13th of January 2012 - Fundamental Forex Market Overview

DAILY MARKET COMMENTARY
13 January 2012 – 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's rebound continued during the Asia session, buoyed by yesterday's rally across Eurozone sovereign bond markets. EURUSD traded 1.2807-1.2873, USDJPY traded 76.69-76.84. Strong demand at Thursday's Spanish auction has raised hopes for a positive outcome when Italy tries to sell EUR3-4.75 bn of BTPs today. Our Eurozone rates strategy colleagues expect the relatively small amount of supply to be easily absorbed, which we expect will give the euro a short-term boost. However, they doubt the performance of Italian debt will be as impressive today as it was yesterday. Even though fundamentals have not budged by one inch for the Eurozone, it appears that there is demand out there for sovereign paper. Spain's Tesoro sold almost EUR10 bn across three lines, double the guidance and over 10% this year's planned issuance.

The ECB left interest rates unchanged yesterday, and President Draghi sounded the expected warning bells over the Eurozone economy, but said that there were some 'signs of stabilisation', albeit at very low levels. The ECB was also non-committal on future policy moves, and on the SMP programme, but it appears current market conditions did not warrant a very dovish stance. However, this does not change our bearish outlook on the euro, and we remain short EURUSD as a trade recommendation. In the US, however, retail sales surprised to the downside as core figures fell by 0.2% (cons. 0.3%). The December budget deficit was also higher than expected at -$86bn (cons. -$83.7bn). Trade figures are due out in the US and Canada, along with the University of Michigan Confidence reading.

EUR
Fitch said on Thursday that France's debt and deficit make it the weakest AAA in the Eurozone, and warned that there is a significant risk of an Italy downgrade.

The Greek deputy finance minister said that Greece may need more funds from European partners if participation of private investors in the PSI scheme falls short of 100%. Despite reports from Greek and EU sources that the PSI negotiations are going well, positive signals from the IIF have been in short supply and the issue remains unresolved.

Charles Dallara, the Managing Director of the IIF warned that all parties must confirm they are seeking a voluntary deal and it 'has to be done really in the next few days'. He said he was 'concerned' about the lack of 'clear process' over Greece, according to the Wall Street Journal

The IMF warned that Greek IMF loans depend on a private bondholder deal, as full financing for any programme was required. In addition the IMF said it was still targeting a 120% debt-to-GDP ratio for the country and warned that higher ratios would be unsustainable. The next mission to the country is planned for Jan 17.

Italian industrial output was surprisingly strong in November, coming in at +0.3% m/m. This still marks a 4.1% y/y decline however. Prime Minister Monti said Italy is against the introduction of more rigid restrictions or further sanctions in the fiscal pact. Monti added that the ECB could be "more relaxed" after the fiscal pact is concluded. The ECB has continually stated that developments on the fiscal front are necessary before further ECB action.

GBP
Industrial production in November fell -0.6% m/m, lower than expectations of -0.1%. Our UK economist notes that the sharp drop is because of a contraction in oil and gas extraction and electricity production. Manufacturing, the dominant component of overall industrial production, came in at -0.2% m/m instead of -0.1% expected. This raises the possibility of negative GDP growth in Q4, but it's important to note that the industrial sector is much smaller than the services sector. We have a GDP growth forecast of -0.2% q/q for Q4

The Bank of England kept rates on hold, and said that the BoE expects the programme to end in early February, presumably after the next BoE meeting. Our UK economist notes that this gives the MPC an extra month to think through their forthcoming decision - data on the domestic front data such as the PMIs will be key, along with any signs of life in the bank unsecured term-funding market.


A. White
Analyst at Fibosignals.com


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