DAILY MARKET COMMENTARY
25 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
The euro remained soft overnight but quiet holiday trading probably limited further losses and the breach of 1.33 against the dollar was only temporary. Investors remain nervous about the currency and although leaders are pushing for structural changes, short-term market-oriented solutions continue to be ruled out. German Chancellor Merkel, French President Sarkozy and Italian Prime Minister Monti met yesterday, but no new crisis-fighting measures were announced at the subsequent press conference. The ambition to change the Treaty remains in place, and Germany continues to rule out common bond issuance. Fitch downgraded Portugal one notch to BB+, becoming the second rating agency to cut the rating to junk status.
The Financial Times reported that the ECB is considering the introduction of 2y or even 3y liquidity operations to help ease funding pressures in the banking system. It appears that a letter sent to Brussels by Greek opposition leader Samaras has been deemed satisfactory. A letter from Samaras committing to the implementation of reforms had been set as a pre-condition for the release of additional funds to Greece. This will likely now pave the way for the disbursement of Greece's long-overdue sixth tranche of cash by mid-December. We expect to hear more on this at the upcoming meeting of Eurozone finance ministers on Nov. 29. Ahead today there is very little data out but Italy's T-bill and zero-bond auction will be a stern test of market sentiment, with up to EUR10 bn targeted. Yesterday the 10-year yield on BTPs went through 7% again. Equity markets were weak overnight in Asia. EURUSD traded 1.3299-1.3355 and USDJPY 77.10-77.53.
EUR
German Chancellor Merkel, French President Sarkozy and Italian Prime Minister Monti met. No new crisis-fighting measures were announced, but the long-term ambition to change the EU Treaty remains in place. Merkel restated her opposition to the introduction of common bond issuance, noting "the conditions aren't right" and that their introduction would send the "wrong signal". Sarkozy added they all agreed not to make demands of the ECB.
EU Commissioner Rehn said Wednesday's bund auction shows that the crisis is spreading to healthy core countries. We note that bund yields did not come back in on Thursday, suggesting the psychology around the German bond market may be changing. If so this would be a euro negative development. Italy announced plans to issue up to EUR 8bn of BTPs on Nov. 29 (a meeting of Eurozone finance ministers is scheduled for the same day). This is likely to be another risk event for the euro, with further selling of BTPs likely in the days leading up the auction.
ECB Executive Board member Gonzalez-Paramo repeated the ECB's position that governments cannot expect the ECB to finance public debts given the ECB is not the lender of last resort to governments. He said the sovereign debt crisis is one of the biggest challenges Europe has ever faced.
The Financial Times reported that the ECB is considering the introduction of 2y or even 3y liquidity operations to help ease funding pressures in the banking system. We note that the maximum tenor currently available is 13m, so this would represent a significant extension. However, the report did not comment on whether any plans were afoot to help address the scarcity of ECB-eligible collateral.
Fitch downgraded Portugal one notch to BB+, becoming the second rating agency to cut the rating to junk status. The outlook remains negative. Moody's rates Portugal one level further down, and S&P rates the sovereign one level higher than Fitch.
It appears that a letter sent to Brussels by Greek opposition leader Samaras has been deemed satisfactory. A letter from Samaras committing to the implementation of reforms had been set as a pre-condition for the release of additional funds to Greece. This will likely now pave the way for the disbursement of Greece's long-overdue sixth tranche of cash by mid-December.
Germany's IFO for November surprised to the upside which gave the euro a temporary boost. The components were climate 106.6 (cons. 105.2), current assessment 116.7 (cons 115.0), expectations 97.3 (cons 96.0). Separately, Italian consumer confidence for November was much stronger than consensus at 96.5 (cons. 92.4, prev. 92.9). Our European economists note that it is the biggest increase in almost 3 years. It is quite surprising considering the ongoing troubles, but may be related to the installation of a new technocratic administration.
JPY
National CPI came in at -0.2%y/y, worse than expected and core inflation was at -1.0%. The fear of deflation expectations becoming ever-more entrenched suggest the BoJ will continue to act if JPY faces significant appreciation pressure.
AUD
RBA Governor Stevens said that the terms of trade have likely peaked, that the greatest risks to the Australian economy are external, and that China probably has ample scope for expansionary policy once it is confident that inflation is under control.
A. White
Analyst at Fibosignals.com
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