DAILY MARKET COMMENTARY
9 November 2011 – 8:00 GMT
Wednesday
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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
News that Italian Prime Minister Berlusconi could resign soon and the expected establishment of a technocratic government in Greece has helped sooth market nerves somewhat. A lower CPI number in China and hopes of looser policy ahead in the world's second largest economy has also helped sentiment, though we continue to note that there are several variables in play. Compared to Greece at present, there is a lack of clarity in Italy over who could succeed Berlusconi and the prospect of further uncertainty in the run-up to elections, while a change of government does not automatically mean a country's fiscal problems would go away. The market will be keeping a close eye on Italian bond yields, the 10-year spread over Germany is still hovering close to 500bp and the parliamentary vote on new austerity measures is not due until next week. Elsewhere, EURCHF gave back some of its recent gains after SNB Vice-Chair Jordan sounded as though there are no immediate plans to lift the exchange rate floor above 1.20. He cited "enormous deflationary pressure" as a precondition for additional policy easing, and added that it would be wrong to engage in competitive devaluation. Although the recent barrage of comments in Switzerland suggests the stage is being set for some sort of auction, the SNB appears to be acknowledging that there are constraints to action and we believe the instability over politics in several Eurozone countries have led to a cautious approach. Ahead today, Riksbank minutes and industrial production numbers are due in Sweden, while Fed Chairman Bernanke will be speaking at a Fed conference on small businesses. Overnight EURUSD traded in a range of 1.3815-1.3859 and USDJPY traded 77.54-77.79.
EUR
At the end of a bilateral meeting between the two, Italy's President Napolitano announced that Prime Minister Berlusconi will resign after the new budget law is approved. Our analysts note that this could happen as early as Nov. 15. The news came after Berlusconi's government earlier won a parliamentary vote with the help of abstentions, but failed to command an overall majority of seats. The euro climbed 70 pips on the resignation news, and risk appetite in general got a boost. The Eurozone bond markets were closed for the evening at the time the headlines hit.
Attention now shifts to what form a new Italian administration might take. Berlusconi has already expressed his opposition to a technocratic government, but our analysts do not rule out the possibility.
Italy's Opposition Leader Bersani said there is a real risk that Italy loses market access in the coming days.
Meanwhile in Greece, negotiations are still ongoing over the make-up of the new government, and in particular who will be prime minister. Newswire reports suggest that former ECB Vice President Papademos is emerging as a favourite for the post.
ECB Executive Board member Stark said Europe needs 'bold steps toward fiscal union'.
A Greek minister revealed that Europe has asked Greece to produce a letter pledging to implement the rescue deal agreed in outline on Oct. 27. The letter is to be signed by Prime Minister Papandreou, Opposition Leader Samaras, Central Bank Governor Provopoulos, and whoever the new prime and finance ministers will be.
A Kremlin aid noted that Russia EFSF contribution would be more likely if ECB can participate, but he voiced doubts as to whether the EFSF can gather the planned $1tn.
Bank of Canada Governor Carney said that deleveraging by European banks could trigger sharp swings in global liquidity and that this "will soon be felt" in the real economy.
CHF
EURCHF fell a quick big figure after SNB Vice-Chair Jordan cited "enormous deflationary pressure" as a precondition for additional measures, and added that it would be wrong to engage in competitive devaluation. Earlier, Jordan had echoed the thoughts of other members, stating that the central bank is committed to defending the EURCHF floor to fulfill its price stability mandate and views the franc as overvalued at current levels. However, he said that the floor isn't without risks, and could involve high costs.
GBP
September industrial production remained unchanged m/m at +0.0%. Manufacturing output rose +0.2% vs consensus +0.1%. According to the ONS, today's data will have only a marginal downward impact on Q3 GDP, which stands at +0.5% q/q.
JPY
Japanese Finance Minister Jun Azumi admitted that he was targeting USDJPY back to 80 during last week's intervention. Such comments appear to be inconsistent with the original Japanese position to target speculative positions only and avoid outright targets.
A. White
Analyst at Fibosignals.com
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