13th of March 2012 - Fundamental Forex Market Overview

DAILY MARKET COMMENTARY
13 March 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

WORLD
The Bank of Japan kept market participants waiting much longer than usual for their overnight policy decision. The delay prompted speculation that a further round of easing might be in the pipeline, but USDJPY dropped 30 pips when no material shift in stance emerged. Crucially, unlike the previous meeting, there was no change to the BoJ's JGB-purchase ambitions: rinban operations will continue at the same pace, and purchases of shorter-dated JGBs by the asset purchase facility will also continue as before. There were four very minor tweaks to a second-tier lending facility though. This gave it a new lease of life but the adjustments were otherwise insignificant and well below the threshold needed to influence the yen. Attention now shifts to Tuesday's FOMC meeting. We do not expect any shift in policy stance given the Fed remains in wait-and-see mode as it scrutinises incoming economic data. The lack of a post-meeting press conference and the absence of new quarterly forecasts further reduces the scope for communicating any shift in opinion. Our analysts expect little new information about policymakers' thought processes or the possibility (or design) of any further easing.

However, signs of labour market improvement will likely be acknowledged, and this may contribute to a slightly more upbeat tone. For USDJPY the key consideration is whether the policy statement will say enough to keep US 2y yields moving higher. These broke and closed above 32 bp yesterday setting a 7-month high, and any further gains will give USDJPY a further incremental boost. Our baseline scenario assumes the Fed will stay on hold well into next year, ultimately giving way to a rate hike in H2 2013 - well before the BoJ. This divergence underpins our bullish call on USDJPY towards 85 on a three-month horizon and 90 in 2013. Overnight, USDJPY traded between 81.97-82.49, with EURUSD at 1.3145-1.3191.

EUR
Greece formally completed the first stage of its bond exchange yesterday. Bonds worth EUR 177.25 bn were restructured but CAC activation was needed to reach this level.

As expected, the latest meeting of Eurozone finance minsters broke up overnight without agreement on whether to combine the firepower of the EFSF and the ESM. The two facilities are due to run alongside each other from July. Currently a ceiling of EUR 500 bn applies even though the ESM alone could supply this funding capacity on its own. The EFSF could in theory add another EUR 250 bn of capacity to the funding pot if political opposition to this can be overcome. Eurogroup Chairman Juncker said the plan remains to decide on this issue by the end of March, and that the size of the 'firewall' simply has to be increased.

Spain featured prominently at the meeting too with all sides trying to play down the significance of Spain's decision to relax its 2012 deficit reduction target. Juncker said the important thing is that Spain has agreed to stick to its 3% deficit target for 2013. Germany's Finance Minister Schaeuble said Spain is certainly not the next Greece. Juncker said he sees no link between the debt positions of the two countries, but said he was 'highly concerned' about Spain's unemployment rate.

Juncker said there is 'overwhelming' support within the IMF for the second aid package for Greece. This follows comments from IMF Managing Director Lagarde, who said she will recommend that the IMF Executive Board approves a four-year EUR 28 bn contribution to Greece's second rescue. The Board is tentatively due to meet on Wednesday to formally decide.

Bundesbank President Weidmann said it is not the task of monetary policy to keep struggling banks alive artificially or to ensure that states remain solvent.

ECB's Governing Council member Knot gave his qualified approval to the concept of common Eurozone bond issuance. He said these are not suitable as a crisis-fighting instrument but could be a serious option for the Eurozone if some conditions for enhancing economic stability have been met. We see the introduction of the fiscal compact as a key component of this enterprise.

Greek Finance Minister Venizelos said he expects the first tranche of funds for bank recapitalisation to be received soon. He asserted that Greece has 'fundamental obligations' and must continue to implement its austerity measures, while noting the elections would not interrupt the process.

JPY
The BoJ kept key policy levers unchanged. However, it gave a new lease of life to a special lending fund set up to encourage bank lending to growth industries. First, instead of being wound down at the end of this month as planned, the fund's life was extended (as widely expected). It will now survive another two years. Second, the size of the original fund was increased to JPY 5 trn from JPY 3 trn previously. Third and fourth, two new lending features were added to complement the original design: the BoJ will now be allowed to provide smaller loans for amounts less than JPY 10 mn each, and the fund will soon be able to offer loans in dollars too.


A. White
Analyst at Fibosignals.com


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