12th of July 2011 - Fundamental Forex Market Overview

DAILY MARKET COMMENTARY
12 July 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 euro continued to sell off during the Asia session as Monday's meeting of Eurozone finance ministers failed to produce any concrete proposals to address the latest bout of market nervousness. EURUSD traded 1.3932-1.4062 and USDJPY 80.06-80.38. Italy's debt auctions on Thursday are likely to be the next major risk event for the euro, and are already fast becoming the focus of market attention. Yesterday, Spanish 10y yields climbed above 6% for the first time since the launch of the euro. Italian 10y yields pushed 42 bp higher on the day, while German bunds saw safe haven demand. EURCHF made new record lows overnight, dipping below 1.1700 again. European stocks fell sharply, and the S&P 500 followed closing -1.81% lower. FOMC minutes are due, but events inside the Eurozone are likely to remain the principal driver of EURUSD for the foreseeable future.

EUR
No new policy initiatives were announced at Monday's meeting of Eurozone finance ministers despite yesterday's broad-based selloff in euro-denominated assets. The post-meeting statement made no direct reference to Italy or Spain. Given these countries are the source of the latest bout of market nervousness, this omission is unlikely to soothe market concerns. Although Eurogroup Chairman Juncker did say he was aware that Italy is currently the focus of market attention, he conceded the meeting did not discuss developments in Italy in specific detail.

Ministers said they "stand ready to adopt further measures" to improve the Eurozone's capacity "to resist contagion risk". But the details were disappointingly vague. The possibility of "enhancing the flexibility and the scope of the EFSF" was mentioned, but proposals on this have yet to be even presented to ministers. Some progress on this is expected "shortly", but no specific timeframe was mentioned.

The most interesting development was that ministers have dropped their ambition to find a solution that avoids a 'selective default' rating for Greece. This is likely a tacit admission that a default rating will be almost impossible to avoid. That in itself is a worrying development for the euro given the uncertainties around how the ECB and national regulators may react.

ECB Executive Board member Bini-Smaghi said that inflation expectations in the Eurozone are stable for now. On the sovereign debt issue, he stuck to his previous view claiming that allowing a country to default would be "madness'. He described the correlation between sovereign risk and banking sector risk as 'explosive', but insisted that Italy will never default because it is a rich country and is clearly able to repay its debt. However, he recommended that Italian banks should accelerate their plans to raise capital.

German Chancellor Merkel said that Italy must send an urgent signal about its commitment to fiscal reform.

German Finance Minister Schaeuble said that speculation about doubling the size of Europe's rescue facility has no basis in fact.

The PBoC's Deputy Governor said that he has confidence in the euro, and that Europe will remain a primary investment target for China. He added he is prepared to explore cooperation with the EU, although did not elaborate.

EU Financial Services Commissioner Barnier said he would ask the G20 to consider global rules on ratings agencies.

JPY
The BoJ kept the policy rate unchanged, and made no adjustments to any of its unconventional policy measures.


A. White
Analyst at Fibosignals.com


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