8th of July 2011 - Fundamental Forex Market Overview

DAILY MARKET COMMENTARY
8 July 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
Attention shifts to payrolls today as the market seeks to end the week consolidating the gains made in risk. A robust ADP payrolls report has boosted hopes of a good number today (UBSe +135k, cons. 100k) and sentiment is invariably better on the economy compared to just over a weak ago, when soft regional PMI prints out of the US prompted fears that the soft patch was entrenching. Consensus expectations for the headline payrolls number has risen by around 20k since, though even with a good print the Fed will remain underwhelmed. In other news, yesterday the euro caught a bid after the ECB unexpectedly tweaked its collateral rules to favour Portuguese sovereign bonds. Consequently, these bonds will still be considered eligible collateral at ECB tenders even if the sovereign rating is eventually cut to "junk" status by all three ratings agencies. Previously, only Greek and Irish sovereign debt had enjoyed this privilege. Before Thursday's decision, there had been a hypothetical risk that Portuguese banks might soon be unable to access ECB cash, leading to a potential funding crisis - but the ECB's action now effectively removes this risk in the near term. EURUSD traded in a range of 1.4335-1.4368 and USDJPY 81.22-81.31.

EUR
The ECB hiked interest rates for the second time in the current cycle, pushing the refi rate 25 bp higher to 1.50%. This was widely expected, so the euro climbed just 10 pips in the immediate aftermath of the announcement, only to surrender these gains moments later. At the subsequent press conference, ECB President Trichet maintained his hawkish tightening bias, noting that the risks to inflation remain on the upside and that he is monitoring these risks "very closely". Trichet also repeated the ECB's opposition to any rollover of Greek debt that would result in either a credit event, or a selective default rating.

EU President Van Rompuy again said the EUR is not facing a crisis, and the currency is stable and strong.

German industrial production was very strong at 7.6%y/y, and 1.2%m/m. This is consistent with the firm factory orders releases sent this weak, though doubts remain over the sustainability of the figures.

German trade surplus in May was stronger than expected at EUR12.8bln, helped by a 19.9% jump in exports. However the current account was softer compared to April at EUR6.9bln.

GBP
The Bank of England held the base rate steady at 0.50% and kept its asset purchase target unchanged. No statement was released, and investors will now look to the minutes for further details - sterling is likely to be hurt on any evidence of a shift in opinion towards more Gilt purchases. We continue to see GBP trading heavy in the medium term.

CHF
Swiss Unemployment was in line with expectations at 2.8% in June, data remains robust in the country though the SNB remains in a difficult position to move forward with policy, even though the ECB has now pushed the rate gap to 125bp.

Swiss CPI for June came in below consensus with consumer prices increasing +0.6% y/y and -0.2% m/m. We remain positive on EURCHF in the medium term as last week's weaker than expected manufacturing PMI suggests Swiss exports may be starting to feel the effects from their strong currency, but in the short term Moody's recent downgrade Portugal, and other associated periphery risks are weighing on EURCHF.


A. White
Analyst at Fibosignals.com


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