DAILY MARKET COMMENTARY
12 December 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 euro did not manage to sustain its Friday strength but at this stage the Eurozone's leaders would probably be content that the market is not selling off en masse and this week's bond supply can simply pass without incident. There were no major developments over the weekend, though financing for the IMF appears to be taking shape with major central banks in Europe ready to increase their commitments, though as ECB President Draghi warned last week, the legalities still need to be resolved.
The ECB itself will be keeping a close eye on the banking system to gauge the effect of its announcements at last week's policy meeting. Taking into account the ECB's 'menu' for the banks and the EU decisions, perhaps markets have less reason to fear immediate financial market disruptions but it remains clear that deep structural reforms lay ahead, and the growth outlook within the new 'austerity union' will be challenging. The ECB has taken this into account in its rates decisions but the inflation outlook suggests they do not have as much room for manoeuvre as previously anticipated. What's more, several ECB Governing Council members appeared to disagree with even the most recent cuts and a market in search of far greater stimulus from balance sheet deployment to rate cuts will need to manage their expectations. In addition, the ECB appears to be unimpressed by potential IMF calls upon their cash, though Draghi has conceded that this discussion may be out of his hands for the time being.
The week ahead will be a good opportunity to assess the market's verdict on Europe, with the last week of major bond issuance in the Eurozone before the holiday season kicks in. Spain, Italy and Germany are the only countries which have not hit their 2011 supply quotas yet and will tap the market for around EUR12bn. Overnight Chinese and Australian trade data both showed some deceleration, but as expected under current circumstances. Ahead this week, the FOMC and Norges Bank meet, though the SNB move will dominate markets and we look for the EURCHF target to be raised to 1.25.
EUR
This week we visited clients in the Middle East. There has been much speculation about accounts in the region propping up the euro over the last few months. But with a couple of exceptions, we found most Middle East managers to be cautious on the euro. Though clients have not significantly reduced their Eurozone holdings, they have rotated away from peripheral to core bond markets, suggesting the euro is still at risk to selling out of the region if AAA European countries are downgraded. That keeps us bearish on the euro. Please see http://www.ubs.com/fx for details.
Early on Friday the European Commission released their communiqué on the Summit's agreements. Firstly, unanimity was not achieved with the UK choosing to remain outside the protocol. Hungary, Sweden and the Czech Republic have expressed reservations in different ways and have stayed their decision, though it is expected they will join at some point.
Germany appears to have blocked key points which could have rallied markets, with the issue of providing the ESM with a banking license a key point of contention. This had appeared on the initial draft but was swiftly deemed as 'out of the question' by the senior Eurozone sources. Automatic sanctions will apply for countries that break the new fiscal rules, which was a key demand of Germany and ultimately welcomed by Chancellor Merkel.
In the statement itself, Eurozone leaders merely said the ESM will adhere to IMF principles and be deployed in 2012 with 15% of paid-in capital to outstanding ESM issuance, but they are still counting on the ESFS to deliver the goods for now. One area which could represent somewhat of a concession by Germany was on the PSI, which looks like will be removed from the permanent mechanism. The Greek PSI was deemed 'unique and exceptional'.
Merkel said summit leaders didn't discuss the ECB's role or policy, and that there was no discussion of ECB independence. She said that EUR200bn will be loaned to the IMF, and regretted the UK's refusal to sign up to the summit's decisions. Reports overnight suggest the Bundesbank is ready to increase its IMF line to EUR45bn. Bundesbank executive board member Dombret said the funds would not be exclusively for the Eurozone as it would contravene Bundesbank and IMF rules.
On Friday, the euro and risk assets pushed higher after sources told Reuters that China is to set up an investment vehicle comprising two funds, one focused on Europe and one on the US, with total size of $300 bn. In our view, this is a future diversification effort similar in magnitude to previous and existing funds and not a dramatic new development, nor a Eurozone rescue. China has been talking about some form of stabilisation fund for a while and we believe it refers to this rather than anything specifically related to the Eurozone.
A Bundesbank spokesman says EU summit decisions to strengthen existing treaties are a step in the right direction. The bank also later said that it is "fundamentally open" to bilateral loans to IMF and is talking to the German government over modality of loans. It said however that the loans must not be earmarked for Eurozone and it is important to observe IMF rules in use of funds.
ECB's Stark said in a paper over the weekend that more involvement from the IMF in the Eurozone would be 'an act of desperation' and did not welcome such a step. He said the Eurozone needed 'a quantum leap' and a European Finance Ministry. The summit did not explicitly called for the establishment of such institutions amid the need for treaty change but the ECB has been demanding such a step since the crisis began.
Bundesbank President Jens Weidmann welcomed the new accords, but again stressed it was up to governments to resolve the crisis, and not with the ECB. He again stressed that 'financing of sovereign debt through central banks is and remains forbidden by treaty'.
Germany, Italy and Spain will tap markets this week for around EUR12bn in the final major bond supply week of the year.
GBP
UK Prime Minister David Cameron will face MPs today after vetoing the new EU treaty last week.. He said this treaty will not be presented to the UK parliament, as financial services need to be protected. Domestically, there is concern over the stability of the ruling coalition, as Deputy Prime Minister Nick Clegg called the outcome of the summit 'bad for Britain' which could leave the country marginalised.
The will decide on policy on Thursday. We expect rates to remain at zero but the EURCHF policy floor will be raised to 1.25. This is not a consensus call given the exceptional circumstances but price we believe deflationary pressures are strong enough to justify such a step.
CHF
The will decide on policy on Thursday. We expect rates to remain at zero but the EURCHF policy floor will be raised to 1.25. This is not a consensus call given the exceptional circumstances but price we believe deflationary pressures are strong enough to justify such a step.
The key data release for the week will be PPI figures for November, due the day before the rate decision. A sharp decline in export prices would prove further justification for the SNB to shift policy.
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AUD
The Trade Balance for October came in at AUD1.596bn vs. AUD2.25bn the previous month, as imports increased but export prices were weaker for iron ore, one of Australia's key exports to China. Chinese trade figures were also released overnight, which showed import growth slowed modestly from 28.7%y/y in October to 22.1%y/y in USD terms, stronger than expected. However, commodity imports were generally resilient from China so there isn't that much risk of a massive deceleration for Australia just yet.
A. White
Analyst at Fibosignals.com
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