6th of January 2012 - Fundamental Forex Market Overview

DAILY MARKET COMMENTARY
6 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
In a typical prelude to a US payrolls release, FX markets traded in very tight ranges in Asia until newswires reported speculation of a nuclear incident in North Korea. Officials in Seoul and Tokyo later rejected the idea, but not before EURUSD broke to new 15-month lows, and AUDUSD dropped 20 pips. Expectations for a buoyant payrolls report are still running high after the December ADP employment report came in strongly above expectations at +325k. Our analysts note though that the figures may not be a forward indicator of stronger official BLS payroll numbers today, and they keep their forecast for private payrolls unchanged at +150k (headline +125k).

End-of-year reconciliations of payroll records typically result in an artificially high ADP estimate. That was the case last year, and appears to have been the case this year as well. Caution is therefore clearly warranted. St. Louis Fed President Bullard noted that the Fed may choose to adopt inflation targeting this year. Given the Fed's current stance, this could suggest targeted asset purchases until headline CPI or core PCE reaches a certain level. Given that zero rates are here to stay until 2014 or so (according to current pricing), it is clear that any inflation target in the medium term will be calibrated through quantitative balance sheet targets rather than interest rates. Elsewhere, Eurozone concerns remain amid reports that the IMF had pushed back its payment schedule for Greece, and the Eurozone financial sector remains under scrutiny. Ahead on Friday, in addition to the unemployment report, Canadian jobs numbers are out and Swiss CPI will be released. EURUSD traded 1.2764-1.2799 and USDJPY 77.07-77.26.

EUR
France sold a total of EUR7.96 bn in a four-way auction, towards the upper end of supply expectations. In general the result was treated as decent, though this failed to arrest the euro's decline. The Euribor fixing coming in lower than expected minutes afterwards did not help the euro's cause either.

Italian 10y yields closed above 7% again yesterday and the spread over the German 10-year has now widened to well over 500bp. Our euro rates strategists expect Italian bonds to remain under selling pressure into Italy's first auction of the new year on Friday, Jan. 13.

German data were disappointing. Retail sales for November came in at -0.9% m/m (cons. 0.2%). Eurozone figures were weak as well: industrial new orders grew by 1.6% in October.

Reuters reported that due to a delay in payment for the latest tranche from the troika, the aid payment schedule for Greece will be delayed by 3 months. This could complicate Greece's efforts to meet major bond redemptions in March, although the intention remains to replace the initial rescue program with a new one once the terms of the private sector participation plan are agreed.

CHF
Swiss inflation numbers for December are due. The SNB has already revised lower CPI figures in the wake of growth headwinds and a still-overvalued currency, but declined to raise the floor in EURCHF at their December meeting. The market is expecting a -0.5% print (UBSe. -0.7%), which doesn't appear to meet the definition of massive deflation that would need to be met to justify additional measures, such as raising the floor..
GBP
UK services PMI surprised to the upside for December, coming in at 54.0 vs. 52.1 prior.

Latest data showed that Gilt purchases by institutional investors in October and November were the largest on record, according to the Financial Times. We believe the move was in part driven by such investors rethinking their previous policy of diverting from periphery debt into the Eurozone AAA core. Now, it appears, Gilts are serving as an alternative safe haven, although we would caution against buying sterling purely for this reason given the UK's own challenging fiscal position.


A. White
Analyst at Fibosignals.com


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