19th of May 2011 - Fundamental Forex Market Overview

DAILY MARKET COMMENTARY
19 May 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
Risk appetite rose steadily for most of the Asia trading session, but took a turn for the worse as the start of the European session drew near. USDJPY made some upward progress after the FOMC minutes helped keep US yields supported. EURUSD traded 1.4212-1.4306, USDJPY 81.38-81.81. The minutes themselves were not hugely surprising as Fed Chairman Bernanke had already laid out a less dovish stance at his first press conference. Officials remained cautious on growth, though they did note the recovery would "strengthen over time." But market participants may have been surprised at the extent to which exit strategies were discussed, as officials laid down several guiding principles for policy normalization, even though the minutes gave no indication that any decisions were imminent. Nevertheless, the dollar received a modest boost from the minutes and the S&P 500 closed up +0.88%. St Louis Fed president Bullard said the Fed is likely to stay on hold until at least late 2011. We now await comments from the more dovish members of the committee, regional Fed presidents Dudley and Evans. Upcoming data releases include jobless claims, existing home sales, leading indicators and the Philadelphia Fed manufacturing index.

EUR
ECB Governing Council member Constancio said a Greek debt restructuring is the last resort, which suggests he would not rule it out completely. Meanwhile, ECB Executive Board member Stark said it is an illusion to think Greek debt restructuring would help solve the problems the country faces. Rather, he said it would reduce Greek bank liquidity and wipe out bank capital. Greek Finance Minister Papaconstantinou does not see any magic restructuring scenarios that would take Greece out of a crisis situation but said that Greece will continue with its fiscal austerity plans.

ECB Executive Board member Bini Smaghi said that Greece faces a choice between tough consolidation measures and disaster like Argentine-style default. He added that a soft-restructuring concept is unclear, and that nobody knows what it means exactly. He also said the Fed and the BoE, unlike the ECB, are financing state deficits, which is postponing consolidation in the US and the UK.

JPY
Japan's Q1 GDP was much weaker than expected, falling -0.9% q/q (cons. -0.5%) and -3.7% y/y (cons. -1.9%). The tragic disaster on March 11 clearly played a role, although there is other underlying economic weakness too given this is the second successive quarterly contraction.

GBP
The minutes from the May 5 BoE policy meeting were more dovish than expected. There was no change in the vote split, which remained at 6-3 in favour of no hike. MPC member Sentance voted for a 50bp hike, and Weale and Dale for a 25bp hike. However, the minutes revealed that "Two of these members [Dale and Weale] regarded the matter as finely balanced and favoured only a small tightening in policy, given the weakness of the real economy and the uncertainty facing the outlook". So it is clear that even the hawks are turning more cautious. With rate expectations pushed back we remain cautious on sterling, although a rate hike in August remains the base case of our analysts.

UK April jobless claims increased by +12.4k, well ahead of expectations for no change. UK March ILO unemployment rate came in at 7.7%, just lower than expectations for 7.8%..

NZD
Consumer confidence for May fell -1.3%, and wages in Q1 grew by a slower pace than expected, rising only +0.8% q/q (cons. +1.1%). Our Australian economics team notes that today's data reduces the pressure for a near-term rate hike, but they stick to their view that the RBA will likely next hike in August.


A. White
Analyst at Fibosignals.com


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