17th of June 2011 - Fundamental Forex Market Overview

DAILY MARKET COMMENTARY
17 June 2011 – 8:00 GMT
Friday

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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 euro weakened towards the end of the Asia session, having earlier found support after the IMF predicted a positive outcome from Monday's meeting of Eurozone finance ministers. Nevertheless, uncertainty prevails over whether Greece will receive the next quarterly instalment of funds, and whether parliamentary approval of the new austerity measures is still a prerequisite. EURUSD recovered and traded at 1.4128-1.4222, while USDJPY traded at 80.49-80.76.

Asian stocks were generally weaker, although the S&P500 earlier managed to close just inside positive territory.

EUR
The IMF said that they look for a positive outcome from the June 20 Eurogroup meeting. It is the first official news we have heard, following several news reports suggesting they would release their ?3.3bn portion of the next ?12bn loan tranche for Greece on the back of assurances form the EU on future financing. Their support is subject to the adoption of agreed Greek reforms so the final confirmation may not yet come.

The IMF has softened its stance and seems willing to release the next tranche based on a general statement of ongoing support for Greece by the EU heads of state on 24 June. This idea backs up earlier IMF comments in the European session as well as the earlier comments by Olli Rehn. This agreement will buy policymakers time and ensure that policy will not be rushed through. Clearly relevant parties do not want Greece to default on its debt and a longer-term solution is likely to be postponed until July. It is very much a case of postponing the solution.

The main conflict of interest is still the role of private sector involvement. Ratings agencies insist that any form of restructuring will trigger downgrades and the ECB insist that the measure must be entirely voluntary. While the German position has soften slightly, a solution still needs to both appease the Bundestag and the ratings agencies.

The role of the Greek parliament is less clear. It is not certain whether a full approval of the austerity package is required but political risk form this remains significant. Greek PM Papandreou is attempting to reshuffle his cabinet. The PM plans to cut the number of deputy ministers and add up to 4 non-elected officials. The confidence vote is expected to take several days and will therefore take place on Sunday at the earliest, although reports are conflicting. The candidate who was to become the new Greek finance minister resigned from parliament. However, the balance does not change as the member will be replaced directly. Greek officials warn that the Greek government is now facing a loss of confidence from its own MPs and that a third deputy may resign too.

Earlier, the EU Commission commented that Olli Rehn still expects a decision to be taken in June on the next tranche of funding for Greece, while an agreement on a continuation of the Greek program to come in July. The Commission said it is working very closely with the IMF.

EU May headline inflation confirmed at 0.0 m/m 2.7 y/y, down from 2.8 y/y in April. Core inflation nudges down to 1.5% y/y from 1.6 in April. The ECB is unlikely to change its stance on monetary policy due to this.

ECB's Liikanen says the ECB must avoid second-round effects from commodity prices by keeping inflation expectations well-anchored.

The details behind the Spanish bond auction were mixed. Spain sells EUR1.5bn of 15 year bonds at a rate of 6.027% and bid to cover 2.57x. They also sell EUR1.3bn of 2019 debt at 5.352% and a cover of 2.1x. Although the bid-to-cover rates are reasonable, it seems the Spanish authorities perhaps scaled back the offering due to high yields. Direct comparisons don't really exist but they sold EUR2.5 bn of 2021 bonds on 19/05 at a yield of 5.395%. The 2019 rate is hardly attractive, but unsurprising given movements in peripheral market spreads in recent weeks..

CHF
SNB kept its 3m Libor target rate unchanged at 0.25% as expected. It also held the 2011 GDP forecast at 2%. The inflation forecast for 2012 is marginally lower at 1.0% from 1.1% earlier and at +1.7% from +2.0% earlier for 2013. These are minor changes. Our Swiss economist notes that the SNB acknowledged increased capacity utilisation and mentioned the danger of an overheating housing market. The mention of an overheating construction sector is new.

Hildebrand says SNB is concerned about exchange rate developments; however his colleague Danthine says selling forex reserves for Swiss francs not option at moment. SNB's Danthine says concerned about CHF strength because monetary policy mix is not ideal. Says monetary policy concept not targeted to a given CHF level

As we expect risk aversion to be a key driver in the coming weeks the franc will likely stay in demand versus currencies such as the EUR..

CHF
Our analysts now think the Bank of England will not hike the policy rate until February 2012 - previously he had anticipated the first hike in August 2011.


A. White
Analyst at Fibosignals.com


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