1st of February 2012 - Fundamental Forex Market Overview

DAILY MARKET COMMENTARY
1 February 2012 – 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 price action overnight was largely driven by a better-than-expected China PMI which gave AUD a modest but temporary boost. The euro meanwhile remained under downward pressure as investors digested yesterday's news reports suggesting Greece is resisting further austerity measures to bring debt down to sustainable levels, and that negotiations on this front are likely to make slow progress. This is a timely reminder that the proposed bond swap is just one element in a broader deal that must be agreed in full if Greece is to secure fresh funding through a second rescue package. Despite the latest headlines - which are undoubtedly a cause for concern - there is still time for a grand deal to be forged and this could eventually precipitate a risk rally. But eventual success will require delicate negotiations on a number of matters where political realities may collide with financial necessities. Elsewhere, US data ran into some speed bumps as the Chicago PMI came in weaker than expected, albeit at resilient levels. Ahead on Wednesday, manufacturing PMI numbers will be released globally and investors will be hoping for stable growth to compensate for jitters coming out of the sovereign debt front. EURUSD traded 1.3045-1.3093 and USDJPY 76.15-76.31.

EUR
Eurozone data was generally weak on Tuesday. German retail sales fell 1.4% on the month bringing the y/y number to -0.9%. French consumer spending also disappointed at -0.7% m/m and -3.1% y/y. The Eurozone unemployment rate increased to 10.4% from 10.3, in line with consensus. However, the German labour market continues to show signs of improvement - with unemployment falling by 34k in January.

There was a general lack of commentary by Eurozone leaders on Tuesday, as most of the details on upcoming Eurozone decisions were adopted on Monday. However, this has put Greece's PSI talks back in the limelight. Several news sources have reported that talks between the Greek government and the Troika have also reached an impasse doubts are surfacing as whether Greece can agree to new austerity measures to manage debt levels back down to target.

Reuters reported that a deal between Greece and private sector bondholders could be reached as soon as Wednesday, but the overall deal would require public sector participation. Whether this can be achieved via the ECB, or national central banks' writedowns remains to be seen. The Greek Finance Minister has warned that private sector creditors could see an NPV writedown of more than 70%, which is bigger than what has been discussed previously.

Eurogroup Chair Juncker said he had not decided on whether to call a special meeting on Greece. His spokesman noted that there are no decisions yet as to whether talks will recommence next week. There have been some expressions of impatience amongst European leaders over the duration of the talks. The Dutch Finance Minister warned that the talks could not drag on 'for a couple more weeks', while the French Finance Minister stressed that a deal was expected by the end of the week, but similar comments have been uttered before.

Irish PM Kenny affirmed that Ireland will hold a referendum on the fiscal compact if needed.

German Manufacturing PMI and harmonised CPI figures are due on Wednesday.

CHF
The SNB's foreign FX reserves declined to CHF 257.5 billion in December. The data is tough to interpret regarding EUR holdings. The balance sheet number is driven by EURCHF FX swaps maturing and being rolled over. Hence, it is just a snapshot at any one time, and says little about the SNB's intentions. What seems clear is that the SNB is trying to keep the outstanding liquidity more or less constant via rolling over the bulk of the FX swaps The more important question, of course, is where exactly and how the SNB would choose to start defending the floor. Our expectation has been that we will see their bid somewhere slightly above 1.20, and that it will not trade through, even for a short time, as this would be very risky.

EURCHF has continued to grind lower in recent days and we suspect there could be more challenges for the franc up ahead as the cross traded sub 1.2040 on Tuesday. Retail sales figures and manufacturing PMI numbers for Switzerland are also due on Wednesday.

GBP
UK December mortgage approvals disappointed, at 52.9k vs expectations of 54.0. Our analysts note that today's data is unlikely to have a major impact on the MPC decision. More interesting is the M4, a measure of money supply watched by the MPC. The 3m annualised rate fell from 3.2% to -0.8%.


A. White
Analyst at Fibosignals.com


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