DAILY MARKET COMMENTARY
18 November 2011 – 8:00 GMT
Friday
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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
Although G10 FX markets were relatively range-bound during the Asia session, local equities followed US stocks lower. New York Fed President Dudley said the euro is certain to survive the crisis. There was a general lack of commentary about the Eurozone itself though new Italian Prime Minister Monti has cleared a first hurdle by passing a confidence vote in the Italian senate. However, the previous administration's senior ruling party has warned that it would withdraw support for the technocratic government if a wealth tax were to be introduced. In other developments, the German government appears to be pushing for fresh treaty changes as a part of an overhaul of governance in the Eurozone, though there could be significant opposition within the wider European Union given the political logistics involved. The US managed to continue its good run of form on the data front, with housing starts, building permits and jobless claims all surprising to the positive side. Ahead on Friday, ECB President Mario Draghi will be speaking and investors will be looking for further insight on his position towards an expansion in the ECB's bond purchases. Over the past 24 hours, EURUSD traded 1.3422-1.3489 and USDJPY 76.85-77.09.
EUR
The euro came under pressure on Thursday, following a weak Spanish auction. The 10 year bonds came far below the market at an average yield of 6.975% and a bid:cover of 1.54. Our fixed income traders noted that the auction had a long tail and they needed to fill everyone who participated in order to sell the bonds. Initial estimates for the size had been between EUR3 and 5 bn. A French multi-tranche auction was better received however, coming at the higher end of initial estimates. The SMP were actively buying in the markets once again.
Angela Merkel said that even if the ECB took on the role of the lender of last resort, it would not immediately solve the Eurozone crisis. She also said that Europe must consider treaty changes in order to back the euro and that budget control requires a limited change. See above for a further discussion on this.
Funding stress remains elevated, FRA-EONIA continued to widen on Thursday while EURUSD basis swaps also ticked lower. Liquidity issues are clearly driving some of these problems but the issues are getting increased coverage with market speculation that the Fed may lower the cost of its swap line funding with the ECB. One effect of this would have to be to expanding the Fed's balance sheet. After the fall of Lehman Brothers, Fed swap line usage hit $590 bn - about 20% of the current size of the Fed's balance sheet - and might be seen as a USD-negative development.
In comments made on Thursday, German Chancellor Angela Merkel said the country would press for a Eurozone treaty change on Dec. 9, the date of the next European Union summit. The Wall Street Journal suggests that although non-Eurozone EU nations have reservations, UK Prime Minister David Cameron appears to be backing limited treaty changes in exchange for guarantees London's status as a financial status would not be hurt.
Italian PM Monti easily passed a confidence vote in the Senate and is expected to win similar support in a vote in the Chamber of Deputies. The PdL has warned that it would withdraw support if a wealth tax is enacted.
According to Reuters, an EFSF official said feedback from investors on leveraging options is positive, and would join leveraging schemes if volatility falls and the market's confidence improves. The fund could still be leveraged 4-5 times but countries 'need to do their reform homework'. However, the official warned that the IMF would not be able to directly participate in the leverage scheme.
GBP
In an interview in today's Financial Times, Bank of England MPC member Weale said there is a "very strong case" for extending Gilt purchases into next year unless the outlook improves. He added that it is "perfectly possible" the UK economy is already contracting.
UK retail sales were stronger than consensus estimates at +0.6% (m/m) +0.9% (y/y). While the numbers appear on the surface fairly strong, the data print is volatile and the ONS say that the strength was driven by pre-Christmas sales.
A. White
Analyst at Fibosignals.com
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