31st of January 2012 - Fundamental Forex Market Overview

DAILY MARKET COMMENTARY
31 January 2012 – 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
Risk appetite was boosted overnight by an article in the Financial Times claiming that the ECB's next 3y LTRO (due on Feb 29) could see demand for up to EUR1 trn in cash, double the previous amount. If so, it would go a long way towards alleviating term funding concerns for Eurozone banks as their bonds fall due throughout the year. There were no major surprises out of Monday's Eurozone summit. In French President Sarkozy's words, the summit 'went as planned'. Most of the decisions adopted on Monday, such as early execution of the ESM and updates on the situation in Greece ,were flagged well in advance. The Czech Republic joined the UK in opting out of the fiscal compact, with Sarkozy noting this was largely due to 'constitutional reasons'.

There has been a significant pullback in rhetoric since plans for potential transfer of fiscal sovereignty from Greece to Brussels were first floated over the weekend. However, governments remain aware that time is running out to finalise talks on the second Greek rescue before the mid-February deadlines, especially as the current debt-swap plans have not even been concluded. Portugal, the other elephant in the room, was not discussed outright at Monday's summit but the moves in bond markets surely have not gone unnoticed, and markets may need to brace for fresh volatility if yields continue to spiral higher. Ahead on Tuesday, macro figures are due across Europe, while consumer confidence is out in the US.

EUR
The Italian treasury sold a total of EUR7.5 bn worth of bonds, near the top of estimates. While the yields were down from the last auctions, our fixed income strategists were slightly disappointed by the results. They note that the bid/cover on the 5y was close to historical lows, despite EUR37 bn worth of redemptions and coupons this week, only a fraction of which was ploughed back into the auction.

Ireland's European Affairs Minister Lucinda Creighton said that if voters rejected a fiscal treaty, it would be hard for the country to remain in the Eurozone. The Irish government is due to decide in the coming month whether the text of the fiscal compact agreed last night will need to be ratified via referendum. Even if the government opts for parliamentary ratification, a potentially time-consuming Supreme Court challenge could be in store.

The Czech Republic has joined the United Kingdom in opting out of the fiscal compact. This was confirmed by EU President Van Rompuy. The Czech Prime Minister said that the new treaty was 'difficult to accept' and said its participation in negotiations 'will be purely symbolic'.

Several Eurozone officials confirmed that the ESM Treaty will be signed in March and will come into force in July. There were no details on the potential for strengthening the firepower of the fund, and the issue is due to be revisited in March. Portugal did not come up in discussions and the Portuguese PM ruled out any need for a Greece-like PSI.

Newswires reported that a special summit on Greece might be held in February to discuss fiscal sovereignty issues in particular, although there has been no official confirmation. German Chancellor Merkel said that rapid sealing of the fiscal pact is an 'important step' towards a stability union. However, when pressed on Greece, she said she did not back demands for greater oversight, which was suggested by some of her government partners earlier. French President Sarkozy affirmed this view, saying he is opposed to placing Greece under budgetary control.

In a further warning of Spain's aggregate fiscal position, S&P has cut the ratings or outlook on several Spanish regions. The ratings agency attributed the moves to recent action on the sovereign, in addition to the wider economic issues facing the country. Spain is due to issue bonds on Thursday, having aggressively front-loaded its funding so far this year, taking advantage of more preferable market conditions.

ECB Governing Council member Nowotny warned that the Eurozone economy could stagnate in 2012 and a recession for a certain period could materialise.

JPY
USDJPY continues to drift lower in the wake of the dovish FOMC. Finance Minister Azumi issued the usual warning overnight that there has been no change in Japan's stance on FX intervention, and that he stands ready to take FX steps if needed.

AUD
Australia produced a batch of relatively subdued data overnight, reinforcing our economists' view that the RBA is likely to cut the cash rate by 25bp next week. Business conditions and confidence were still below average in December, and credit growth was modest.


A. White
Analyst at Fibosignals.com


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