20th of January 2012 - Fundamental Forex Market Overview

DAILY MARKET COMMENTARY
20 January 2012 – 8:00 GMT
Friday

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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 continued its rebound on Thursday, trading in a 1.2839-1.2972 range against the dollar, on the back of strong auction results and hopes of a satisfactory conclusion to PSI talks in Greece. Spanish and French auctions were taken favorably by the markets and the euro pushed higher in the European session. The IIF will continue discussions on Friday and a deal is already expected, though wires have suggested several different proposals remain on the table. Expectations have reached a certain level such that any potential missteps could prove costly for sentiment.

Nevertheless, given the information flow over the past week most investors would probably not want to be excessively short the euro, or hold positions which express a similar view to the downside. The troika have clearly stated that there won't be fresh funding for Greece's upcoming payment requirements until the PSI is settled, and a satisfactory solution removes one further barrier towards crisis resolution, though from a wider standpoint, macro adjustment throughout the Eurozone must be a priority and on this front good news will be far harder to come by. For example, there is no guarantee that Greece will embark on a sustainable debt path post-PSI. In addition, scrutiny over the fiscal compact will return, and reports today suggest again that the final agreement may not prove as watertight as agreed during the initial discussions as once again allowances for 'exceptions' are being made.

Late during the US session, Moody's warned that while a disorderly default in Greece is not their 'central case view', the probability is rising. An orderly decline in the euro remains a part of that process; improvements on the Greek front will help ensure financial stability, and more importantly avert wider sovereign contagion, but we believe investors will need to be cognizant of the wider macro backdrop. Ahead on Friday, markets will be looking for further assurances that the global economy will be able to avert recession, especially if the flash manufacturing PMI out of China rebounds above 50. UK retail sales figures are due, and CPI figures are due in Canada. USDJPY traded in a 76.70-77.32 range on Thursday..

EUR
Auctions in Spain and France were well received by the market. In a 3-line auction, the Spanish treasure managed to issue over EUR 6.6bn, above initial estimates of EUR4.5bn. The yields were also relatively low, at an average 5.403% on the 10-year (compares to 6.975% in November) and strong bid-to-covers. Most importantly, Spain has now issued almost EUR17bn of bonds in the last two weeks, which constitutes around 20% of their yearly issuance. The French auction was also relatively successful, issuance was at the top of estimates of EUR8bn.

The ECB said that EUR3.317 bn was borrowed using the overnight loan facility and EUR395.327 bn was deposited. This is a big drop in overnight deposits, but that is due to technical reasons (a new maintenance period kicked in yesterday) and not due to an improvement in market functioning. We expect deposits to keep rising further from here, and to make new highs, perhaps within days.

Fitch said that it expects to downgrade most of the 6 Eurozone countries by 1-2 notches by the end of its ratings review. This refers to Spain, Slovenia, Italy, Ireland and Cyprus, which are on review until the end of January.

Despite S&P's downgrade, EFSF lending capacity should be adequate for all programmes underway, Slovak FinMin Miklos says.

More details on the Greek PSI were released on Friday, as it appears final details on the bond swap terms need to be refined but parties may be closer to agreement. The Wall Street Journal reported that Greece is now proposal a 3.6%-3.7% initial coupon which will 'progressively increase over time'. EU officials said it was 'very possible' that a deal would be done on Friday. The IIF, however, is looking for a 4% initial coupon and increases every two years.

The draft of the ESM treaty noted that the combined capacity of Eurozone temporary and permanent bailout funds remains at EUR500bn. Collective action clauses will be introduced in all new Eurozone bonds one month after it comes into force. However, member states will be able to deviate from balanced budget goals in 'exceptional circumstances' if there are 'unusual events' or 'periods of severe economic downturn'.


A. White
Analyst at Fibosignals.com


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