DAILY MARKET COMMENTARY
21 November 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
Headlines this week are expected to be dominated by further news on debt woes, with the US' problems adding to the mix. Barring a last-minute breakthrough, we believe it would be hard for the Congressional 'super committee' to come up with structural cuts to eat into the US fiscal deficit, thus beginning the process of painful sequesters, as mandated by legislation. Although there will be plenty of headlines generated, we doubt that the process will be as traumatic as the debt ceiling debate this summer, though given the scale of the cuts on hand, investors will worry whether the US' growth trajectory would be affected, especially in light of external conditions. In the Eurozone, Spain's Popular Party won a sweeping electoral victory but prime minister-elect Rajoy warned not to expect any miracles as debt concerns escalate. Last week's disappointing bond auctions for Spain have laid bare the scale of market disquiet over the fiscal situation and as in Greece and Italy, the new administration will probably not enjoy too long a honeymoon period before concrete action is expected. The Financial Times reports that the European Commission is expected to publish a report on Wednesday arguing for the creation of commonly backed 'stability bonds' to help all Eurozone members 'meet their financing needs'. However, the report is also expected to acknowledge that treaty changes are needed so this would not be the most feasible scheme in the current environment. Overnight EURUSD traded 1.3507-1.3537 and USDJPY 76.77-76.91.
EUR
The euro climbed on Friday amid reports that the IMF might be able to boost its lending capacity by first borrowing from the ECB and then on-lending the cash to needy sovereigns. Newswires reported the idea was first floated at the Oct. 27 EU Summit, but that both Germany and the ECB opposed it. We note that earlier plans to allow the EFSF to borrow from the ECB were not implemented, suggesting this latest proposal also may never see the light of day.
An unnamed IMF official seemed hopeful however, noting that Article 23 of the ECB's charter allows it to conduct "banking transactions in relations with third countries and international organizations, including borrowing and lending operations". Also, IMF Deputy Chief Lipsky noted that the IMF "can borrow from anyone, its member states and central banks".
The Financial Times reported that in a report set to be published on Wednesday, the European Commission is expected to outline three proposals for debt crisis resolution. First, the complete substitution of national bonds for 'eurobonds'; the other two options are limited guarantees for new bonds, or an intermediate approach where 'a large portion of national debt would be funded through Eurobonds but countries would be forced to issue national bonds if debt levels go too high'. The second option would not require a treaty change but is not dissimilar to the much-maligned EFSF.
Dutch Finance Minister de Jager said last week's increase in Dutch yields is "not an alarming signal". He noted borrowing costs are still around their lowest levels in 200 years, and that investors consider "Dutch state bonds as very stable, very secure". He added that a leveraged EFSF might still be able to reach a EUR 1 tn effective lending capacity, but suggested that one of the leverage options - the SPIV idea - may no longer be a serious contender.
The debate continues over whether the ECB should intervene more forcefully in sovereign bond markets. ECB President Mario Draghi gave no indication that the ECB will step up its bond purchases. Rather, he sounded exasperated over the slow pace of implementation of EFSF leveraging saying "we should not be waiting any longer." ECB Executive Board member Gonzalez-Paramo said quantitative easing is not feasible in the Eurozone and is against EU rules in any event. Germany's Finance Minister Schaeuble said there is no pressure on the ECB to "unleash" all its "firepower", and that even if it did the "calm would last for a few weeks at most". Former German Chancellor Gerhard Schroeder opined that if the "situation in Italy, Spain and possibly also France worsens, the ECB will make it clear that it will intervene without limits to defend the euro".
Germany's Frankfurter Allgemeine Zeitung newspaper reported that the ECB has privately agreed that weekly bond purchases under the SMP program should be capped at EUR 20 bn per week. The market initially took the headline as a euro-positive, likely because weekly bond purchases have been considerably lower of late, and have only once exceeded EUR 20 bn previously. However, we caution that such a relatively low limit seems to preclude the possibility for QE. The paper also reported that skepticism over the SMP is growing more widespread on the 23-person governing council - central bankers from Germany, Luxembourg, Netherlands and Austria are now reportedly opposed.
Current German Chancellor Merkel said the British are "right" to demand that "we use a large amount of firepower to win back credibility for the Eurozone". However she added that care should be taken not to "pretend to have powers we don't have. Because the markets will figure out very quickly that this won't work."
Mario Monti formally became Italian prime minister on Friday after a vote of confidence in his government was passed in the lower house of parliament, 556 votes to 61. He said he will provide details of his new economic program at the Nov. 28 meeting of EU finance ministers. On Tuesday, Monti is due to meet EU Commission President Barroso and EU Council President Von Rompuy. Meetings with French President Sarkozy and German Chancellor Merkel are due to follow on Wednesday.
The Greek government revealed its 2012 budget plan. It sees the budget deficit at 5.4% of GDP, if the debt swap is implemented, but 6.7% of GDP if it is not. It sees 2012 debt at 145.5% of GDP at EUR309.3 bn, if the debt swap is implemented.
JPY
The minutes of the BoJ's Oct. 27 meeting are due for release. At this meeting the ceiling on the size of the asset purchase program was increased by JPY 5 trn to JPY 55 trn. There was no material currency reaction at the time, and we doubt the publication of the minutes today will be any more market moving. However, it will be of interest to see if the BoJ considered the possibility of expanding its monthly bond purchases beyond the current pace of JPY 1.8 trn per month. In the unlikely event that this option was seriously entertained, we would interpret it as a yen-negative.
AUD
RBA Assistant Governor Guy Debelle said overnight that Australia's mortgage rates are about 'where the central bank wants them to be', suggesting that there would be no short-term rates relief from the RBA for households.
A. White
Analyst at Fibosignals.com
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