18th of January 2011 - Fundamental Forex Market Overview

DAILY MARKET COMMENTARY
18 January 2011 – 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

With the US holiday on holiday yesterday the Asia session was deprived of its usual directional guidance, and price action was consequently relatively subdued. The absence of news throughout the session kept markets relatively quiet, although sterling benefited from a slight improvement in UK economic data. EURUSD traded 1.3253-1.3338, USDJPY 82.46-82.78. No tier-one US data was released yesterday, but we did hear from one Fed speaker. Philadelphia Fed President Plosser said that the Fed's QE program could end sooner than expected if conditions were to call for it, and he expressed his support for the concept of inflation targeting. Plosser added that he doesn't know when the policy rate will be hiked for the first time, but he would not rule out a rate hike this year.

EUR

The meeting of the 17 Eurozone finance ministers produced lots of headlines but no market-moving decisions. There is clearly some difference of opinion over how urgently Europe's financial rescue infrastructure needs to be overhauled, and how extensive any modifications should be. Belgian Finance Minister Reynders said he would be in favour of doubling the rescue fund's lending capacity, and that discussions on this could begin immediately. Germany's Finance Minister Schaeuble and Austria's Finance Minister Proell maintained there was no need for such urgency. French Finance Minister Lagarde said that the EFSF should be "replaced and reinforced" and that EU states should submit a draft blueprint for a new design by March. Irish Finance Minister Lenihan said he was keen to make progress on the question of the interest rate applied to monies drawn down. Discussions continue later today when all 27 EU finance ministers are due to meet.

The first EFSF bond is due to be issued next week with a 5-year maturity and a size in the range of €3-5 bn. EFSF CEO Regling said he is confident the issue will help to restore stability in the bond markets and will protect the euro. He envisages a further two benchmark bond issues later this year specifically to fund the Ireland support program.

ECB Governing Council member Orphanides said that markets may have over-reacted to comments made at the ECB's press conference on Thursday and that the policy board is not "overly hawkish". He added that if a new-look EFSF were equipped to buy government bonds, some of the ECB's non-standard measures might no longer be necessary. The ECB settled €2.313 bn worth of bonds purchases last week, up from €113 mn the week before.

GBP

Sterling found a bid after better than expected economic data for December. The RICS house price balance came in at -39% (cons. -44%, prev. -44%), while consumer confidence climbed to 53 (cons. 44, prev. 45).

CAD

Finance Minister Flaherty announced a tightening of mortgage lending rules to discourage excessive borrowing. He said the new rules are preventative, and aimed at avoiding the kind of housing problems that have been seen in other countries. Flaherty added that the timing of his announcement had nothing to do with the Bank of Canada's policy decision, which is due later today. The consensus expects no change to the policy rate.

A. M. Negrin Bautista, CFA

Chief Analyst at Fibosignals.com

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