23rd of December 2011 - Fundamental Forex Market Overview

DAILY MARKET COMMENTARY
23 December 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
Flows were very light in Asia as markets gradually wind down for the holiday season.

The Wall Street Journal reports that the Fed is reconsidering the policy rate guidance it provided in August - when it signalled that rates would likely stay at zero until mid-2013. The article says the FOMC is poised to revamp its policy communication strategy at the Jan. 25 policy meeting, and could indicate that rates are likely to stay near zero until 2014 or beyond. The report cited FOMC members' fear of weak economic conditions as the reason to move to an even more dovish stance.

Also, a day after the ECB engaged in 'quasi-QE' via its 3-year refinancing operation, outgoing Executive Board member Bini-Smaghi stated in an interview with the Financial Times that quantitative easing should be an option for the ECB if deflation risks were to emerge. We note that the recent data prints out of Germany and the ECB's own inflation forecasts still suggest outright ECB QE (outside of the SMP mandate) is not on the horizon, but we have seen over the last two years that previous taboos in the Eurozone have been broken one by one, and the same could happen again.

In the US, Q3 GDP figures were revised lower to 1.8%y/y. The University of Michigan Index also came in weaker than expected at 68.0 (cons. 69.9). However, jobless claims were again lower than expected, creating a visible downtrend which suggests the US labour market may be in better shape than commonly assumed. On Friday, Canadian GDP is due and the US will have the durable goods and personal income and spending report for November.

EUR
In an interview with the Financial Times, the ECB's outgoing Executive Board member Bini-Smaghi said that he 'did not understand the quasi-religious discussion' over quantitative easing. He acknowledged that the US and the UK are adopting current measures because the central banks of these countries saw strong deflation risk, whereas this is so far not the case for the Eurozone. However, he also stated 'But if conditions changed and the need to further increase liquidity emerged, I would see no reason why such an instrument, tailor made for the specific characteristics of the euro area, should not be used.'

On the SMP programme, Bini-Smaghi refused to commit to any explicit form of action, such as purchase or yield targets. However, he called for 'constructive ambiguity' on the matter and noted that central banks still need to be mindful of their mandates. ECB President Draghi has stressed in the past that acting as a lender of last resort to governments is not in the ECB's mandate.

The Portuguese government announced that a Chinese State-Owned Enterprise had won the auction for its 21% stake in a major energy company. This is an example of how we believe China will chose to help the Eurozone - via strategic acquisition of assets rather than an increase in bond purchases or greater IMF support.
GBP
UK Q3 GDP was revised higher slightly to +0.6% q/q from +0.5% y/y. Our UK economist noted that this trend-like pace in Q3 comes after a very poor holiday and weather disrupted Q2. In fact, Q2 data was revised down from 0.1% to 0.0%. Forward-looking indicators point to a stagnant economy in Q4.

The UK current account deficit for Q3 was much wider than expected at GBP15.2 bn from GBP7.4 bn last, expanding to 4% of GDP. We note that the quarterly data is volatile and prone to revision and that the trend thus far has been for the trade deficit to narrow after the currency depreciation in 2008.

NZD
Moody's affirmed New Zealand's sovereign rating at AAA, outlook stable. The agency did observe though that the rating could face downward pressure if the upward trend in public debt was not corrected. We note that both S&P and Fitch already cut the rating one notch to AA+ on Sept 29.

Another earthquake, measuring 5.9, struck Christchurch during the Asia session. NZD briefly fell 20 pips but soon recovered fully.


A. White
Analyst at Fibosignals.com


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