DAILY MARKET COMMENTARY
19 September 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 euro continued to suffer on Monday during the Asia session concerns mount over the situation in Greece. With another EUR8bn in funding by the Troika witheld and Greece's current cash running out, investors appear willing to price in a greater chance of default. Prime Minister Papandreou cancelled a planned trip to the US stating the need to remain in the country as talks with the troika resume. As it stands, the Troika is expected to demand fresh austerity measures otherwise the next trance of funding could be witheld, as reported by several news agencies. In addition, domestic politics threatens to complicate the situtaion as the leader of the opposition has called for new elections. This has been dismissed outright but clearly it shows how capacity for fresh austerity will be extremely restrained given the lack of national unity.
Otherwise, market focus for the week ahead will undoubtedly be with the Fed decision. Our economists are calling for 'operation twist' to be announced. In doing so the maturity of its balance sheet will be extended to lower long-term interest rates. Our economists note that as such a policy is apt to be controversial for the divided FOMC, investors should not view such a change as high-probability, while further balance sheet expansion is unlikely. We expect risk to stay on a soft note in general, pending further developments in the Eurozone. EURUSD opened much lower and the pair traded in a range of 1.3647-1.3790, while USDJPY traded 76.87 - 77.00. Major indices in Asia are trading in a nervy manner on fears the Eurozone crisis could hit global growth even mor.
EUR
US Treasury Secretary Geithner said bigger EU economies should be ring-fenced from the crisis. Geithner was pressed at the Eurogroup meeting for Eurozone to leverage EFSF, but made no reference to the TALF programme. We believe that it really depends on how the plan is being sold to the European governments. The story needs to be about balance sheet creation/conservation and bank term funding, and has nothing to do with money printing
Greek Finance Minister Venizelos said the country must promote changes to achieve competitiveness, and the fiscal targets for this year and next. He noted that Geithner's presence at the recent Eurogroup meetings showed the situation was critical, but ruled out political compromises and aid he was 'taken aback' by comments by the opposition. The Greece - Troika teleconference will be held later on Monday.
Finlands PM reiterated demand for Greece collateral, though an agreement was not reached over the weekend. The next gathering of the Eurogroup is on October 3rd, and all parties would hope that the July 21st agreements were ratified ahead of time.
German finance ministers warned that he couldn't say when the Troika mission would be completed, but stressed that there was no 'euro crisis'. He also said over the weekend that the Greece situation was 'not that urgent' and monetary policy alone wouldn't solve real world problem. He ruled out fresh fiscal stimulus as suggested by Geithner.
In German state elections in Berlin, Chancellor Merkel's party's vote share increased but coalition party FDP's share fell below the 5% required to gain seats.
ECB's Mersch said that that he could imagine Eurozone bonds issued jointly by the AAA credit-rated states. Nowotny said that the ECB's bond buying is temporary and the ECB would need to rethink its bond buying program if EFSF ratification is delayed. However, German Chancellor Merkel said euro bonds are 'absolutely' the wrong way forward..
GBP
BoE's Weale moved from being one of the most hawkish on the committee to sounding dovish, suggesting that QE could be implemented if inflation risks undershooting its long-run target and also noted that the risk of recession has increased since July.
The Rightmove House Price Index showed a 0.7%m/m gain, 1.5%y/y. The BoE minutes are due this week and we note an extra voter for QE is possible. We expect GBP to remain under pressure in the near term.
NZD
The Westpac Q3 New Zealand consumer confidence figure was unchanged at 112.0. We remain cautious on NZD at current levels as the RBNZ is in no hurry to move on rates in the near future. Q2 GDP is due this week, and a modest 0.5% quarterly rise is expected.
A. White
Analyst at Fibosignals.com
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