DAILY Fundamental Forex Market Overview
27 December 2010 – 8:00 GMT
Monday
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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
In a surprise move, China hiked benchmark interest rates by 25bp over the weekend, but the FX reaction during the Asia session overnight was relatively muted. EURUSD traded 1.3073-1.3146, USDJPY 82.76-82.98, and AUDUSD 0.9988-1.0047. Although the US dollar initially strengthened against its Australian counterpart, the gains were eventually surrendered. This does not suggest the AUD has suddenly developed an immunity to policy tightening risks in China; the absence of a stronger reaction probably has much more to do with thin year-end trading conditions. Today, the Dallas Fed's manufacturing activity index for December is due to kick off a quiet week for US economic data. The consensus expects a very marginal increase over the November print.
JPY
Senior Vice Finance Minister Igarashi said that Japan needs to be cautious about yen movements. These remarks are very much in tune with comments made by Finance Minister Noda on Friday when he said that Japan will take decisive action on FX when needed.
The minutes from BoJ meetings held on Oct 28, and Nov 4-5 showed that "a few" members on the policy board noted that purchases conducted through the new asset purchase program could be front-loaded, or the size of the program could be increased if necessary. There was some obvious concern over the Fed's decision to embark on another round of quantitative easing, and board members agreed it would be "necessary to pay attention to how this would affect financial and foreign exchange markets".
"Many members" also felt that careful attention should continue to be paid to the risks that yen appreciation might exert downward pressure on Japan's economy "by negatively affecting business and household sentiment, in addition to depressing growth in exports and corporate profits".
Japan approved a record Y92.4 trn budget for the 2011-2012 fiscal year. JGB issuance via regular auctions is also set to hit a record, of Y144.9 trn. Prime Minister Kan warned that fiscal restoration has not gone far enough.
CHF
A Swiss Sunday newspaper reported that the Swiss government is exploring ways to protect exports from the strong CHF. No sources were cited by the article.
In its latest quarterly bulletin, the SNB warned that the worsening debt concerns inside the Eurozone have led to a stronger franc, and this would hurt economic growth in Switzerland. The bank also warned that measures would be taken to counter deflation threats if needed, implying a readiness to intervene.
A. M. Negrin Bautista, CFA
Chief Analyst at Fibosignals.com
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