4th of January 2012 - Fundamental Forex Market Overview

DAILY MARKET COMMENTARY
4 January 2012 – 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
Markets mostly trod water during the Asia session as the absence of news headlines and G10 economic data releases provided no incentive to participate. It was Japan's first day back after the holiday season, but activity is still well below typical daily levels. The FOMC minutes from the December meeting confirmed that several members are still uncomfortable with the current pledge to keep rates unchanged until mid-2013. This should not come as any surprise given three dissenting votes were cast when the policy language was first adopted. Of greater interest were plans to change the Fed's communication strategy. This strategy has been in flux for over a year now and, as a result, the Fed Chairman now gives post-meeting press conferences four times per year.

The December minutes revealed yet another innovation - at the January meeting the Fed will provide projections on how policymakers think the Fed Funds target will move in the future, and these forecasts will be updated quarterly along with the wider set of quarterly economic forecasts already provided. This would be a first for the Fed, but is (somewhat) similar to the approach already used by the Riksbank where a view on the future path of the repo rate is given. This latest Fed initiative did not come out of the blue - it had been flagged weeks ago in the Wall Street Journal.

The new approach is likely to provide greater clarity and granularity on the Fed's policy intentions. It is also likely to offer the Fed greater flexibility in tweaking its guidance, rather than relying entirely on the written word. We doubt the dollar will be negatively impacted by the new approach alone unless the rate forecasts suggest an inert Fed beyond mid-2013. This is a risk we are watching. Still with the US, the economy has maintained its upward momentum as ISM manufacturing surprised to the upside at 53.9 (cons. 53.5), and construction spending was also firm. EURUSD traded in a range of 1.3049-1.3077 and USDJPY 76.62-76.82.

EUR
The EFSF plans to issue a new EUR3 bn 3-year bond "in the near future, subject to market conditions". The bond is intended to fund the rescue programmes for Ireland and Portugal. This would be the fifth bond issued in support of these two programmes, and would take outstanding EFSF issuance to EUR19 bn. We note that the EFSF has a triple-A issuance capacity of EUR440 bn, although a possible downgrade of France could lower this ceiling considerably.

Bundesbank President Weidmann stuck to his stance that it would be wrong for the ECB to become a lender of last resort to governments.

A Greek government spokesman said the country must finalise the financial rescue agreement which was reached with the EU in October, or "we will be out of the markets, out of the euro".

German unemployment fell by 22k, larger than the 10k decline expected by consensus. The jobless rate edged down to 6.8% from 6.9%, hitting yet another euro-lifetime low.

According to newswire sources, the IIF said it must have a Greek debt deal done in the 'days ahead' on the basis of the Oct. 26/27 agreement. We still see a strong risk of coercive (as opposed to voluntary) restructuring by Greece this year, accompanied by a triggering of CDS contracts. We very much doubt the risk is fully reflected in the price of the euro, and would look for further euro downside if headlines suggested a coercive restructuring was being pursued.

French government sources said the country has still not been notified of any change to its AAA rating by S&P. France was put on negative watch on Dec. 5 (along with 14 other Eurozone nations) largely pending the outcome of the Dec. 9 EU summit.
CHF
December PMI was surprisingly strong at 50.7 vs consensus of 45.6. Our Swiss economist notes that the two most important sub-indices, production (56.1) and to a lesser degree order backlog (53.5) managed to move back into expansionary territory at the end of 2011. This very good print supports the argument that the SNB's floor under EURCHF is having a stabilising effect on Switzerland's production sector, as is the somewhat improved business sentiment across Europe.

This week, we went long EURCHF at 1.2155 targeting a move up to 1.2500, with a stop at 1.1990.

GBP
Sterling caught a bid after UK December manufacturing PMI rose to 49.6, vs consensus of 47.4. Export orders rose at the fastest pace since April. This is still weak on a quarterly comparison, but is showing signs of some improvement from earlier in the quarter.


A. White
Analyst at Fibosignals.com


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