DAILY MARKET COMMENTARY
28 July 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 RBNZ kept the OCR steady at 2.5%, but pointed to the need for a near-term rate hike. Other than that, there was very little fresh news during the Asia session. The White House and Congress remain deadlocked in talks over the debt ceiling, and there does not appear to be any clear consensus on which deal, if any, has the best chance of being passed before August 2. The plan offered by Speaker Boehner appears to be falling out of favour as the President has suggested it would be vetoed, while the Congressional Budget Office warned that savings would not be as high as claimed. The White House noted that Congress is still expected to act decisively and a message must be sent to the world that "the US pays on time". Investors are becoming more nervous, with equities leading the way - the S&P was down 2% and Asian equities have followed suit. On the data front, the Fed's Beige Book showed the US economy slowed in 8 out of the 12 regions. EURUSD traded 1.4330-1.4377 and USDJPY traded 77.73-78.15.
EUR
The ECB's Provopoulos said that Greece should aim to exceed its budget goals as exceeding targets would help win market trust. He also said that monetary policy is 'still very accommodative'.
ECB President Trichet said that speculating on a Greek default would be 'a sure-fire way of losing money given the decisions taken last Thursday.' However, he then toned down his comments and said that what was critical was for Greece to implement all that it had agreed to, to rebalance its economy.
Unnamed Reuters sources said that the EFSF is likely to conduct the Greek buybacks itself, rather than Greece. It appears buybacks will focus on bonds trading at less than 65% and the buyback won't be limited to the EUR20 bn figure indicated at the leaders' summit. We believe this is important in light of Greek PM Papandreou's comments earlier - that the loans are indeed the first stages of common issuance.
German preliminary CPI for July increased to +2.4% y/y, in line with consensus. Inflation expectations and short-term rates have eased over the last few weeks, indicating that price pressures are not a big issue for the market anymore. The wider Eurozone CPI figure is due for release on Friday.
German Finance Minister Schaeuble said the government rejects a 'carte blanche' for secondary bond market purchases by EFSF/ESM and added that it would be wrong to think that the Eurozone crisis could be permanently solved by a one-off summit. This suggests that further policy announcements may be likely and implementation risks are significant..
JPY
Reuters reported that Economy Minister Yosano had said at a meeting with the governor of a Japanese prefecture that FX intervention of the order of JPY1-2 trn would be quite difficult. He also reportedly said that FX intervention would be unlikely before Aug 2. We note that on Sept. 15, the BoJ sold Y2.1 trn worth of yen, and on March 18 they sold just under Y0.7 trn.
GBP
MPC member David Miles offered no real change in tone, suggesting that the UK economy could fall back into recession, although this is not the base case. He also said that inflation is likely to remain above target through 2011 and much of 2012, but action now risks undesirable output volatility.
NZD
The RBNZ kept the policy rate unchanged at 2.5%. Governor Bollard did point to the possibility of an early hike though, noting there was "little need" for the previous "insurance" cut of 50bp "to remain in place much longer". Looking even further ahead, he said the strong NZD would reduce the need for additional hikes.
In response to the overnight policy statement, our New Zealand economist brought forward his RBNZ hike call - he now thinks RBNZ to hike by 50bp in Dec. 2011 (previously March 2012).
A. White
Analyst at Fibosignals.com
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