17th of October 2011 - Fundamental Forex Market Overview

DAILY MARKET COMMENTARY
17 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
The weekend meeting of G20 finance ministers and central bank governors passed largely without incident and there were no concrete signs that any tangible progress had been made. The IMF, however, does appear to be increasingly amenable to providing short term liquidity to solvent sovereigns, and IMF Managing Director Lagarde said proposals on this would be presented at the Nov. 3 G20 summit. The current strategies being proposed by the Eurozone, which are scheduled to be signed off at the upcoming EU/Eurozone leaders' summit in Brussels appear to have won the endorsement of G20 partners, but there are still conflicting reports of the IMF's and non-Eurozone economies' respective roles, as the Eurozone appears intent on completing matters without external help. This may damage sentiment somewhat as investors question whether the currency union has the adequate firepower. While it is clear that risks to the process remain, not only to markets but to growth, fears of a global recession have probably softened slightly. On the US data front, after solid ISM, payrolls, and retail sales reports, our economists have materially raised their Q3 GDP forecasts to 2.6% from 1.5% annualised. Overnight Asian equities were broadly firm, EURUSD traded 1.3827-1.3888 and USDJPY traded 76.94-77.33.

EUR
German Finance Minister Schaeuble conceded for the first time that private holders of Greek debt will likely suffer losses greater than the 21% initially agreed in July. He said the details of this are still being discussed, and that final agreement on this need not be reached by the EU summit on Oct 23, but that at least "the principles must be clear" by then. He also raised the possibility of a coercive approach for the first time noting that agreement with the banks would be welcome "if possible", but that "there must be a level of participation which is enough to bring about a lasting solution for Greece".

Shortly before the close of the US session on Friday, the Financial Times reported that holders of Greek debt are unwilling to accept losses above and beyond 21%. IIF Managing Director Callara who brokered the original July 21 agreement was cited as the source.

German Chancellor Merkel has now begun to talk publicly about the possibility of a haircut being applied to Greek debt. She said that if a haircut were to be hypothetically applied, it would need cautious preparation.

EU Commissioner Barroso said that any review of the Greek rescue package must retain the voluntary involvement of banks and not lead to a credit event. French Finance Minister Baroin said that France would reject any proposed solution to the Greek crisis that would mean a credit event.

Schaeuble also hinted that the process of bank recapitalisation will not be swift even if agreement is reached on a recapitalisation program at the upcoming EU summit. He said that European banks should be given more time to raise capital privately.

Bundesbank President Weidmann acknowledged that trust between European banks has been in decline since the middle of the year. Weidmann, like several other ECB policymakers before him, rejected the idea of the ECB being used to leverage the EFSF. He said it was simply "not on the agenda", noting that it is excluded under EU rules. To us, this implies that the idea of giving the EFSF bank status so that it might avail of ECB liquidity facilities seems increasingly far-fetched.

ECB President Trichet suggested that once the EFSF starts to buy bonds in the secondary market, this would restore stability to financial markets, and that would mean it would no longer be necessary for the ECB to buy bonds under its SMP program.

EU Commissioner Rehn said that the Oct. 23 Summit will take a decision on Greece's second rescue program. He also suggested that an earlier launch of the European Stability Mechanism would be beneficial (the ESM was originally intended to become operational in July 2103). We note that one of the tasks of the proposed ESM is to facilitate the restructuring of sovereign debt for sovereigns deemed to be insolvent. A desire to accelerate its introduction suggests that a sovereign default could be closer than many investors think. It supports the view of our economists that a Greek default by Q1 of 2012 is more likely than not.
JPY
USDJPY spiked higher after newswires reported that Japan would unveil new steps against the strong yen as early as this coming week, citing an unnamed Japanese government official. Measures to encourage overseas investment by Japanese coporates were mentioned.

BoJ Governor Shirakawa said that uncertainty in the global economy is behind the yen's strength. Overnight Japan industrial production was softer than expected at 0.6%m/m (cons. 0.8%), 0.4%y/y.

CAD
Bank of Canada Governor Carney said that the policy rate is currently appropriate, although he hinted that interest rate cuts could be considered in future. Specifically, he noted that "we have additional room with our overnight rate; it's higher than the lowest level it can go". Nevertheless, he stressed that the bank would not be "trigger happy" when it came to interest rate adjustments.


A. White
Analyst at Fibosignals.com


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