20th of March 2012 - Fundamental Forex Market Overview

DAILY MARKET COMMENTARY
20 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 RBA sounded a cautious but steady note with its release of policy meeting minutes, but this did not prevent AUD from taking a knock after commercial entities voiced concerns about Chinese demand for resources. The reaction function for the AUD just goes to show how the individual exposures for various currencies matter at this point, especially within the risk bloc, and investors have become more mindful of individual catalysts. Our flow monitor for the past week, in emerging markets for example, showed broad-based liquidation out of these risk currencies in favour of the dollar, yet the past sessions have been characterised by a positive risk environment, another confirmation of our view that the market is continuing to price out the dollar as a funder. So far policymakers appear willing to tolerate the moves.

Dovish Fed member William Dudley yesterday also acknowledged some degree of conditionality and uncertainty about the further need for stimulus in the coming months, though in all likelihood more debate would occur heading into the end of current operations. Fed Chairman Bernanke will be speaking later today, Treasury Secretary Geithner is also set to testify on the international financial system in Washington, and Eurozone observers may be interested in whether the US is any closer to providing funding for their firewall via the IMF at this point. UK CPI figures are also set to show another drop in headline inflation to 3.0% - levels which no longer risk triggering a letter to the Chancellor, which to some extent would confirm the BoE's views on price pressures through the decision to commence the latest round of asset purchases. Nonetheless, rhetoric from the likes of the ECB has been slightly more cautious on price pressures of late, and policymakers will be especially in bind if headline inflation begins to eat into the real economy at the wrong point in the cycle. EURUSD traded 1.3226-1.3245 and USDJPY 83.36-83.50.

EUR
Late on Monday ECB's Nowotny said he could exclude the possibility that high oil prices will increase inflation, but there was no risk for demand-driven inflation in Europe. Although the ECB remains on a cautious footing, it is more attentive to price pressures at this stage and closely monitory second round effects. We don't expect further easing at this point.

The Greek credit default swap auction results are through and show a recovery rate, or a fair value price for Greek bonds, of 21.5 cents to the euro. Holders of the swaps will be paid out a total of $2.5 bn.

The Greek central bank released a report warning that the country needed to strictly implement the troika plan to restore confidence. In addition, it warned that Greek GDP would contract 4.5% this year, and unemployment would exceed 19%. The Greek current account gap was to shrink to 7% of GDP this year, while the economy may start recovering in 2013.

EFSF's Regling expressed optimism, saying that the aid recipients Ireland and Portugal are bolstering their fiscal positions, while Italy is revamping economic policies in a bid to avoid the need for financial help. He added that Greece, which just received a second rescue, is a "very special case".

The EFSF raised EUR 1.5 bn ($2 bn) from the sale of the inaugural 20-year bonds, which were priced to yield 115 basis points more than the benchmark swap rate. The issue attracted almost EUR 4.8 bn of orders, and CEO Regling called it a "success" - further boosting the market's view on Europe's current firewall capabilities.

Greek Finance Minister Venizelos has confirmed his resignation; he will be leading the PASOK Party in the upcoming elections, which are expected to be held around the end of April or early May.

The ECB announced that it did not complete any bond purchases in the week to March 16th, vs. EUR27mln the previous week. German PPI numbers are due on Tuesday.

GBP
CPI figures will be out in the UK on Tuesday. We are slightly below market expectations in looking for a 3% headline print. RPI is also expected to fall to 3.5%.

The focus for the UK this week remains with Wednesday's budget. Our economists note The government is unlikely to alter its macro forecasts so the focus this time will be on details that help unblock the logjam in the credit markets and other initiatives to kick-start economic growth that were announced in the Autumn Statement in November.

AUD
The RBA minutes from the last meeting were released overnight. The RBA, in holding rates, noted that downside risks were 'less likely' to materialise', and it was appropriate for interest rates to be at current levels. The minutes also noted that the impact of a high AUD, and a mining boom were roughly balanced. On the inflation front, the RBA noted some improvement in productivity across the economy was needed to keep inflation contained.

Overall, minutes suggest RBA is on hold, as we expect - unless downside risks materialise, but this seems less likely now. This echoes the comments made by Governor Stevens on Monday.


A. White
Analyst at Fibosignals.com


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