DAILY MARKET COMMENTARY
4 August 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 yen weaken sharply during the Asia session and Finance Minister Noda confirmed that Japan had intervened for the third time in 12 months. Additionally, the Bank of Japan cut short a scheduled two-day policy meeting and announced a further easing of monetary policy. The BoJ's asset purchase facility was marginally increased, but this is unlikely to have any material or lasting impact on the yen. USDJPY traded 76.81-79.39. The Nikkei 225 is up +0.27% - boosted largely by the falling yen.
In the US, a disappointing non-manufacturing ISM report supported the notion of further softening in business activity - the weaker employment and new orders components in particular. It also cast a longer shadow over Friday's US employment report which is anxiously awaited. The S&P 500 closed up +0.5% earlier, and the Nikkei 225 is up +0.27% at the time of writing - boosted largely by the falling yen. After two bold policy actions elsewhere in the past 24 hours, the focus now shifts to the ECB press conference.
EUR
In line with market expectations, we anticipate no change in the ECB's key policy rates. During the press conference, we see little scope for President Trichet to sound more hawkish than last month. Growth momentum for the Eurozone as a whole has been weakening. Inflation expectations have been falling as well. At the same time, uncertainty with respect to global growth conditions has been rising, chiefly because of slowing economic activity in the US and Asia. Separately, our economists lowered their forecast for ECB policy rate increases to 75bp from 125bp by the end of 2012, mainly due to weaker global growth prospects.
In a speech to Italy's parliament, Prime Minister Berlusconi stressed that Italy has solid economic fundamentals. He also said that markets were misjudging fundamentals and failing to take into account the solidity of the Italian financial system. As such, he related market stress to external factors, such as conditions in the US. Nevertheless, he said more has to be done in order to support domestic growth conditions.
Eurozone June retail sales were stronger, coming in at +0.9% m/m -0.4% y/y vs 0.5%, -1.0% consensus. The Eurozone service sector PMI was also revised higher to 51.6, after a flash estimate of 51.4.
JPY
Finance Minister Noda confirmed that Japan had intervened in FX markets, and that it would be a unilateral operation. Additionally the BoJ increased the size of the asset purchase facility to JPY 50 trn from JPY40 trn. Monthly Rinban operations were not increased however, which substantially reduces the FX impact of today's easing.
CHF
The SNB announced several measures to counter franc strength. It lowered the 3m CHF Libor target range to 0.0-0.25% and said it is aiming to keep it as close to zero as possible. The SNB also aims to flood Swiss money markets with liquidity, expanding banks' sight deposits at the SNB from CHF30 bn to CHF80 bn, and it will no longer renew repos and SNB bills that fall due. Finally, the SNB said it would repurchase its outstanding bills.
Without additional measures, however, it seems questionable whether these moves alone can sustainably stop the franc's appreciating trend - not least because of an overall environment still ridden with uncertainty about the global economy. Then again, the SNB vowed a readiness to take more action if necessary..
GBP
UK construction PMI came in at 53.5, slightly higher than expectations for 53.1. The important indicator for the UK government will be the services indicator, due on August 4.
UK service sector PMI for July was stronger at 55.4, ahead of expectations for 53.2 and from 53.9 in June. Our European economist notes that all other components are soundly up, while expect prices that fell markedly.
A. White
Analyst at Fibosignals.com
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