DAILY MARKET COMMENTARY
22 November 2011 – 8:00 GMT
Tuesday
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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
Investors continued to offload risk trades following yesterday's sharp declines in Europe. More attention was given to developments in the US as the chairs of the Congressional Super-Committee confirmed that no deal would be possible on fiscal consolidation. Ratings agencies so far have noted that there would be no impact on the US' standing, as political paralysis appears to have been widely expected. Indeed, this was one of the key reasons behind Standard & Poor's downgrade of the US this summer and so far their fears have been justified.
Our analysts expect the headlines to pass without major incident and the focus will revert to the situation in Europe. Although there are no major summits due, work is already underway for the heads of newly-installed/elected governments in southern Europe to contain the fallout from the debt crisis. Italian PM Mario Monti is due to meet EU President Van Rompuy later today, before meeting Sarkozy and Merkel tomorrow. Greek PM Papademos is due to meet Eurogroup Chair Juncker today in Luxembourg and ECB President Draghi in Frankfurt. A decision over the release of the 6th tranche of aid to Greece is expected to be made on Nov. 29th at the next Eurogroup meeting, and domestically Greece will push for parliament to vote on a new aid deal with the Eurozone in January. Meanwhile, in a further sign of sovereign stress starting to affect the core, Austrian banks are now required to limit further lending to central and eastern European nations as potential losses rise. Overnight EURUSD traded 1.3470-1.3508 and USDJPY 76.88-77.31. Ahead today, US GDP and the FOMC minutes are due.
EUR
Moody's gave a warning about France, saying that elevated borrowing costs would be credit negative if they continue. Outlook remains stable (in line with other agencies) but this could be easily threatened if funding costs remain elevated.
Eurogroup Chairman Juncker said if France were to lose its triple-A rating, then so would the EFSF. He added that it would be inappropriate for a ratings agency to downgrade France.
Greek Prime Minister Papademos said staying inside the Eurozone is the only option, and that the prospects are excellent for reducing Greece's debt burden as laid out in the Oct 26 Summit agreement.
The euro was boosted by Greek Finance Minister Venizelos who said the Eurogroup meeting on Nov 29 would decide on releasing the sixth tranche of aid to Greece. EU Council President von Rompuy agreed.
However, Venizelos also appeared to postpone the dates of events that had been due to take place before year-end. He now aims to complete the debt swap in time for a EUR 14.4 bn bond redemption due on March 20, and does not see the Greek parliament voting on the deal until January.
Regarding the Greek banking system, Venizelos said all bank deposits are guaranteed in practice though the state may need to take over some smaller lenders. One stumbling block in Greece for the next tranche remains that the opposition leader Antonis Samaras has refused to sign a letter committing his party to the previously-agreed austerity measures.
The ECB announced it made EUR 7.99 bn worth of bond purchases in the week ended Tuesday, Nov 15 - higher than the EUR 4.48 bn done the week before, but not exceptionally large by any means. Clearly the ECB has not yet stepped up the pace of its bond buying in response to recent events.
The ECB's Nowotny said that they will have to discuss ECB's role in crisis resolution and that printing money is not an option 'in simple form'. The comments may be referencing reports that the IMF might be able to boost its lending capacity by first borrowing from the ECB and then on-lending the cash to needy sovereigns. Newswires reported the idea was first floated at the Oct. 27 EU Summit, but that both Germany and the ECB opposed it. We note that earlier plans to allow the EFSF to borrow from the ECB were not implemented, suggesting this latest proposal also may never see the light of day..
GBP
Public sector borrowing numbers are due in the UK today, and the market is expecting a ?1bn print for the net credit requirement, with borrowing falling to ?3.8bn from ?11.4bn previously.
UK Prime Minister David Cameron acknowledged that at this stage it is harder to cut the deficit, given the weak growth outlook, but also said 'there is no letting up', suggesting the UK will stick to its austerity plan and not shift towards a more growth-oriented strategy.
A. White
Analyst at Fibosignals.com
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