate hike, postponing it until August at the earliest. In line with his view, we now raise our 1m and 3m EURGBP targets to 0.90 from 0.85.

EUR
Eurogroup President Juncker said they would give a full response to Portugal by mid-May and reiterated that Greek debt restructuring is not an option at this stage. Juncker also said he thought Bank of Italy Governor Draghi appears to have strong support to be the next ECB president, once Trichet's term ends in October.

Greek Finance Minister Papaconstantinou repeated that Greece does not need to restructure its debt, but that an extension to the repayment schedule on the EU/IMF loans could be beneficial. EU's Rehn says the EU strategy to rescue Greece isn't 'failing'; and that the EU has 'largely contained' bond market distress.

The ECB's Constancio reiterated that risks to the inflation outlook have moved to the upside and said officials have not decided to rush into a series of rate hikes. Constancio also said that non-standard measures are temporary by nature.

There was a series of upward revisions to European PMIs. German manufacturing PMI was revised up to 62.0, while the Eurozone-wide number was revised up to 58.0.

AUD
The RBA kept policy unchanged for the fifth consecutive meeting, but allowed slightly more hawkish language to creep into the policy statement. Our Australian economics team sees this as an attempt to reintroduce a near-term tightening bias, which was virtually absent in the previous statement. Specifically, the RBA noted the terms of trade were reaching higher levels than assumed a few months ago, and that the 'marked decline' in core inflation had now 'run its course'. It was again noted that the strong AUD was useful in the fight against inflation, but the board questioned the currency's ability to control inflation single-handedly. Our economists stick to their view that the next hike will likely come in August.


A. White
Analyst at Fibosignals.com

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