30th of January 2012 - Fundamental Forex Market Overview

DAILY MARKET COMMENTARY
30 January 2012 – 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
Fitch downgraded five Eurozone sovereigns on Friday night shortly after Eurozone bond markets had closed. Italy, Spain, Slovenia were cut two notches each, while Belgium and Cyprus dropped one notch apiece. The downgrades themselves were signalled weeks ago, and were expected to occur before the end of January so EURUSD continued to rally in spite of the news, eventually closing above 1.32 for the first time in seven weeks. The timing of the downgrades is unfortunate given Italy's second BTP auction of 2012 is due to take place around 1000 GMT today. However our Eurozone rates strategists expect the supply to be easily absorbed, with demand boosted by redemptions and coupon payments worth about three times the debt on offer. Brisk demand is likely to give the euro another temporary boost.

The first EU summit of 2012 is due to get underway this afternoon. The objective is to finalise two texts: the new fiscal compact, and the treaty changes required to introduce the ESM rescue vehicle. Talks on the Greek bond swap made further progress over the weekend, and we expect a positive outcome in a matter of days. Despite the latest positive news flow we remain intensely cautious on the euro's prospects in the run-up to the March 20 Greek bond redemption. Already new hurdles to a second financial rescue are appearing. Over the weekend press reports surfaced on German plans for greater surveillance over Greece's fiscal affairs.

The fact that such proposals are even under discussion indicates that official sponsors are extremely wary of Greece's ability to bring its debt down to sustainable levels. The proposals have already met a frosty response in Greece and the controversy indicates how difficult it will be reach final agreement on the second rescue even if a bond swap deal is ultimately reached on a voluntary basis. With the euro having already rallied six big figures from the lows, we remain on alert for opportunities to enter fresh shorts. The US is due to release the core PCE report - a metric which has suddenly risen in importance after the Fed's adoption of an inflation target based specifically on this measure.

EUR
Both Greek Finance Minister Venizelos and the IIF said they expect to finalise the debt swap deal this week.

Over the weekend, several newswires reported that Germany wanted Greece to cede fiscal control to European institutions, or a to a European budget tsar. The measures were given official backing by German cabinet member Philipp Roesler. The reception to these proposals was understandably chilly in Greece - Finance Minister Venizelos warned against asking Greece to choose between economic assistance and national dignity. Although concluding a voluntary bond swap is an important element in a second financial rescue of Greece, many other issues clearly remain unresolved. We expect more euro-negative news of this sort to hit the headlines ahead of the March 20 bond redemption.

On Friday, Fitch downgraded Belgium, Spain, Italy, Cyprus and Slovenia. Ireland's rating - also on review - was affirmed.

According to Der Spiegel, Greece's funding needs from the second rescue package have ballooned again, this time to EUR145 bn, up from previous estimates of EUR130 bn. The figure is largely due to the deteriorating economic outlook in Greece, and puts pressure on the troika to support the strongest possible deal with private-sector creditors.

ECB member Gonzales-Paramo said the ECB is not involved in the Greek debt negotiations and highlighted the central bank's restrictions about lending to governments. He also said that the ECB has not committed to any minimum interest rate, suggesting that further cuts below the 1% level remain possible.

ECB Governing Council member Nowotny said he expects that the second 3y LTRO scheduled for Feb 29 is likely to be "similarly well used" as the first one given the "enormous refinancing need" of Eurozone banks.

The Sunday Times reported that the Irish government is lobbying the ECB to allow the repayment of a EUR31 bn loan to be delayed by 10 years. This would reduce the overall cost of the bailout for Irish banks.

Austrian Chancellor Faymann expressed support for increasing the Eurozone's bailout funds, including combining the firepower of the ESM and EFSF. In addition he has expressed support for granting the ESM a banking license, which has been a red line for Germany.

JPY
Moody's said the divergence between Japan's actual fiscal position and its deficit reduction goals could widen further, adding that the risk of a crisis would rise if credible fiscal action is not taken.

Prime Minister Noda said Japan is already helping Europe by buying EFSF bonds, and will continue to do so.

GBP
Bank of England MPC member Miles said it is "presumptuous" to conclude that another round of QE in February is inevitable. He said the decision will hinge on the forecasts contained in the quarterly inflation report. Nevertheless, he did acknowledge that CPI has been on a "pretty steep" downward trajectory recently. previously.

AUD
Fitch put a number of Australian banks on ratings watch negative, which caused AUDUSD to briefly slip 20 pips before recovering within minutes.


A. White
Analyst at Fibosignals.com


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