DAILY MARKET COMMENTARY
17 February 2011 – 8:00 GMT
Thursday
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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
A lack of news flow ensured a relatively subdued Asia session, although the dollar still weakened against most of its G10 peers. EURUSD traded 1.3536-1.3609, USDJPY 83.50-83.86. Asian stocks continue to make gains, as risk appetite firmed despite further tensions in the Middle East. Earlier, the S&P 500 closed +0.63% ahead, and has now doubled since the mid-crisis intra-day low of March 2009. US data was mixed. Housing starts surprised to the upside despite bad weather, though building permits dropped as expected. Industrial production unexpectedly fell -0.1%, and PPI and core PPI both rose more than anticipated, though our US economists caution on any extrapolation as January has usually shown exaggerated swings.
The FOMC minutes showed diminishing downside risks, however, the "assessment of the most likely outcomes for economic activity and inflation over the projection period was not greatly changed." The committee upgraded its estimate for 2011 real (inflation-adjusted) GDP growth but only modestly lowered its unemployment forecast. It also lowered its inflation forecast. Changes to the outlook may not occur quickly enough to scale back QE2 but our economists expect that the growth outlook, if realized, would be sufficient for the FOMC to allow the balance sheet to contract from H2 2011, followed by a gradual tightening cycle beginning in 2012.
EUR
German Chancellor Merkel nominated Jens Weidmann, her chief economic adviser, as the next Bundesbank president. Current Bundesbank President Weber is expected to remain in the post until April 30.
We remain negative on the euro as US growth is likely to outperform that of the Eurozone this year. We also doubt that Europe's "comprehensive solution" due by the end of March will solve the sovereign debt crisis.
GBP
Sterling sold off after BoE Governor King talked down expectations of an early rate hike. He said that "some people are running ahead of themselves" if they think the BoE is laying the groundwork for a rate rise. He denied that the bank was endorsing the market's expectations for future policy tightening. He also dismissed the idea that the BoE might deliver an early hike to allay public concern about inflation, adding that the MPC is "not in the business of futile gestures".
Nevertheless, our analysts note that the BoE's inflation forecast was revised up in the quarterly inflation report, despite a new higher path for interest rates being used (this higher path assumes the policy rate will reach 1% by year-end). Our UK economist sticks to his view that the first hike to the policy rate will come in Q3, although he acknowledges that the chances of a May hike are now "significant". Attention will now shift to the minutes of the BoE's Feb. 10 policy meeting, which are due for release next week.
Unemployment data was slightly disappointing; the market was predicting a decline in the jobless claims number by 3k but the number came in at +2.4k, with the claimant count rate and ILO rate unchanged.
CHF
The Swiss government announced measures to help domestic industries cope with the strong Swiss franc. However, these measures do not aim to weaken the franc itself, and the government was clear that monetary policy is the responsibility of the SNB. The franc overreacted to the news, falling one big figure against the euro and dollar before eventually recovering.
AUD
RBA Assistant Governor Lowe noted that higher commodity prices are adding to global inflationary pressures, and he sees risks to Asian growth if central banks are forced to respond to accelerating food inflation.
A. M. Negrin Bautista, CFA
Chief Analyst at Fibosignals.com
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