24th of January 2011 - Fundamental Forex Market Overview

DAILY MARKET COMMENTARY
24 January 2011 – 8:00 GMT
Monday

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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 stabilised during the Asia session after sustaining heavy losses against its G10 peers on Friday. EURUSD traded 1.3586-1.3647, setting a new 8-week high. USDJPY traded 82.53-82.81. There was a good deal of news out over the weekend, but FX markets seemed unconcerned. The latest reports appear to confirm that European officials are inching closer to a more comprehensive solution to the Eurozone sovereign debt crisis, although a final design still seems to be several weeks away. Asian stocks were mixed overnight, although the S&P 500 finished 0.24% ahead on Friday. The AUD slipped slightly on a weaker than expected PPI, but soon recovered. There were no tier-one US economic data releases on Friday, and none are scheduled for today either. As a result, investors are likely to focus more intensely on the two-day FOMC meeting which begins on Tuesday. Our analysts team expects that no near-term change in Fed policy will be signalled in the policy statement, and they anticipate the current program of QE purchases will run to completion as scheduled in June.

EUR

Over the weekend ECB Executive Board member Stark said he "could imagine the EFSF recapitalising banks or buying sovereign debt", although he emphasised that any extension of the EFSF's capabilities would be a political decision. He also indicated his opposition to any joint issue of e-bonds on the grounds that it would "blur the responsibility for every government to be held liable for its own debt".

Weekend comments from Eurogroup Chairman Juncker focused on the size of the EFSF, and how to boost its effective lending capacity to match the headline figure of ?440 bn promised last May. He said changes to the current design were now "inevitable" and that he was "confident" the German government "will not ignore this common European goal".

Juncker said a comprehensive response to the debt crisis could emerge in a few weeks. Significantly, German Finance Minister Schaeuble also indicated the German government wants to produce a "complete package in the next weeks" which would include redesigning the EFSF so that ?440 bn "is actually available on demand".

ECB President Trichet said the bank's monetary policy stance and its emergency measures are "decoupled" and can be adjusted independently. The comments suggest that it is logistically possible for the ECB to hike interest rates even if emergency measures have not been fully unwound.

Trichet said he did not expect a Eurozone country would restructure its debt this year. ECB Governing Council member Provopoulos, also the head of the Greek central bank, indicated his opposition to debt restructuring, saying "the political and economic impact of debt restructuring would far exceed the short-term pain of fiscal adjustment. On Friday, Greece's Deputy Finance Minister Sachinidis said "the Greek government did not discuss and is not discussing the possibility of debt restructuring".

The junior party in Ireland's ruling coalition withdrew from government. Ireland's Prime Minister Cowen now leads a minority government. Earlier, Cowen resigned as head of the Fianna F?il political party, but he stays on as prime minister.

JPY

Finance Minister Noda said that he must pay heed to the yen's rise, and to downside economic risks. He repeated his willingness to work with the BoJ to beat deflation. Economy Minister Yosano warned that long-term JGB yields could spike if new JGB issuance continues to exceed tax revenue. Prime Minister Kan said the government will reveal its proposals for tax reform by June.

GBP

Bank of England MPC member Posen maintained his dovish stance saying his "position is unchanged" regarding underlying inflation in the UK, at least as far as domestic influences are concerned. But he noted that "positive surprises abroad, particularly in the euro area&could influence not just demand for UK goods and services, but also the exchange rate". Regarding the recent increase in rate hike expectations, Posen said that "just because the markets price in a rate increase or a rate cut at any time doesn't necessarily mean it will occur".

CAD

Finance Minister Flaherty said the CAD "is not likely to go back to the days of being relatively cheap" with respect to the USD, noting there would be no return to what he called "the Canadian peso".

A. M. Negrin Bautista, CFA

Chief Analyst at Fibosignals.com

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