11th of July 2011 - Fundamental Forex Market Overview

DAILY MARKET COMMENTARY
11 July 2011 – 8:00 GMT
Monday

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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 dollar enjoyed a broad-based though somewhat cautious advance during the Asia session. The euro came under further selling pressure after several vague newspaper articles suggested that opposition to an eventual Greek default may be starting to melt away among European officials. EURUSD traded 1.4181-1.4297. USDJPY traded 80.51-81.78. On Friday, non-farm payrolls only managed to climb by +18k (cons. +105k), while private payrolls rose only +57k (cons. +132k). The unemployment rate unexpectedly ticked higher again to 9.2% (cons. 9.1%). In response, the dollar fell sharply against the JPY and the CHF as US 10y yields dropped 15bp. US President Obama said the payrolls data shows "we still have a long way to go". US Treasury Secretary Geithner said he expects to see yields push higher as the Aug. 2 deadline approaches for changes to the debt ceiling. Our rates strategists agree, and we believe that if the move up in yields is gradual and orderly, USDJPY and USDCHF should receive some support, at least in the early stages of the move.

EUR
Eurozone finance ministers are due to hold their regular monthly meeting today, beginning at 1245 GMT. However Reuters, citing unnamed sources, reports that an additional emergency meeting will take place beforehand. A small number of key decision makers are expected to attend, including EU Council President Von Rompuy, ECB President Trichet, Eurogroup Chairman Juncker, European Commission President Barroso and EU Commissioner for Economic and Monetary Affairs Rehn.

ECB Executive Board member Bini-Smaghi said that the crisis has shown that the euro is an incomplete construct. The comment appears to contradict the claim - popular among EU politicians and policymakers - that this crisis is not a crisis of the euro but rather a debt crisis in a number of Eurozone countries.

Bini-Smaghi said that longer-term solutions are needed to bolster the euro, even if Treaty changes may be needed to achieve them. He suggested that Eurozone countries could eventually transfer their debt issuance functions to a supra-national agency. He added that he favours a change in EFSF rules so that the release of funds will no longer need unanimous approval. We note that this would, in principle, make it easier for cash to be delivered to fiscally-challenged member states in future and would likely be seen as euro-positive.

Italian sovereign bonds and equities fell quite sharply on Friday - with the markets regulator saying that the selling was likely due to an over-reaction to rising levels of uncertainty. Italian Prime Minister Berlusconi said he had a "long and cordial" meeting with Economy Minister Tremonti, somewhat alleviating market concerns that a rift had developed between them. Berlusconi added that Italy aims to balance the budget by 2014. Reuters reports that German newspaper Die Welt will claim on Monday that the ECB favours a doubling of the EFSF's size to ?1.5 trn so as to cope with a possible escalation of the situation in Italy.

German President Wulff said that it could take another "10 to 15 years" to solve Greece's fiscal problems - a "lot more time&than...Europe is currently willing to acknowledge".

The IMF's Executive Board approved the release of ?3.2 bn to Greece as part of the fifth quarterly tranche (the EU has already approved its own contribution of ?8.7 bn). The decision was widely expected given the Greek parliament's approval of the latest round of austerity measures. IMF Managing Director Lagarde, referring to Greece, warned that "a durable fiscal adjustment is needed, lest the deficit get entrenched at an unsustainably high level".

Barroso said that a consensus is now building on how to regulate ratings agencies, but that the European Commission has no plans to create a new ratings agency.

JPY
Finance Minister Noda said that recent yen rises are not "excessive" but that Japan will intervene decisively if yen moves become as sharp as they were in March. Noda went on to say that Japan's intervention policy would not change under a new prime minister as FX policy is decided by the finance minister and not the prime minister.

The BoJ is scheduled to begin a two-day policy meeting today. We do not expect any shifts in policy to be announced on Tuesday.

AUD
Weekend data showed that China's CPI was firmer than expected in June, rising to +6.4% y/y (cons. 6.2%, prev. 5.5%). Ordinarily, CPI strength of this magnitude would hurt the AUD on fears of imminent policy tightening. However, the PBoC hiked the policy rate last week pre-emptively, so the AUD has taken the weekend news in its stride. China's June trade data showed a slowdown in overall import growth, to +19.3% y/y (cons. 25.3%, prev. 28.4%).

CAD
Canadian jobs numbers were robust with net change in employment coming in at 28.4k, mostly driven by part-time employment which accounted for about two-thirds of the rise. The unemployment rate was flat at 7.4%, in line with expectations.

USDCAD climbed almost 80 pips immediately after the weak US payrolls numbers were released, but surrendered half of its gains before the close.


A. White
Analyst at Fibosignals.com


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