1st of August 2011 - Fundamental Forex Market Overview

DAILY MARKET COMMENTARY
1 August 2011 – 8:00 GMT
Monday

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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
A deal has been agreed between President Obama and Congressional leaders to raise the debt ceiling by $0.9 trn immediately, and by as much as $2.4 trn by early next year. Fiscal spending cuts of up to $2.5 trn have also been agreed, although the detail is unclear given that a Congressional committee has been tasked with suggesting where those cuts are to be made. To become law, both the Senate and the House must still vote to approve the deal. Full votes are expected later today in Washington, although it must be stressed that acceptance is not a foregone conclusion. It is even conceivable that the debate drags on for a number of days. Despite the uncertainty surrounding the deal, both USDJPY and USDCHF found support overnight, although buying was somewhat cautious. EURUSD traded 1.4346-1.4410, and USDJPY 76.65-78.05. On Friday the S&P 500 fell -0.65%, although S&P futures are over 16 points ahead at the time of writing. US Q2 GDP growth came in well short of expectations at an annualised rate of only +1.3% (cons. +1.8%). Q1 growth was also revised down to a mere +0.4%, from a previous estimate of +1.9%. As a result, our US economics team have pushed back their call for the first Fed policy rate hike to "near the end of" 2012 (from Q1 2012..

EUR
Spanish Prime Minister Zapatero called a general election for November 20, and the euro initially reacted poorly. Apart from the political uncertainty this may bring, our European rates strategists note this may delay the full ratification of the EFSF's proposed new powers, announced at the July 21 EU summit.

Doubts have been raised in the press about whether the EFSF will be ready to provide Greece's sixth tranche of rescue funding which is due in September. All the previous tranches have been provided via a network of bilateral loans from donor countries, as the EFSF did not exist when Greece first needed to be rescued. However, since the July 21 summit, the stated ambition is to migrate responsibility for funding Greece to the EFSF. Somewhat alleviating concerns, a spokesman for the Eurogroup of Finance Ministers said that even if the EFSF cash cannot be mobilised in time for September, the existing system of bilateral loans which has funded Greece so far could be used again.

Newswires raised the possibility that Italy and Spain might choose not to contribute to Greece's sixth tranche if the bilateral system of loans is used again. Under the agreement reached in May 2010, a country may exercise its right not to participate if its own borrowing costs exceed the interest rate charged to Greece. We note that if the EFSF is ready in time, the problem goes away as countries would no longer need to raise cash directly to support Greece - rather that responsibility would fall on the EFSF, with Italy's and Spain's involvement limited to only guaranteeing the EFSF bonds issued. Spanish and Italian 10y yields closed slightly wider on the day at 6.04% and 5.85% respectively.

Eurozone July inflation was softer than expected at +2.5% y/y (cons. 2.7%). Nevertheless, hawkish rhetoric from ECB policymakers has been in plentiful supply over recent days, suggesting the bank remains alert to the risk of second-round inflationary pressures.

Moody's put Spain's Aa2 rating on review for a possible downgrade, noting that any actual downgrade would likely be one notch only. S&P currently rates Spain at the same level (AA), while Fitch's rating on Spain is one notch higher (AA+). Moody's cited the increased vulnerability of government finances, and the risk that the recent increases in funding costs will be sustained..

JPY
During the US session on Friday, Prime Minister Kan repeated comments made throughout the week by Finance Minister Noda. He said that recent FX moves are one-sided and that he would carefully watch FX moves closely. USDJPY briefly ticked about 10 pips higher, in the most pronounced reaction to rhetoric the market saw all week.

CHF
Swiss Economy Minister Schneider-Ammann said that the Swiss franc's rise is not temporary and it would not return to its former levels any time soon. He added that unemployment might climb because of the franc's strength.


A. White
Analyst at Fibosignals.com


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