22nd of March 2012 - Fundamental Forex Market Overview

DAILY MARKET COMMENTARY
22 March 2012 – 8:00 GMT
Thursday

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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
AUDUSD dropped 100 pips after China's flash PMI estimate for March came in well below February's final print (48.1 versus previous 49.6). The PMI also added to the kiwi's troubles, compounding the selloff that began earlier after very weak New Zealand Q4 GDP. There was positive news too overnight - Japan's trade balance unexpectedly climbed back into surplus territory in February (on a non-seasonally adjusted basis). Surprisingly, stronger exports were the root cause - and even more surprisingly exports to the US in particular grew sharply. This is yet another piece of evidence that the US economic recovery is gaining momentum.

On one hand, a return to a trade surplus is likely to provide some temporary support to the yen, but rising US yields on the back of an accelerating US recovery will likely keep USDJPY aloft. USDJPY should also be supported by a gradually fading 'home currency bias' among yield-hungry Japanese investors entering fiscal 2012 - as highlighted in comments (reported yesterday) by an official at one of the major life insurers, who deemed the BoJ's easing move on Feb 14 to be a "historical turning point" that will boost USDJPY. Advance Eurozone PMI figures for March are due - our European economics team expects the manufacturing survey to come in well below the consensus. Considering Spanish yields are also much higher once again, we think the euro is looking decidedly vulnerable at these levels.

EUR
ECB President Draghi declared that 'the worst is over', and said investor confidence is returning. In a clear nod towards the need for fiscal restraint and perhaps a beefed up EFSF-ESM, he said it is now up to governments to make the Eurozone crisis-proof. Draghi added that LTROs do not fuel inflation and stressed that there is no sign of inflationary pressure. However he warned that 'should the inflation outlook deteriorate, we will immediately take preventative action'.

ECB's Asmussen said that the ECB must "start to carefully prepare an exit", echoing comments by other members of late. It is surprising that the ECB is talking more about exit strategies barely a quarter after they effectively increased stimulus measures. Asmussen also said there were no signs of an asset bubble in the Eurozone, but German house prices need to be closely watched.

The EU Commission said that Portugal's recapitalisation needs would be "challenging" and a few non-state banks will probably need official support. However, the EU-ECB-IMF review last month noted there was no reform fatigue and Portugal remains on track.

Portugal sold March 2013 bills and the yield fell sharply to 3.652% vs. 4.943% last month. The July 2012 auction (size EUR382 mn) was covered 6.7 times at a yield of 2.168%.

GBP
The BoE minutes showed a 7-2 vote for the QE programme, with two members voting for an extension of GBP25 bn. There were some more hawkish comments, with Martin Weale warning that there was a risk inflation would have "more persistence". Our economists note that the overall tone of the minutes remained dovish. The committee acknowledged the improved market conditions following the LTRO, but again highlighted the higher funding costs for lenders.

The public finance net credit requirement was much worse than expected at -GBP7.8 bn. The tax intake shortfall again confirms there is a lot of risk for more fiscal slippage, and net debt has risen to 63.1% of GDP vs. 58.8% a year earlier.

The UK budget turned out to be an economic non-event. Most of the budget was on expected lines, with Chancellor Osborne announcing a corporate tax cut of 1% and income tax cut of 5% starting next year. The GDP growth forecast was revised to 0.8% for 2012, while a growth rate of 2% is projected for 2013.

NZD
Q4 GDP growth came in at just 0.3% q/q, well below the 0.6% q/q market consensus. In y/y terms, Q4 growth was 1.8% vs the 2.2% expected. This should push market expectations of rate hikes further out, and keep NZDUSD on the back foot for now.


A. White
Analyst at Fibosignals.com


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