6th of October 2011 - Fundamental Forex Market Overview

DAILY MARKET COMMENTARY
6 October 2011 – 8:00 GMT
Thursday

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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 has been firm in Asia, mainly on the back of yesterday's better-than-expected US data and hopes that Eurozone policymakers will step up efforts to recapitalise the banking sector. For instance, German Chancellor Merkel said the state would step in if banks cannot recapitalize on their own. Comments by the IMF's European head Borges also attracted attention; he said the IMF could create an SPV to buy the bonds of Spain and Italy if needed. However, he also said that any new alternative in lending modalities would require a different legal structure and a different source of financing as the IMF itself can only lend to countries and not use its resources to intervene in bond markets.On the data front, the US ISM non-manufacturing was above expectations yesterday and details showed that the leading new orders component rose considerably. However, the emplyoment component suggested continued weakeness in labour markets. This is unlikely to bring much relief to the Fed as the weak labour market indicates muted price risk. At the time of writing the Nikkei is trading 1.42% higher and US stock futures are broadly flat. EURUSD traded 1.3320-1.3375 and USDJPY 76.71-76.85. Investor focus will now shift to the BoE and ECB rate announcements today.

EUR
Investors are focused on the ECB rate announcement and press conference today. We expect President Trichet to again stress increased downside risks to growth. He may still characterise inflation risk as broadly balanced, particularly as the central bank is likely to wait for the next staff forecasts before relaxing its view on inflation. Trichet recently said the separation of non-standard measures allows the bank to maintain price stability even in a deep crisis and that the risk to medium-term inflation was broadly balanced at the last meeting. Growth momentum has been softening somewhat and worries about the Eurozone periphery have been rising. Trichet maintains however that it is the task of governments to resolve the debt crisis. Improved labour market conditions in larger Eurozone member states such as Germany, along with the latest upside surprise in inflation, also suggest that price risks may not have fallen sharply. All this would argue against an aggressive non-consensus easing today, especially as the central bank will likely announce new liquidity measures to ease market stress.

The IMF's Borges gave the euro a boost when he said that the IMF could, if needed, create an SPV to buy the bonds of Spain and Italy on primary and secondary markets alongside the EFSF. However, he also stated that any new alternative in lending modalities would require a different legal structure and a different source of financing as the IMF itself can only lend to markets and not use its resources for intervening in bond markets.

In Switzerland, today's release of CPI for September will be closely followed. Any indication of rising deflation risk would support the SNB's current monetary policy stance. The SNB is also due to release its report on foreign currency reserves today.
GBP
UK data was mixed. The services PMI numbers were above consensus at 52.9 (consensus 50.5) but the forward looking components of the print, such as business expectations, were slightly less encouraging.

Q2 GDP numbers were revised down to +0.1% q/q. Our UK economist notes that the ONS published a major revision to its back data to show that that the economy suffered a deeper recession - 7.1% output loss compared to -6.4% previously, but that the recession was shorter than anticipated. This suggests that the output gap is bigger than expected, and should open the door for more QE.

Our team of analysts expects no policy change from the Bank of England today, but anticipates the MPC will announce a fresh round of QE in November.


A. White
Analyst at Fibosignals.com


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