13th of January 2011 - Fundamental Forex Market Overview

DAILY MARKET COMMENTARY
13 January 2011 – 8:00 GMT
Thursday

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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 price action was relatively quiet during the Asia session as market participants digested yesterday's developments inside the Eurozone. The euro surrendered some of yesterday's gains however, and EURUSD traded 1.3082-1.3145. USDJPY traded 82.81-83.18. Australian jobs data disappointed, temporarily weakening AUDUSD. US equities closed almost 1% higher and a strong auction for a re-opened 10y issue helped bring Treasury yields back from earlier session highs. With few data releases, market participants focused on the Fed's Beige Book and comments from Dallas Fed President Fisher, a 2011 FOMC voter.

The Beige Book contained few surprises as, "Economic activity continued to expand moderately from November through December." But there was a brighter note as officials noted that, "Lending activity remained stable across most Districts. Credit quality has been steady to improving." Our team believes even stabilization in lending is an improvement and provides an incremental boost to growth. Fisher again sounded cautious on QE2 and is wary of expanding the Fed's balance sheet further. Similar to other Fed officials, he focused on the need for further fiscal/tax policy changes for additional stimulus but he did not sound ready to pull the plug on QE2 yet. Jobless claims are due and Fed Chairman Bernanke speaks at an FDIC panel on lending.

EUR

Belgium's Prime Minister Leterme said that he does not think Belgium needs help from the stability fund, and that there is no justification for bond spread widening. He insisted he would do whatever it takes to defend the euro.

Portugal's much-anticipated bond auction passed without incident yesterday. The bid-cover ratios were good though the yields remained elevated. The Portuguese Finance Minister said that 80% of the demand from the auction was from foreign sources. There were also headlines that Chinese officials remain interested in Eurozone sovereign bonds, including EFSF bonds, but the comments still sounded conditional.

German Chancellor Merkel said Germany would do what is needed to support the euro but a government spokesperson later said now may not be the time to discuss EFSF expansion. The European Commission's Barroso said EU leaders may decide on potential EFSF changes in early February and a Bloomberg story specifically noted Greek bond purchases could be discussed at Tuesday's Ecofin meeting, as part of plans to expand the size and scope of the EFSF. The story cites unnamed sources 'with direct knowledge of the talks'.

German Finance Minister Schaeuble said European nations are working on a mid-term solution to the current debt crisis that could include a comprehensive package but that no agreement is expected at the next Eurogroup meeting, though a deal may be possible at an upcoming summit.

An internal EU report for the EU Commission (seen by Reuters) suggests that the European Stability Mechanism could take in contributions direct from financial institutions and it is in the interest of the financial system that institutions contribute to the safety net. Applying a banking tax of 0.2% of the Euro area bank assets would allow around EUR50 bn to be raised.

GBP

Our team does not expect a change in the BoE's policy stance and as has been the case recently, the minutes will be key. MPC votes will likely show another three-way split but it will interesting to see how the sustained inflation levels are affecting their thinking.

CHF

SNB Vice President Jordan said Swiss franc strength poses a threat to growth but did not comment if the SNB would take action to weaken the currency. He did appear to be especially concerned about how the Eurozone crisis might unfold and what it might mean for the CHF. He dismissed the idea of pegging the CHF to the EUR. Jordan said the SNB would have to raise rates over the medium term to maintain price stability but that it had some flexibility over the timing of rate hikes.

AUD

The December employment report disappointed expectations. Employment rose by +2.3k (cons. +25k, prev. 54.6k). The unemployment rate fell to 5.0% (cons. 5.1%, prev. 5.2%), but this was largely due to a falling participation rate. Our analysts team continues to look for the next RBA hike in July.

A. M. Negrin Bautista, CFA

Chief Analyst at Fibosignals.com

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