26th of October 2010 - Fundamental Forex Market Overview

DAILY Fundamental Forex Market Overview
26 October 2010 – 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 was largely range-bound throughout a quiet Asia session, with little news or economic data to act as drivers. Asia equity performance has been mixed, although the S&P 500 closed fractionally ahead. EURUSD traded 1.3908-1.3993, USDJPY 80.67-80.89. Kansas City Fed President Hoenig again called for Fed rate hikes and claimed that embarking on another round of QE would be a "dangerous gamble". New York Fed President Dudley said that he "would put very little weight" on what the market has priced in for the scale of further easing - the FOMC will decide what is best to satisfy its mandate. He said that if the Fed sticks to its mandate, then the dollar will look after itself. Existing home sales rose more than expected in September at 10.0% and the upturn in contract closings, reflected in the data, appears roughly consistent with the earlier improvements in mortgage applications and in initial sales contract signings in the pending home sales index. Although the sales pace was still weak on a historical basis, sales appear to have bottomed. The current activity index in the Dallas Fed manufacturing survey rose to 2.6 in October from -17.7 in September versus consensus -8.0. Other regional surveys had previously shown improvement or at least a fading of weakness. S&P/Case Shiller, Conference Board consumer confidence and the Richmond Fed manufacturing survey are due.

EUR

ECB Governing Council Member Weber said he saw no point in commenting on euro levels though he was critical of excessive currency volatility. Weber said the quicker the European interbank market recovers, the quicker the ECB should be able to withdraw nonconventional measures and return to a more normal monetary policy. He also said current rates are appropriate but the ECB should not keep rates too low for too long.

At 24.4% y/y (cons. 17.1%, prev. 11.2%) and 5.3% m/m, Eurozone industrial new orders for August were well above expectations. The trend in new orders suggests that industrial activity may continue to hold up. The August numbers benefited from a lower euro but it remains to be seen how recent appreciation will affect external demand.

EURUSD long positioning remains near this year's extremes and we are still cautious on chasing significant upside above 1.40.

JPY

Rhetoric levels from Japanese officials escalated over the past 24 hours, despite the G20 pledge to "refrain from competitive devaluation". Finance Minister Noda said Monday's FX moves were somewhat one-sided, a term he used ahead of the Sept 15 act of intervention. He also noted that the G20 felt excessive FX moves were undesirable, a clear indication that he sees justification in the text of the communiqu? for further intervention. Noda said he is watching FX markets with great interest and is ready to take decisive action when needed.

Economy Minister Kaieda warned that "excessive intervention should be avoided but the government can be allowed to do so if currency moves are volatile and one-sided". Deputy Finance Minister Igarashi also suggested that FX intervention remains very much an option and said: "A surprise move would probably be effective to some extent. We can't make an announcement in advance that we will act, but, on the other hand, we can't say that we won't act either." He had earlier said that any intervention would be aimed at restraining excessive currency swings and the latest G20 language appeared to give them the green light on that basis.

GBP

The advance estimate of Q3 GDP is expected lower at consensus 0.4% q/q (UBSe 0.5%) after 1.2% previously. But on a y/y basis, we expect to see an increase from the previous reading. We remain cautious on sterling given the government's recently announced spending cuts.

A. M. Negrin Bautista, CFA

Chief Analyst at Fibosignals.com

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