10th of October 2011 - Fundamental Forex Market Overview

DAILY MARKET COMMENTARY
10 October 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
Risk sentiment improved in Asia on continued hopes of a more targeted policymaker response to the Eurozone debt crisis. Investors' growth expectations have also started to improve after Friday's better-than-expected US payrolls release. German Chancellor Merkel and French President Sarkozy met on Sunday to seek a compromise on a bank recapitalization plan and generally discuss a more efficient response to the European debt crisis. Both leaders indicated they are determined to do everything necessary to ensure the recapitalization of their banks, something Sarkozy had consistently opposed previously. Although no details were given, they both confirmed that wide-reaching action will be announced by the end of October, ahead of the G20 meeting. The convergence in opinion and the fact that they agreed on a self-imposed deadline for a common crisis response suggests that a major announcement is likely in the next couple of weeks. These developments should be supportive of both risk sentiment and the euro.

US payrolls surprised positively on Friday while the unemployment rate was steady at 9.1%. This suggests that the Fed will remain cautious on labour market conditions and that rate expectations will therefore stay capped. Fitch downgraded Italy and Spain on Friday, but given the limited likelihood of a near-term move by S&P and the fact that Fitch was partly following up, the impact on the euro should is not lasting. Finally, Dexia's board of directors accepted a rescue plan which was prepared by France's and Belgium's governments. EURUSD traded 1.3346-1.3478 and USDJPY 76.70-76.85. US stock futures are trading in the black, with S&P futures up by 1.2%.

EUR
On Sunday, German Chancellor Merkel and French President Sarkozy gave a joint press conference in Berlin. They said their ambition is to agree a plan for stabilising the Eurozone by the end of October and that they both agree on the issue of recapitalizing the banking sector. This suggests a major convergence in opinion for recapitalizing the banking sector, something Sarkozy had consistently opposed previously. They self-imposed a deadline for providing a comprehensive and wide-reaching plan for bank recapitalization and for responding to the crisis. Such a plan will be announced by end of October, and most crucially ahead of the next G20 meeting. The convergence in opinion in combination with the fact they both agreed on a self-imposed deadline confirms officials' seriousness and signals that indeed some major announcement should be expected during the next couple of weeks. Under such conditions both risk and the euro will likely stay supported.

Thomsen, the IMF's Mission Chief in Greece, said Greece is "at a crossroads" and that the program "will not work if the authorities do not take the path that requires much stricter structural reforms than those that we have seen so far." He noted too that "political and social fatigue is growing."

Greece's representative at the IMF, Panagiotis Roumelitis, said that Greece would need more funding than that already envisaged under the second proposed rescue of Greece agreed on July 21. He said either the EUR 109 bn proposed rescue would have to be increased, or the financing gap would have to be closed "through a restructuring of private debt". He said the IMF favoured the latter option.

Fitch first downgraded Italy one notch to A+, outlook negative. They also downgraded Spain 2 notches to AA-, outlook negative. However, with the probability for S&P to act in the short-term too rather limited and part of Fitch's rating action a follow up its impact on the euro is not lasting.
GBP
On Sunday, Bank of England MPC member Weale indicated that he supported Thursday's decision to embark on another round of QE (the full voting breakdown will not be known until the minutes are released on Oct 19). This marks quite a turnaround in thinking given Weale had, until recently, cast his vote in favour of rate hikes, only dropping his call for this at the August meeting. Like Governor King on Thursday, Weale also raised the possibility that further rounds of QE could follow - he said "there is quite a lot of scope for further quantitative easing" noting that the stock of issued Gilts was greater now than it had been when the Bank first embarked on QE in March 2009.


A. White
Analyst at Fibosignals.com


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