DAILY Fundamental Forex Market Overview
8 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
The dollar strengthened further during the Asia session, supported by US Treasury yields that continue to climb sharply. The trigger for the move was the news that US President Obama and the Republican leadership have reached a tentative agreement on a new tax deal. EURUSD traded 1.3206-1.3316, USDJPY 83.24-84.02. Under the plan, the Bush-era tax cuts are to be extended for another two years. Middle-income earners are also to enjoy tax cuts, and Federal unemployment benefits are to be extended for a further 13 months. Newswires cited a Moody's analyst saying that although they do not see a change in the US ratings outlook in the next year or two, there are long-term concerns on the outlook that the tax proposal does not address. Fitch, on the other hand, said the tax moves show the "broad political agreement needed for fiscal consolidation”.
Our team of analysts notes that, if passed in its current form, this tax proposal could add as much as 0.5% to our already above-consensus growth outlook of 2.7% (calendar average) for 2011. It would also likely boost their budget deficit estimates for both fiscal years 2011 and 2012, by $230 bn and $145 bn, respectively.
EUR
Ireland's Budget 2011 was passed by parliamentary vote. In line with expectations, a ?6 bn fiscal adjustment is targeted for next year. This of course is just another step in what is likely to be a lengthy process of fiscal consolidation extending out to 2014 or 2015.
German Finance Minister Schaeuble remains ready to defend the euro and is confident Portugal will do what is necessary. He also said a Eurobond is not possible without fundamental EU changes. An key advisor to the German government said Eurobonds would be inappropriate. Instead he favours a joint European fiscal policy.
EU Commissioner Rehn said new, more rigorous bank stress tests will start in February. Methodology and scope are under discussion and a liquidity assessment could be included.
JPY
Japan's Economy Minister Kaieda said it would be desirable for the BoJ to remove its self-imposed limit on the stock of JGBs the Bank can hold. Sticking to the government's existing line, he said FX markets are basically decided by markets, but that the government needs to take steps if the yen rises excessively.
GBP
Manufacturing production beat consensus at 0.6% m/m versus 0.3% in October, which supported sterling despite a below expectations industrial production print. The November BRC retail sales survey was also less positive but the data should have minimal impact on the upcoming BoE meeting, where we expect no change in policy.
CAD
The BoC kept the policy rate unchanged as expected. The tone of the statement was dovish, unsurprising given disappointing Q3 GDP, as H2 2010 activity appears weaker versus the October Monetary Policy Report projections. Officials said weak net exports continue to drag on growth and the combination of disappointing productivity performance and CAD strength could keep downward pressure on net exports. The inflation picture was unchanged and the statement again noted any policy stimulus reduction, "would need to be carefully considered”.
A. M. Negrin Bautista, CFA
Chief Analyst at Fibosignals.com
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