DAILY MARKET COMMENTARY
13 December 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
EURUSD continued its post-summit slide as the market has reverted to the conclusion that not enough has been done. Although some stability measures for financial markets have been welcome, the summit agreements themselves raise plenty of new questions, to which the market is not convinced that the answers would be favourable, such as the ratification process and the relevant democratic mandates by individual EU governments. In addition, investors are also querying whether enough has been done to avoid some major downgrades in the coming weeks and months from all the ratings agencies.
French President Sarkozy appears to be resigned to the fact that his country will lose the coveted AAA rating, which would immediately translate into new questions for the costs of the Eurozone's bailout mechanisms as the underlying guarantees come under strain. Yesterday's gains in Eurozone periphery yields is another warning that the battle to tackle sovereign debt is far from over, and the countries at risk must not count on any immediate reduction in borrowing costs to alleviate the strains of austerity. Ahead today, attention will turn to the Fed. We expect the last meeting of the year to be more about communication policy rather than underlying economics, which in general have remained favourable. We may have to wait until the minutes are released later in the month to get the full details however. EURUSD traded 1.3162-1.3203 and USDJPY 77.84-77.96.
EUR
Fitch said it is too early to judge effectiveness of fiscal compact due to uncertainty in implementation. It added that the ECB is the only truly credible firewall against liquidity and solvency crises in Europe. Earlier, risk assets came under pressure after Moody's reported that the EU summit on Thursday night did not produce the decisive initiatives that had been hoped for. The absence of clear measures to stabilize the credit markets meant that the eurozone remains vulnerable to further shocks, and they would therefore revisit the ratings of all EU sovereigns in Q1 2012.
French President Sarkozy said overnight that the loss of AAA status 'could be overcome' and he would respond 'with a cool head' if it happened. He said it would be 'one more difficulty, but not insurmountable'. S&P warned recently that France could face a 2-notch downgrade.
The Wall Street Journal reported that Fed Chairman Bernanke recently urged the ECB's President Mario Draghi to respond aggressively to the Eurozone crisis.
German Chancellor Merkel will give a statement to the German parliament tomorrow on the fiscal compact. Today EU's Van Rompuy and Barroso will be hosting debate on the EU summit in the EU parliament.
The ECB bought just EUR635 mn of bonds under the SMP last week, well below expectations and a clear sign that the ECB is waiting for European politicians to fully address the underlying problems before any structural change in their policy.
Greek Finance Minister Venizelos says that he hopes to have completed the PSI talks by the end of January.
The European bond markets came under further pressure on Monday, although volumes were low. An Italian 12m auction was relatively well received however, with the yield coming below the market at 5.95%. Germany and Spain will also tap the markets this week in the final major bond supply week of the year.
The ZEW survey is out in Germany today. The market is looking for another decline to 31.0.
GBP
Elsewhere UK Prime Minister David Cameron defended his decision to veto treaty changes at last weeks EU Summit in front of parliament but nonetheless faced strong criticism from the opposition. 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 marginalized. Cameron reiterated previous comments that IMF funds 'can't be used to support the euro'. We view these as important as they are far more in line with the US/Canadian line on the purpose of the IMF than the recent EU talk. Some may see this as signs of an even deeper rift between UK and Eurozone than already is obvious.
Ahead today CPI is due in the UK and the market is looking for a 0.2%m/m gain in prices, though the annualised figure could fall to 4.8%. RPI is expected to come in at 5.1%, down from 5.4%. The numbers are less relevant given the BoE is already engaging in fresh QE.
AUD
The November NAB survey of business conditions increased to +1.0, from October's -0.4 print. Business confidence was flat at 2.0%, but stronger than the August low of -8.8. Our economists note that overall, recent trends in business conditions suggest the economy's momentum is tracking sideways at a modest pace, though on the positive side sentiment has held well despite the Eurozone's issues.
A. White
Analyst at Fibosignals.com
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