DAILY Fundamental Forex Market Overview
7 December 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 weakened moderately during the Asia session after hopes were raised that Ireland's 2011 budget might be approved at today's parliamentary vote. EURUSD traded 1.3277-1.3354, USDJPY 82.34-82.73. Gold has retreated slightly from yesterday's all time high, and is trading at $1,420.98/oz at the time of writing. Richmond Fed President Lacker said history suggests that the Fed should be careful not to target the jobless rate, though he does see better labour conditions despite the recent payrolls disappointment. Like Fed Chairman Bernanke, Lacker is confident the Fed can withdraw its stimulus measures, though getting the correct timing is the difficult part and further expansion of the balance sheet now could complicate matters. He also said US economic growth is self-sustaining, though sluggish. Several Fed officials have said it is appropriate to review the QE2 policy regularly, and investor interest in the outcome of next week's FOMC meeting is already starting to build. But it is not likely the FOMC will choose to alter the program so soon after inception and Eurozone developments should remain the main driver for currencies.
EUR
Eurogroup Chairman Juncker said the monthly meeting of Eurozone finance ministers was mostly technical, with no new decisions taken. He said Spain and Portugal explained their current and planned austerity and reform measures, and he repeated that any private sector involvement in rescues post-2013 will be done on a case-by-case basis. Juncker also sees no need to increase the capacity of the EFSF for the time being.
Several finance ministers commented on a potential Eurobond. Some officials, such as the Greek and Spanish contingent, seemed to at least favour discussion exploring a Eurobond, though the Austrian and Dutch finance ministers clearly oppose the idea. Meanwhile, Spanish Economy Minister Salgado reiterated that Spain does not need aid. The attention now shifts to the Irish budget vote. But even if the budget passes, contagion worries will persist, which keeps us negative on the euro.
The Irish finance minister is expected to detail the budget measures in parliament today, starting at 1545GMT, and the voting should begin around 1900GMT. Independent lawmaker Michael Lowry said he will support the budget and the press reported another independent lawmaker, Jackie Healy-Rae, will also likely support the budget.
The ECB's bond buying program continues and ?1.96 bn worth of bond purchases settled in the week ended Dec. 3. Our fixed income strategists note that, given the 3 day settlement period, the data does not cover bonds bought from Dec. 1, and therefore excludes purchases made in and around ECB President Trichet's press conference.
Some better news did emerge out of the Eurozone when a leading London-based clearing house announced that it would reduce the extra margin required to hold Irish Government bonds to 30% from 45%.
AUD
The RBA kept the policy rate on hold at 4.75%, and adopted a more neutral policy posture, noting that the Board views "this setting of monetary policy as appropriate for the economic outlook". The policy statement also noted the beneficial impact of the strong AUD in helping to curtail inflationary pressures. In response, our Australian economists changed their call on future RBA hikes, and now expect the RBA to be on hold for all of H1 2011, with two 25bp hikes expected to follow in H2.
CAD
Despite the all-items inflation rate moving above the midpoint of the BoC's target range in October, we think the much weaker Q3 GDP will keep the BoC on hold at the upcoming meeting. The GDP print was much weaker than the October Monetary Policy Report projections but we do look for the BoC to gradually raise short rates to 2.00% by the end of 2011 as household debt growth remains firm.
A. M. Negrin Bautista, CFA
Chief Analyst at Fibosignals.com
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