16th of August 2011 - Fundamental Forex Market Overview

DAILY MARKET COMMENTARY
16 August 2011 – 8:00 GMT
Tuesday

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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 remained relatively firm during the Asia session as investors look ahead to the Sarkozy-Merkel summit later today for further policy guidance. A Wall Street Journal article published overnight noted that the two countries are being forced to reconsider the possibility of Eurobonds as the prospect of fiscal union moves up the agenda, though political obstacles remain strong and we remain cautious on over-expecting a positive result from today. Elsewhere, an editorial in a major Chinese paper suggested the time is ripe for CNY flexibility to be increased. Although this doesn't immediately point to outright appreciation, expectations of a band widening have risen. During the US session Atlanta Fed President Lockhart (a 2012 voter) sounded sceptical about the possibility of further QE, but kept the door open to further asset purchases nonetheless. He said in theory the Fed could extend asset purchases "quite extensively" but that the bar is still very high for another round of monetary stimulus. On the data front German GDP is due, which is likely to be a significant driver of risk appetite today. US industrial production is also in the calendar. We remain on the lookout for SNB policy announcements.

EUR
Investors seem to be expecting some euro-positive developments to emerge from Tuesday's meeting between French President Sarkozy and German Chancellor Merkel. We have our doubts however, especially given that both governments have explicitly stated that eurobonds will not be on the agenda. Instead, all investors are likely to get is yet another pledge to implement the July 21 summit proposals as quickly as possible. A Wall Street Journal article released overnight suggested the leaders were being forced to reconsider the prospect of Eurobonds in light of market conditions. This remains politically controversial but cannot be dismissed outright any longer.

The ECB announced it bought ?22 bn worth of bonds under its Securities Markets Program in the latest week, reactivating the facility after 19-weeks of dormancy. This was the biggest amount ever purchased in a single week - consistent with unconfirmed newswire reports that the ECB bought Spanish and Italian debt for the first time. The sheer scale of the operation is a clear demonstration of the ECB's determination to prevent the crisis from escalating, but it could also introduce sterilisation challenges over the medium term. The ECB is scheduled to sterilise these purchases on Tuesday by absorbing ?96 bn in one-week deposits. FX investors will be watching to see if the full amount is taken in.

GBP
Minutes from the RBA's August 2 policy overnight underscored the central case for hikes, though rising external risks have kept the RBA on hold. Our economists note conditions had deteriorated since the initial meeting, and we now no longer expect any move this year.

AUD
Minutes from the RBA's August 2 policy overnight underscored the central case for hikes, though rising external risks have kept the RBA on hold. Our economists note conditions had deteriorated since the initial meeting, and we now no longer expect any move this year.

CHF
Swiss combined producer and import prices came in at -0.7% m/m and -0.6% y/y, largely in line with market expectations.

The Tages-Anzeiger paper in Switzerland reported that the government would meet today on measures to counter franc appreciation but this would focus more on the economic side, such as helping affected industries, rather than outright FX/monetary policy measures.


A. White
Analyst at Fibosignals.com


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