DAILY MARKET COMMENTARY
17 November 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 appetite faltered just before the Asia session got underway after Fitch warned that contagion from Europe could spread across the Atlantic, and might eventually have negative outlook implications for the ratings of US banks. This undid much of the positivity triggered by a stronger than expected US industrial production report. US headline inflation cooled to 3.5%, while core inflation was steady. Capital flows into the US surprised to the upside. Although these points are still not enough to turn the US dollarinto a growth currency, the sustained flow of capital into the US to capture stronger growth will likely pick up speed if the flow of solid economic data can be maintained. On Thursday the news and data flow is somewhat lighter, though Europe will face more bond auctions by sovereigns and slip-ups are likely to prove costly. Mario Monti was formally sworn in as Italian prime minister with a purely technocratic cabinet, and we believe he will need to race against time to come up with comprehensive plans to turn around Italy's debt situation. EURUSD traded 1.3422-1.3553 and USDJPY 76.94-77.07.
EUR
France appears to be shifting its position again on the question of whether to give the EFSF a banking license. Having initially advocated this approach months ago, only to drop the idea weeks later, it appears the proposal may once again be back on the table. In comments made on Wednesday afternoon, Finance Minister Baroin said an EFSF banking license would be the best way to create a structural firewall around the Eurozone and to prevent contagion. However, he said that "Germany has reservations that are more than historical, almost sociological and structural, concerning such an intervention from the central bank". Indeed, Germany's deputy finance minister flatly ruled out such an approach, saying "it is essential that the EFSF cannot tap the ECB".
In a report, Fitch ratings agency said the ratings outlook for US banks could materially worsen if conditions in the Eurozone were to deteriorate. However, the agency acknowledged that US banks had significantly reduced exposure to Eurozone banks.
Italian Prime Minister Monti was officially sworn in on Wednesday. Eurogoup chief Juncker said he was the 'right man' to reform Italy. Juncker also noted that Germany's debt to GDP ratio was actually larger than Spain's, but "no one wants to know about that".
The Troika review for Portugal was largely positive. The ECB said the mission agreed on program policies and growth in 2011 was better than expected. However, 2012 would be more challenging in growth terms, and the report warned that the program's success depended on structural reforms. Crucially, the next EUR8bn tranche would be disbursed either in December or January.
The IMF's Europe director resigned without giving details on Wednesday.
GBP
The BoE released its quarterly inflation report, downgrading both its GDP and CPI outlooks. The report stated that inflation is likely to be below target in the next two years and the outlook for growth is unusually uncertain. Growth is expected to be markedly weaker than the Bank had previously thought. They see the Eurozone crisis as the biggest single risk to the UK. The fan charts show CPI at around 1.3% in 2 years. Provided that CPI begins to decline as the BoE expects, the scope for further asset purchases is relatively high, especially if conditions in the Eurozone deteriorate further.
Labour data was mixed, October jobless claims increased +5.3k vs +21.0k consensus and the claimant count rate fell to 5.0% vs 5.1% expected. However, the ILO unemployment rate rose to 8.3%.
A. White
Analyst at Fibosignals.com
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