15th of June 2011 - Fundamental Forex Market Overview

DAILY MARKET COMMENTARY
15 June 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
Although the dollar recovered some of yesterday's losses against the euro, risk appetite was modestly supported after a solid performance by US equities. EURUSD traded 1.4404-1.4497, USDJPY 80.38-80.64. The AUD in particular held onto Tuesday's gains, eventually helped higher by a hawkish RBA Governor Stevens. US industrial production and CPI are due later. These are always key numbers but assume an even greater significance on this occasion given the FOMC decision and subsequent press conference are scheduled for next week.

EUR
European finance ministers will hold an emergency meeting on Tuesday in an effort to speed up the implementation of the EUR172 bn rescue package for Greece. With few signs that the differences between policymakers have been resolved, it is unlikely to see any significant developments, the meeting is more of a pre-meeting for next week. Nonetheless, headline risk remains and price action in the euro could be volatile. We stay short EURUSD as a trade recommendation via a 3m EUR put/USD call option with a strike at 1.35

European finance ministers held an emergency meeting on Tuesday in an effort to speed up the implementation of the EUR172 bn rescue package for Greece. The meeting was more of a pre-meeting for next week. German Finance Minister Schaeuble reiterated that private sector involvement in the solution will be discussed and Finish Finance Minister Katainen offered his support to the proposals. Austrian Finance Minister Fekter said ministers still looking for Greek compromise, still differ on bailout model for the Greek bailout. Comments from the Luxembourg Finance Minister Luc Frieden that aid may be delayed until July hurt market sentiment. We stay short EURUSD as a trade recommendation via a 3m EUR put/USD call option with a strike at 1.35.

A headline saying that the Greek Finance Ministry finalises a EUR80bn loan extension gave some brief support to the euro. However, this is just a formal signing off by the Greek government on the agreement in March to extend the repayment term of Greece's EU loans.

The ECB remain hawkish. Governing Council member Jozef Makuch said a July hike is likely but not definite. This is similar to what Trichet has said in recent days and a 25bp hike in July remains the base case. ECB's Draghi began his testimony to the European parliament by describing monetary policy as still very accommodative. He said the ECB must adjust interest rates in a pre-emptive manner. He underlined the ECBs view on Greece, stating that the crisis could not force the bank to deviate from its mandate. Draghis assertion "Eurobonds may work in closer union" is similar to what Trichet started talking about last week. It's a longer-term focus and highly contingent on many factors.

ECB's Noyer says doubt over private sector involvement in bailout packages is raising market rates and risk of contagion. Noyer added that France's creditworthiness needs to be defended and safeguarded and it is "highly desirable" for France to step up the pace of deficit reduction. He underlined the ECBs stance though, saying that debt in default cannot be accepted as collateral by the ECB. IF a private sector solution can be found that avoids default, that would be appropriate.

Spain 12-month bid-to-cover 2.85 vs 2.5 at May auction, average yield 2.695% vs 2.546%. Spain 18-month bid-to cover 3.91 vs 4.12 at May auction, average yield 3.260% vs 3.095%. The focus will be on Thursday's bond auction, which is likely to be more significant for markets.

AUD
RBA Governor Stevens struck a hawkish note at his overnight speech. He referred again to the RBA's view that 'further tightening of monetary policy is likely to be required at some point for inflation to remain consistent with the 2-3 per cent medium-term target', and pointed to July's CPI data as a key piece of data that could be influential on the decision-making process.


A. White
Analyst at Fibosignals.com


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