25th of January 2011 - Fundamental Forex Market Overview

DAILY MARKET COMMENTARY
25 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

A disappointing Australian CPI reading allowed the dollar to advance against its Australian counterpart in an otherwise quiet Asia trading session. The BoJ opted to keep policy unchanged. EURUSD traded 1.3628-1.3684, and USDJPY 82.34-82.64. The Nikkei-225 is 1.1% firmer at the time of writing, and the S&P 500 finished +0.58% ahead. President Obama is due to deliver his State of the Union address tonight, a speech in which job creation is expected to feature prominently. At the margin, this could support the US dollar, but its main drivers this week are more likely to be the FOMC announcement and the Q4 GDP data. Our analysts do not think that the FOMC statement will suggest a near-term change in monetary policy. Both the consensus and our US economists are expecting a strong rise of 3.5% q/q annualised rate for Q4 GDP.

EUR

Newswires, citing an unnamed Eurozone source, said EU leaders will have an informal discussion on the Eurozone crisis at the Feb. 4 summit and that formal decisions are expected at the late March summit.

The ECB settled only €146 mn worth of bond purchases last week under its Securities Markets Program, down from €2.313 bn the week before.

The Irish finance minister said the finance bill would pass through parliament by Saturday and the main opposition party said an election is likely in the last week of February. The passage of the finance bill removes the worry that parliament would be dissolved without reaching a final agreement on the last piece of budget legislation.

French President Sarkozy said that the dominating theme of France's chairmanship of the G20 would revolve around FX reforms and highlighted a code of conduct on capital controls as one of his goals.

JPY

The Bank of Japan kept policy unchanged and continues to target a 0-0.1% range for the overnight call rate. No additional measures were announced. The bank revised up its CPI forecast for the fiscal year 2011 to +0.3% y/y from the earlier estimate of +0.1% y/y. Our Japan economics team does not anticipate a BoJ hike until 2013.

GBP

BoE MPC member Andrew Sentence maintained his hawkish stance and said the BoE risks its credibility by failing to tackle inflation. He said the time has come for action and he sees CPI rising to at least 4% during 2011 as it is boosted by global factors, a weaker exchange rate and healthy domestic demand. MPC member Posen has recently affirmed his dovish stance, and the Jan. 13 BoE minutes, due for release on Wednesday, will show if any other MPC member has sided with either of these two non-consensus views.

The consensus expects Q4 GDP to weaken to +0.5% q/q. A stronger print is likely to be sterling-positive, as it may stoke expectations of an early BoE hike.

AUD

The AUD weakened after CPI for Q4 failed to live up to consensus expectations, rising only +0.4% q/q (cons. +0.7%) and +2.7% y/y (cons. +3.0%). Our analysts stick to their view that the next RBA rate hike will not happen until H2 this year.

CAD

The BoC revised down its 2011 core inflation outlook though it still it reaching the 2% target by end-2012. The y/y readings for both headline and core CPI for December are expected to increase, though any rate hikes by the BoC are expected to be gradual this year.

A. M. Negrin Bautista, CFA

Chief Analyst at Fibosignals.com

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