DAILY MARKET COMMENTARY
31 August 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
Risk markets continued to rally in Asia with the dollar softer versus G10 currencies, after a US session that was dominated by dovish FOMC minutes, which initially led the dollar gently lower, and pushed AUDUSD above 1.07 for the first time in almost four weeks. EURUSD traded 1.446-1.4414 and USDJPY 76.54-76.76. Crucially, the minutes revealed that 'a few' members felt that recent economic developments justified 'a more substantial move' at the Aug 9 meeting, but these members were willing to accept the change in forward rate guidance as "a step in the direction of additional accommodation". Earlier, two Fed speakers seemed to reinforce market expectations that the FOMC is shifting towards the dovish end of the spectrum. Chicago Fed President Evans (2011 voter) revealed that "he would have wanted to do more" at the Aug. 9 meeting. Even Minneapolis Fed President Kocherlakota who dissented at the latest meeting, suggested he would not dissent again - at least not for the same reason. Instead he said he would now 'abide' by the Fed's decision to introduce a conditional commitment to keep rates low until mid-2013. On the data front, house prices as measured by the Case-Shiller index showed further declines, and US consumer confidence fell to lows not seen since April 2009. Eurozone CPI and Canadian GDP numbers are due today.
EUR
The rebuttals continue after IMF Managing Director Lagarde over the weekend suggested that EU banks might need to be recapitalised. Bank of France Governor Noyer said he cannot understand why Lagarde would hold this view, and suggested she may have been misinformed by her IMF colleagues. The European Banking Authority also joined the debate, adding it is not calling for urgent and massive recapitalisation of EU banks. Our European banks team however continues to believe that the European banking system is grossly undercapitalised.
Noyer added that speculation about the possibility of a French ratings downgrade is an "absurd rumour".
An Italian auction was poorly received. The bid-to-cover ratio was low at 1.269%.
Eurozone economic sentiment fell to 98.3 in August from a revised 103.0 in July.
The headline CPI rate for the Eurozone is expected to drop slightly to 2.40%, whle the unemployment rate should be unchanged at 9.9%.
CHF
For three of the past four weeks, the SNB has made a policy announcement on Wednesdays at approximately 07:00 GMT. Last week was an exception, but with sight deposits now very close to (or at) the SNB's target of CHF 200 bn, investors will likely brace for the possibility of another SNB announcement. Having said that, the SNB is probably fairly satisfied with EURCHF above 1.18, and more importantly, the upward trend of recent days, and therefore may decide that a policy announcement is not warranted.
JPY
Japan's new PM Noda said he held teleconference with US Treasury Secretary Geithner but did not discuss FX. However, he continues to watch FX moves closely.
Manufacturing and industrial output numbers were softer than expectations at 51.9 and 0.6% m/m respectively.
GBP
M4 money supply numbers showed a further contraction with the y/y number decreasing by 1.1%. This provides further fodder for the BoE doves and may strengthen the case for new asset purchases.
BoE's Posen said the G7 central banks should buy assets to stop the economic downturn, and protect productive capacity and fiscal sustainability. He feels there are no credible threats of sustained higher inflation in advanced economies and more QE is needed.
A. White
Analyst at Fibosignals.com
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