12th of January 2011 - Fundamental Forex Market Overview

DAILY MARKET COMMENTARY
12 January 2011 – 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 dearth of major economic data releases over the past 24 hours has contributed to choppy price action. During the Asia session the dollar weakened against the euro, yen, and sterling, while concern over the economic impact of flooding in Australia kept AUDUSD under pressure. EURUSD traded 1.2944-1.3017, USDJPY 83.08-83.41.

Philadelphia Fed President Plosser remains sceptical of the efficacy of QE2, saying he sees a moderate economic recovery though he did not credit QE2 for recent improvement. Plosser said unemployment will be volatile as the labour market needs time to make difficult adjustments and he subdued inflation in the near term, with a low chance of deflation.

Minneapolis Fed President Kocherlakota said he does not see a rapid improvement in US employment growth in 2011, adding that now is not the time to start tightening policy. Kocherlakota did say, though, that if the Fed does not consider tightening policy by the end of the year, it may need to start considering that option in 2012. Eurozone peripheral auctions remain in focus with Portugal set to issue €1 bn.

EUR

In an article in today's Financial Times EU Commissioner Rehn called for the effective lending capacity of the EFSF to be increased and for its scope to be widened, although he did not elaborate.

The euro strengthened ahead of Portugal's debt auction due today. Portuguese Finance Minister dos Santos said demand for debt has been more than enough recently and that Portugal is still paying relatively low average rates. Elsewhere, Prime Minister Socrates said Portugal will not ask for a bailout and that such speculation is not helpful to the country. The Bank of Portugal, though, did say banks' reliance on ECB funds will stay significant in 2011-2012, given difficulties accessing the interbank markets.

The King of Belgium rejected the Jan. 6 resignation of Belgium's royal mediator, who was tasked with forming a new government. While this is marginally positive for Belgium, the resignation underscores the difficult task at hand, which is contributing to nervousness on the euro.

With debt issuance activity rising considerably in the coming weeks we expect investor uncertainty on the Eurozone periphery to remain high and hence sentiment muted. Under such conditions we do not expect any change in the euro's downtrend.

AUD

RBA Board Member McKibbin said that flooding in Australia could knock up to 1 percentage point off GDP growth.

Home loan lending increased by +2.5% in December (cons. -1.0%, prev. +2.2%). Our Australian economists retain their view that the next +25bp RBA hike will likely come in July.

A. M. Negrin Bautista, CFA

Chief Analyst at Fibosignals.com

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