15th of December 2010 - Fundamental Forex Market Overview

DAILY Fundamental Forex Market Overview
15 December 2010 – 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

Risk traded on a generally soft tone overnight as a combination of regional concerns and higher US yields post-FOMC - the 10y yield hit 3.5% for the first time in 7 months - weighed on sentiment. In addition, Moody's put Spain's sovereign ratings on review for a possible downgrade. The FOMC itself did not surprise much, the statement acknowledged economic recovery is continuing, comparing with the November statement which said "the pace of the recovery in output and employment continues to be slow." However, the FOMC emphasized the lack of progress toward the dual mandate saying, "Currently the unemployment rate is elevated and measures of underlying inflation are somewhat low." Post-the FOMC statement, the dollar was supported by a rise in the US 10y yield, which rose on disappointment that the FOMC did not accelerate or front-load its Treasury purchases as hoped for by some in the market. There remains plenty of event risk for both European and US markets ahead today, given the crowded data and political calendar and we expect some degree of profit-taking on short-dollar positions in a less-favourable risk environment.

EUR

Moody's has put Spain's Aa1 ratings on review for possible downgrade. The news added to pressure on the euro, which was already trading on a softer tone post-FOMC. The agency cited concerns over the country's funding needs, debt levels and control over public finances. The Eurozone will remain the key focus in the short term as Ireland's parliament will also be voting on the IMF package today.

The ZEW survey was mixed with the current situation number lower in Germany and the economic sentiment surveys higher across both Germany and the Eurozone. The German reading was slightly disappointing but PMIs are still due this week, which should give an indication of where GDP is headed.

Italian Premier Berlusconi and his government survived no-confidence votes in the upper and lower houses. The winning margin in the lower house was 314 in favor versus 311 opposed. While the victory ensures continuity in office for Berlusconi, the thin margin of victory suggests that there could be further political uncertainty. And this could raise concerns on his political ability to enforce austerity measures, which could weigh on the euro in 2011.

S&P revised its outlook on Belgium from stable to negative, citing "prolonged political uncertainty”.

JPY

The Tankan index was slightly better than expected with the larger manufacturers' diffusion index coming in at 5 (cons. 3). Nevertheless this was the first quarterly decline in 7 quarters and still shows Japan's recovery is fragile. Asian stocks are generally soft as concerns over regional growth momentum remain in place.

The BoJ will begin buying ETFs and Japanese REITs as soon as today and the bank will post transaction amounts online on the day the purchases are done. This follows BoJ purchases of government and corporate debt. But BoJ Governor Shirakawa again raised the possibility of further JGB purchases if the economy slows down faster than expected.

GBP

CPI numbers were higher than consensus at 3.3% y/y while the RPI numbers also beat expectations at 4.5%. Our UK economist notes that the main drivers were food and clothing, which posted the highest inflation rate since 1997. Sterling failed to react positively to the news because stagflation fears seem to be surpassing the reduced prospects of further QE. But the hawks, such as MPC member Sentance, continue to call for monetary policy tightening.

CAD

BoC Governor Carney again said he is watching the Canadian dollar closely and the risk of a stronger currency on growth is now being partly realized. Carney reiterated the limits of divergence between the US and Canadian economies and also said Canadian household debt levels are unprecedented. He said Canadian banks should not be complacent on lending and this dovetailed with Finance Minister Flaherty's comment that he would tighten mortgage rules again if needed.

A. M. Negrin Bautista, CFA

Chief Analyst at Fibosignals.com

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