7th of February 2011 - Fundamental Forex Market Overview

DAILY MARKET COMMENTARY
7 February 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 price action during the Asia session was subdued relative to the frenetic activity seen after Friday's payrolls report, with USDJPY locked in a particularly tight range. However, the dollar did surrender some of Friday's gains overnight. EURUSD traded 1.3547-1.3624, USDJPY 82.16-82.29. On Friday, the headline payrolls number only gained +36k in January, falling well short of consensus expectations for a +146k increase. But the market seemed content to attribute the weaker print to inclement weather, and focused instead on the lower unemployment rate which unexpectedly fell sharply to 9.0% (cons. 9.5%). In response, the US 10-year Treasury yield climbed significantly higher, and peaked just above 3.66%, reaching levels not seen since May 2010. The S&P 500 finished 0.29% ahead. Given the scale of the surprise, our US economists have lowered their end-2011 unemployment rate forecast, and now expect it to fall to 8.8%, instead of 9.0% previously. They also now see upside risks to their 4.2% forecast for Q1 GDP growth. These latest developments bode well for our view that the dollar is poised to become a growth currency. The long-awaited semi-annual Treasury report on International Economic and Exchange Rate Policies was finally published, having been delayed since October. No major trading partners of the US were deemed to have manipulated their currencies to gain "unfair competitive advantage in international trade".

EUR

As expected at Friday's EU Summit, no concrete decisions were taken regarding the future of Europe's financial rescue mechanisms. EU Council President Von Rompuy pledged that a comprehensive package of anti-crisis measures would instead be adopted in March.

Germany's Chancellor Merkel said a special summit of Eurozone-only states would be held at an unspecified date after March 9.

ECB Executive Board member Gonzalez-Paramo said that the ECB would have to hike rates if CPI inflation did not begin to drop again by year-end.

France's Finance Minister Lagarde said Eurozone leaders are "politically determined to defend the zone and the currency".

JPY

BoJ Governor Shirakawa said further asset buying could be conceivable if the performance of the domestic economy fails to match the BoJ's forecasts. He also sounded cautious on Japan's deteriorating fiscal position, noting that the lesson of history is that no country can continue to run a deficit forever. However he noted that JGB yields have been relatively stable, partly on the belief that Japan is determined to carry out the necessary fiscal consolidation.

AUD

December retail sales grew by only +0.2% m/m, falling well short of the consensus expectations of +0.5% m/m growth. The AUD was briefly hit on the numbers but soon steadied and spent the rest of the Asia session creeping higher. Our Australian economics team expects a soft print in January too, as sales are likely to be significantly hurt by the Queensland floods. Our economists continue to see the next lift in the cash rate in H2, probably in either August or September.

CAD

USDCAD fell sharply to a low of 0.9832 on Friday, reaching levels not seen since May 2008. A particularly strong employment report was the trigger for the move. In January, 69.2k new jobs were created, well above expectations of only a 15.0k gain. The unemployment rate unexpectedly rose to 7.8%, but a corresponding increase in the participation rate was largely to blame.

A. M. Negrin Bautista, CFA

Chief Analyst at Fibosignals.com

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