DAILY MARKET COMMENTARY
21 December 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
The Bank of Japan left policy entirely unchanged at its meeting overnight, as widely expected. Market focus is now fixed squarely on Europe again as the ECB gears up for the first of two three-year LTROs. By all accounts, the take up is expected to be strong and, if so, markets would likely interpret this as a positive development. Asian equities and the AUD in particular were stronger overnight, partly in anticipation of what the liquidity injection will mean for risk appetite. Not only will some of the funding be recycled back into government debt, but the release of abundant liquidity would also secure bank financing over the coming year. We still believe it is difficult to reconcile a government desire for banks to continue buying debt with the need for banks to reduce risk exposure associated with government debt, but it appears all parties involved want to use the tenders as a stop-gap while governments move forward with the fiscal compact in the Eurozone. In other news, economic data continues to surprise to the upside in the US, but also in Germany. New Zealand current account figures were also released overnight, which showed a wider than expected deterioration to -N$4.6bn. EURUSD traded 1.3072-1.3127 and USDJPY 77.76-77.91. The BoE minutes are also scheduled for release shortly before today's LTRO announcement.
EUR
The German IFO rose to 107.2 in December. The print confirms that the domestic economy remains on very solid footing despite what is going on in the periphery. However, this also means that the German sense of urgency remains subdued.
A Spanish bill auction was well received. The Tesoro sold EUR5.64 bn of bills, above the target once again. This indicates that better market conditions are helping to offload supply, although the recent success may also be due to the upcoming LTRO. Market expectations for the amount of liquidity allotted vary widely, but average around EUR 250 bn. Our European economists are looking for a take-up in the LTRO of around EUR320 bn. The result is due to be released at around 10:15 GMT.
Reuters reported that 10 Italian banks are now looking to use the 3-year operation and have requested, and obtained Italian State Guarantees on bank bonds to enable their use as collateral for the ECB tender. Similar schemes have been adopted by both Irish and Greek governments to allow their banks to access cheaper ECB funding. Although banks can obtain funding this way, this does increase the ECB's exposure to the government's overall credit position.
Eurogroup chair Juncker said that Europe does not give the impression abroad that it is doing everything possible to save the euro. However, he warned that there is no political alternative to reducing debt. The comments come amid concerns that national austerity programmes are damaging growth prospects, with the IMF announcing it was bringing forward financing earmarked for Ireland, though the fiscal targets remain unchanged.
Fitch has put several Eurozone banks on downgrade watch after their corresponding sovereigns were hit with similar warnings. The agency warned that it was 'not expected' to resolve France's negative outlook until 2013.
European Union President Van Rompuy confirmed that the next EU leaders summit will be on January 30th. This date had been moved several times until today's announcements. He said that the summit will focus on jobs, and the need to 'take strong action on employment'.
GBP
Moody's warned that the UK's headroom to maintain its AAA rating had diminished, citing the Eurozone's current economic and financial troubles. It said that the UK's rating may be less able to absorb shocks, though the agency said this was merely an annual review of the ratings itself and not outright action being taken. The UK Treasury welcomed the statement.
The Bank of England will likely remain dovish in its December MPC meeting minutes due on Wednesday. We expect the vote on both policy decisions to remain unanimous.
JPY
The Bank of Japan kept its policy rate unchanged at 0-0.1%, and made no adjustments to either its asset purchase or lending programs.
R&I ratings, Japan's domestic credit rating agency, cut the long term sovereign rating one notch to AA+ from AAA. USDJPY only climbed 5 pips in response. R&I warned on Nov. 30 that the rating was vulnerable, so today's move was not a surprise. Moody's, S&P, and Fitch have rated Japan below triple-A for over a decade.
NZD
New Zealand's current account deficit in the third quarter widened to NZ$4.6bn, much larger than market expectations of NZ$3.8bn. The 12m to Q3 deficit also widened to $8.68bn (cons. NZ$7.95bn).
A. White
Analyst at Fibosignals.com
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