DAILY MARKET COMMENTARY
23 November 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
Despite the possible boost that risk could have received from dovish FOMC minutes and the IMF's decision to loosen the criteria for its liquidity facilities, risk was heavy overnight as growth worries resurfaced. Tuesday's soft US GDP figure in addition to a weak PMI print from China both cast doubt on hopes that the non-Eurozone economies would have been able to help the global economy avoid a deep recession. This is now more in doubt and it is understandable that investors are heading towards year end more cautious than usual. Overnight USDJPY traded 76.93-77.07 and EURUSD 1.3447-1.3531. The IMF's potential provision of up to EUR91bn for Italy over the course of two years was initially greeted cautiously, as the numbers, though welcome, would still not make a material difference to the funding needs of Italy and Spain. In addition, should pressure extend beyond the current combination of countries and threaten the core further, the IMF's resources would be far from enough. The pressure is now on the Eurozone to act with urgency, which unfortunately still appears lacking. On the US side, the Supercommittee's inability to reach a deal has to Moody's and S&P announced there would be no US rating actions flowing directly from the failure of a Congressional committee to agree on fiscal consolidation measures have prompted ratings agencies into action. Fitch however issued a reminder that the outlook on the US rating could be lowered to 'negative' from 'stable', and that a final decision on the matter would be taken before the end of November.
EUR
The euro was briefly boosted after the IMF expanded its lending facilities to enable it to provide more flexible financing to economies experiencing short term liquidity issues. Under the new design, IMF loans can be made available for between six months to two years, and funding of up to 10 times quota is available. We note that Italy could be eligible to borrow up to EUR 91 bn from the expanded facilities.
Germany's Finance Minister Schaeuble said the whole Eurozone faces a lack of investor trust. Repeating the language used ahead of previous EU summits, he said the Dec. 9 EU summit needs to give markets a 'clear' signal. He did not elaborate except to say that the EU can master the crisis with existing instruments.
A key personality in Portugal's previous administration suggested Portugal's EUR 78 bn rescue package might be too small. Carlos Pina, who as former Treasury Secretary was involved in the original EU/IMF/ECB negotiations, said a further EUR 20-25 bn might be needed. The additional funding would be needed to support Portugal's public companies which have lost their access to capital markets.
Bundesbank President Weidmann said the ECB cannot be the lender of last resort to governments and that high interest rates in the debt markets can be incentives for sovereign states to reform. Clearly, the core inside the ECB are not changing their tone and remain forcibly against any debt monetization, despite continued calls for greater involvement in stabilizing the Eurozone debt markets. European fixed income markets were little changed on Tuesday with spreads stabilizing somewhat.
The Euro was also affected news of fresh talks over a new rescue deal for a lender in Belgium and France. The market is worried that France's rating could be affected as a result of the bailout, which would damage the overall credit quality of any Eurozone guarantees.
A decision over the release of the 6th tranche of aid to Greece is expected to be made at the next Eurogroup meeting on Nov. 29. However, we note that this will only cover the EU's portion of the tranche, and the timetable for the IMF to disburse its contribution has not yet been announced.
GBP
The UK public sector net balance for October was slightly lower than expected at GBP3.4 bn instead of GBP3.8 bn. 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.
BoE MPC member Miles released a paper on the UK housing market, noting that the proportion of homeowners in the UK is likely to drop on a permanent basis as a result of the crisis.
A. White
Analyst at Fibosignals.com
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