24th of June 2011 - Fundamental Forex Market Overview

DAILY MARKET COMMENTARY
24 June 2011 – 8:00 GMT
Friday

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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
Trading during the Asia session was subdued after a volatile Thursday. Asian equity markets are up and there are no fresh signs of risk aversion. The Eurozone managed to make a recovery late into the US session as Greece, the EU and the IMF announced that a new deal had been reached regarding further austerity. The news was welcome respite for risk appetite, which had a very difficult today post-Fed and further softening in US data. Even though there is still significant implementation risk for Athens - beginning with the austerity vote next week, markets are now relatively confident that the worst has passed for now.

Nonetheless, this does not mean that crisis resolution is back on track as the new deal is spread over five years and questions will be asked at every single quarterly assessment. The new arrangement, should it be pushed through, ensures short-term financing but other details, such as private sector initiatives and the status of bond rollovers remain outstanding. Over the last two days relevant national banking authorities have disclosed talks are ongoing with banks regarding voluntary participation and event risk remains significant. Equity markets globally were weak, EURUSD traded at 1.4164-1.4277 and USDJPY at 80.39-80.64. On Friday, the US final Q1 GDP print plus durable goods data, core PCE and German IFO release for May are due.

EUR
Greek PM Papandreou announced that a new deal had been reached with the EU and IMF on further budget cuts and austerity measures. The measures mirror the 5-year plan approved by the Greek cabinet and the EU/IMF have ensured that it would do whatever it takes to keep Greece on track, especially meet the country's financing needs for July and avoid a disorderly default.

According to Bloomberg, Papandreou called the step a "positive sign for the future of Greece" and called for all parties to back the move. The Greek parliament will vote on the package next week. EU President Van Rompuy said this deal would address the fiscal slippages, while ECB President Trichet also said he would monitor developments in Athens closely. Crucially, the parties involved acknowledged the need for flexibility and EU sources reported that the current plan could be "reprogrammed to ensure Greece meets funding needs".

A German government advisor warned overnight that Greece needed 40%-50% debt forgiveness - this remains contrary to current Eurozone plans for the country.

Throughout Thursday, peripheral market spreads widened in European trading. Portuguese debt, that marks yet another record high. This is partly due to liquidity concerns but wider risk aversion has not helped things either.

The Financial Times reported that "Finance minister in tough talks with creditors after viability of EUR3.8bn in measures queried." A Greek socialist MP said that the Greek Finance Minister is discussing with EU/IMF steps to fill a EUR3.8 bn gap in the mid-term plan. The Greek cabinet approved the 5-year plan as expected, the parliament will vote on it June 28. But the credibility of the plan is being strongly questioned, so parliamentary approval may not give the euro the boost that some people are anticipating.

The German IFO is out on Friday and markets are still looking for a robust 113.4 print.

GBP
The head of the Institute for Fiscal studies has warned that the spending cuts needed for the government to achieve their deficit reduction plans may be 'impossible to achieve', largely because of the political cost of their implementation.. For a guideline to the impact of the measures on the UK retail sector, CBI reported sales printed the worst numbers for a year at -2 (consensus +13).

BoE Governor Sir Mervyn King is due to speak at a press conference at 9:30 GMT on Friday.

CHF
The franc rallied across the board yesterday as risk aversion took its toll. This came amid a strong trade balance showing, at CHF3.31bn for May. Nonetheless, one-offs accounted for a sharp drop in imports, which offset the 1.5% decline in exports.

AUD
RBA's Lowe says interest rates will probably have to be higher in future. Lowe is a known hawk however and the RBA on balance remains in data-watch mode, with the Q2 CPI print the key for a change in its neutral stance.


A. White
Analyst at Fibosignals.com


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