27th of January 2011 - Fundamental Forex Market Overview

DAILY MARKET COMMENTARY
27 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 dollar was largely unchanged against the euro during the Asia session, but relinquished some ground to the yen. EURUSD traded 1.3641-1.3714. USDJPY traded 82.02-82.61. The FOMC kept current policy unchanged, given it still has concerns about low inflation and a weak labour market. No dissenting votes were cast. Clearly, although regional Fed Presidents Plosser and Fisher have publicly expressed some misgivings about QE2, they are willing to go along with the existing asset purchase program for now at least. Intriguingly, the policy statement appeared to signal a possible slowdown in the pace of UST purchases before the end of June, which would result in a more gradual end to the program. Any decline in the pace of purchases likely reduces the risk of an extension of the program beyond the end of June. This is entirely consistent with the views of our analyst team who continue to expect an end to asset purchases in June, followed by the first rate hike in Q1 2012. Elsewhere, the CBO markedly increased its budget deficit forecast for the current fiscal year to $1.5 trn from $1.06 trn.

EUR

ECB's Nowotny said that markets were "too euphoric" about possible changes to Europe's financial rescue mechanisms. He added that even if a Eurozone country were to restructure its sovereign debt, "the country would still remain in the Eurozone".

ECB President Trichet said he would not exclude the possibility of a revamped financial rescue mechanism having the right to buy bonds, as this would be "useful in certain circumstances". ECB Governing Council member Noyer agreed, noting that having the capacity "to intervene in secondary markets" would be "an interesting feature in some cases". Both Trichet and Noyer stressed however that any enhancement to the rescue facility is ultimately a decision for governments.

ECB Executive Board member Stark said that, although interest rates are currently appropriate, the ECB "are ready to act at any moment, should it become necessary". ECB Governing Council member Quaden said he is concerned about Belgian inflation and the ECB would "follow closely the evolution of the situation and we will evaluate and react if it is necessary". Noyer and that he was "quite confident that we will be able to keep inflation at bay" adding that he was not signaling that the ECB is "going to raise interest rates”.

GBP

The minutes of the BoE's Jan. 13 policy meeting revealed a further shift towards the hawkish end of the policy spectrum. Two votes were cast in favour of a policy rate hike, up from one previously: MPC member Weale now joins MPC member Sentence in calling for a 25bp hike. Also, some of those who had concerns over inflationary pressures but still voted for no change, said their decisions were 'finely balanced'. Clearly such hawkish sympathies could easily translate into dissenting votes at a future meeting. MPC member Posen continued to vote for a resumption of the QE program and, as before, advocated a further ?50 bn in asset purchases. However, when the vote was taken, it was not yet known that GDP had suffered a -0.5% q/q contraction in Q4. This new piece of data would likely have surprised the MPC, and may give hawkish members some grounds to reconsider their stance.

AUD

The AUD fell after Australian Prime Minister Gillard announced the introduction of a new tax to fund reconstruction projects in the wake of the extensive floods. She hopes that the tax will ultimately raise A$1.8 bn. She estimated the total direct costs of the clean-up operation to the federal government would run to A$5.6 bn.

A. M. Negrin Bautista, CFA

Chief Analyst at Fibosignals.com

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