DAILY MARKET COMMENTARY
1 March 2011 – 8:00 GMT
Tuesday
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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 dollar advanced against both the yen and the Swiss franc during the Asia session, despite the lack of news flow. AUDUSD came under modest selling pressure after the RBA policy statement suggested no urgency in tightening further. EURUSD traded 1.3781-1.3830, USDJPY 81.74-82.24. Asian equities were broadly stronger after the S&P 500 finished +0.565% ahead. The Chicago PMI surprised to the upside as did the Dallas Fed manufacturing activity index while pending home sales dropped slightly more than consensus estimates. St. Louis Fed President Bullard said the Fed will get the balance sheet back to normal over a roughly five-year period, which is a more aggressive timeframe than had been mentioned by other Fed speakers. Bullard said most other FOMC policymakers are opposed to adjusting the current program of bond purchases. New York Fed President Dudley said it would be unwise for the Fed to overreact to recent commodity press pressures and there are signs that core inflation is now stabilizing. Next to speak is Fed Chairman Bernanke, who begins his semi-annual testimony to Congress on monetary policy.
EUR
We raised our 1m and 3m EURUSD forecasts to 1.37 (prev. 1.30) and 1.30 (prev. 1.25), respectively, amid elevated oil prices and Middle East turmoil and relatively hawkish perceptions of the ECB. But these factors notwithstanding, our medium-term case for dollar strength remains intact. Our analysts expect the Fed will finish quantitative easing by June, while other G7 central banks are unlikely to hike interest rates as fast markets as expect, and fiscal austerity is likely to curb growth in the Eurozone and UK.
Final January CPI numbers in the Eurozone were revised down slightly to -0.7% m/m and 2.3% y/y from the preliminary -0.6% m/m and 2.4% y/y estimates. Core inflation was also revised down to 1.1% y/y, which suggests that most of the acceleration in price pressures is non-core based. ECB policymakers have said that their main concern is second-round price effects, so these numbers could give a slight boost to the doves ahead of Thursday's policy decision.
GBP
In addition to our higher short-term forecasts for EURUSD, we also raise our 1m and 3m cable forecasts to 1.61 (prev. 1.53) and 1.53 (prev. 1.47), respectively. Like the ECB, the BoE has turned more hawkish on inflation. But we continue to see cable as a sell on rallies, as the BoE is unlikely to tighten as rapidly and by as much as the market expects.
AUD
The RBA kept policy unchanged, in line with consensus. The accompanying statement offered little in the way of policy guidance, noting only that the board "judged that the current mildly restrictive stance of monetary policy remained appropriate in view of the general macroeconomic outlook".
CAD
A stronger than expected Q4 GDP print and an upward revision to the previous quarterly reading has kept the Canadian dollar well supported over the past 24 hours. We upgraded our Canadian dollar forecasts on the back of the better relative recovery along with elevated oil prices.
Our analysts are in line with the consensus and expect no policy shift from the Bank of Canada at today's policy announcement.
A. M. Negrin Bautista, CFA
Chief Analyst at Fibosignals.com
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