12th of October 2011 - Fundamental Forex Market Overview

DAILY MARKET COMMENTARY
12 October 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 sentiment was stable in Asia, mainly on a view that China will continue to support the domestic stock market and expectations the Slovakian parliament will still approve enhancements to the EFSF despite the failure of the first vote. The first vote failed as it was linked to a confidence vote for the government, and was thus based on the desire to vote down the government rather than on changes to the stability fund. Already ahead of the vote Finance Minister Miklos said that one way or the other, there would be an approval of EFSF enhancements by the end of the week, and the main opposition party is now set to support the measures.

In other news the US Senate passed the China Currency Bill. However, the bill is not expected to pass the House of Representatives, mainly as Republicans are strongly opposed to it. Elsewhere, Alcoa kicked of the Q3 US earnings season, missing estimates mainly as Europeans were said to have cut orders dramatically due to economic uncertainty.

Nevertheless, the focus during this earnings season will be on retailers and the manufacturing sector in order to evaluate the consumer as well as external demand. With expectations muted there is scope for the current earnings season to beat depressed expectations. This is mainly due to external demand as well as domestic spending holding up better than initially expected. The latest upside surprise of export growth in Germany, which is largely driven by demand in emerging markets, already suggested that demand held up better than initially expected. Last but not least, the troika said Greece will receive the next aid tranche early in November.

Ahead today investors will watch the release of the Sept 20-21 FOMC meeting. Elsewhere, Bank of Italy Governor and incoming ECB president Draghi will speak about the Italian economy. Most Asian stock markets are trading in the black, with the Hang Seng Index up by 0.6%. Alongside stable risk sentiment, still stretched short positioning suggests EURUSD and risk-sensitive pairs such as AUDUSD should find buyers on dips for now..

EUR
Troika staff inspectors announced that the next tranche of cash will be released to Greece when the Eurozone Finance Ministers and the IMF Board approve their report and authorise the release of the funds. The EUR 8 bn is expected to be disbursed in early November. Interestingly, the troika staff felt the cash should be released even though they acknowledged Greece would not meet its 2011 targets.

After silence on the matter for several months, ECB President Trichet warned that a credit event in Greece must be avoided. This is yet another piece of evidence that the July 21 agreement on private sector participation in the Greek rescue has been reopened.

EU Commission President Barroso is scheduled to announce a bank recapitalisation proposal on Wednesday. We note that this is distinct from the Franco-German capitalisation plan that was apparently agreed on Sunday between French President Sarkozy and German Chancellor Merkel, although no details have yet been released..
GBP
Bank of England MPC member Miles said that the central bank could have quite a "substantial effect" on bringing down the cost of corporate debt by buying Gilts. He supports the bank's latest moves and remains a key dove.

Bank of England MPC member Posen said he was pleased the MPC has voted in favour of a resumption of QE, a comment which promptly sent Cable 30 points lower. Later Posen added that QE will be expanded again if an expansion is needed. As for the possibility of buying other assets beyond Gilts, he said that was not a decision for the MPC to make.

JPY
Core machinery orders in August rose by 11% m/m and 2.1% y/y. This was considerably higher than expected and the largest month-on-month gain in more than a year. Latest data suggests that companies are still focused on bringing production levels back to pre-quake levels. This comes as some relief as machinery orders are acting as a leading indicator to capital expenditure.


A. White
Analyst at Fibosignals.com


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