DAILY MARKET COMMENTARY
8 November 2011 – 8:00 GMT
Tuesday
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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 spotlight remains on Italy today as the Italian Prime Minister faces several challenges in parliament. The leaders of the opposition will decide whether to present a no-confidence vote to be attached to the 2010 budget vote. Although it is not clear whether a vote on Silvio Berlusconi's leadership will indeed take place, uncertainty remains high and investors need to be braced for yet more potentially confusing headlines. Compared to the trauma related to the Greek referendum last week, markets appear to be taking current issues in their stride. Yesterday G10 currencies spent the US session trapped in a range. CHF was the exception however, and EURCHF continued to climb, eventually breaking above 1.24. There are more speeches from SNB members today as expectations of a rise in the policy floor continue to build. The monthly meeting of Eurozone finance ministers ended on a positive note - EU Commissioner Rehn made it clear that the sixth tranche of Greek cash might be paid by late November after all, but only on condition that the new Greek government expresses a clear commitment to the terms of the second Greek rescue package. Political maneuvering continues in Greece amid reports that the identity of the new prime minister has been decided and will be announced on Tuesday. The group of EU-27 finance ministers is due to meet in Brussels at 0800GMT on Tuesday. There may be some headlines pertaining to contributions to the IMF for the sake of EFSF enhancement, though this is another area where the Eurozone authorities do not appear to have a clear-cut plan but time is running short. EURUSD traded 1.3737-1.3778 and USDJPY traded 78.02-78.09 overnight.
EUR
The monthly meeting of Eurozone finance ministers ended on a positive note. Eurogroup Chairman Juncker said he welcomed Greece's move towards a national unity government and that, once the new government is installed, the troika will return swiftly to Athens to conclude negotiations. EU Commissioner Rehn even raised the possibility that the sixth tranche of Greek cash might be paid some time in November, on condition that the new Greek government expresses a clear commitment - in writing - to the second Greek rescue package. Juncker added that only a Eurogroup teleconference would be needed to approve final disbursement, and that this could take place before Nov. 29.
Juncker announced that European Commission and IMF monitoring staff will be accompanied by monitors from the ECB when they install themselves in Rome latest this month. This will give the full troika a presence, and could be seen by many as a first step towards more intrusive surveillance.
Italian 10y yields climbed 30 bp to close at a 14-year high of 6.63%. The euro did not seem overly concerned, and the Italian MIB stock index actually advanced +1.3% on the day. Italian political uncertainty continues to cast its shadow over the bond market. There were reports - quickly denied - that Prime Minister Berlusconi was about to resign.
France announced a series of budget measures to help improve its fiscal position. Prime Minister Fillon said that sacrifices were needed to prevent France failing. He said the new measures would include increasing the retirement age to 67 (in 2017) and would be worth EUR7 bn in 2012, and EUR11.6 bn in 2013.
Talks continue in Greece, with Greek state TV claiming that the identity of the new prime minister has been agreed and will be announced on Tuesday.
ECB Executive Board member Stark said he assumes that the crisis will be under control or overcome in 1-2 years.
Newswires reported that the EFSF placed a EUR3 bn 10y bond in support of Ireland's rescue package. This is the fourth bond issued by the EFSF, taking total issuance so far to EUR16 bn.
The ECB announced that EUR9.52 bn worth of sovereign bond purchases settled last week, taking the total stock of ECB purchases since May 2010 to EUR183 bn. This was the most active week for the ECB in seven weeks.
The euro got a brief boost after the European Investment Bank reportedly suggested it could help recapitalise Eurozone banks to the tune of EUR 10 bn if its shareholders (EU governments) increase the EIB's capital by EUR1.3 bn.
Our analysts note that Tuesday is a key day in Italian politics. A vote on the 2010 budget is due to take place sometime in the afternoon. However, at 1000 GMT, the leaders of the opposition parties are due to decide whether to attach a no confidence vote to budget vote. Even if the vote is limited to one on the budget alone it has the potential to be de-stabilising given it has already failed to pass once before and a second rejection would be a definitive proof that the government does not have a working majority in parliament.
CHF
The Swiss Director of Labor, Gaillard said that the Swiss unemployment rate will climb to 3% this year, noting that the trend to lower unemployment has now ended. SNB Vice Chair Jordan said the bank is permanently watching the situation and, if there is a need to act, they will take further measures. Perhaps hinting at his intentions, Jordan added that the Swiss franc is still overvalued with EURCHF at 1.20, and is among the most over-valued currencies in the world. Ahead today, Jordan will speak again at 9:40 GMT and Hildebrand will speak at 13:30 GMT.
The head of a Swiss business group said it would welcome a "Christmas present" of the SNB moving the EURCHF floor to 1.30.
AUD
In figures released overnight, NAB business conditions came in at -1 in October, down from 1.5 the previous month. Business confidence was better at 2, after -1.
The Australian Trade balance was softer than expectations at A$2.56bn, down from last months' $2.95bn.
A. White
Analyst at Fibosignals.com
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