Tuesday, April 17, 2012

17th of April 2012 - Fundamental Forex Market Overview

DAILY MARKET COMMENTARY
17 April 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
Asian equity markets slipped into negative territory overnight, helping set the scene for a modest dollar recovery after Monday's weakness. The minutes from the RBA's April 3 policy meeting sounded slightly more dovish than the policy statement itself, and more overtly signaled the possibility of a future rate cut - inflationary pressures permitting. Investor focus is likely to shift quickly back to Europe now, and to Eurozone bond markets in particular.

Spain auctions bills today, but fears for Thursday's bond auction have receded somewhat after Spain's Tesoro announced its intention to issue a smaller-than-expected amount of only EUR1.5bn-2.5bn. Meanwhile the ECB's Securities Markets Program has been dormant now for five consecutive weeks, as yesterday's data confirmed, but we note it can in principle be activated at any time to lower sovereign bond yields. Germany's ZEW survey, Eurozone CPI, and a speech by ECB President Draghi will vie for investor attention today.

Also in the spotlight will be the Bank of Canada, which is expected to remain on hold, though the recent strength of the employment data has raised the prospect of a shift towards an explicit tightening bias. At the very least we would expect the policy statement to sound somewhat more hawkish, consistent with a possible upgrade to the GDP forecast in the quarterly monetary policy report due on Wednesday. This reasoning figured prominently in our recent decision to lower our three-month USDCAD forecast to 0.98 from 1.03.

EUR
Efforts continue behind the scenes to increase the IMF's crisis-fighting firepower ahead of this week's IMF and World Bank meetings. Although any monies raised would in theory be available to provide financial assistance worldwide, the key objective seems to be to use the funds to deal with a potential escalation of the Eurozone sovereign debt crisis. Japan's Finance Minister Azumi announced overnight that Japan would increase its IMF contribution by $60 bn. Although IMF Managing Director Lagarde expressed the hope that other countries would follow suit, it remains to be seen if Eurozone countries have done enough to satisfy the demands of BRIC countries in particular who would prefer to see European nations first put more of their own money on the line via an enhanced EFSF/ESM. Issues around voting power also remain to be resolved.

ECB's Nowotny said he doesn't see an "immediate need" for a third LTRO even as the peripheral spreads continued to widen on Monday and the Spanish 5-year CDS made a new record high at 520 bp. Nowotny also conceded that divergences within the Eurozone are substantial and convergence will need "probably much more time than expected".

Spanish Prime Minister Rajoy said "the fundamental objective at the moment is to reduce the deficit", warning "if we don't achieve this, the rest won't matter - we won't be able to fund our debt, we won't be able to meet our commitments".

JPY
The latest Asahi Shimbun survey (conducted on April 14-15) served reminder of the considerable headwinds facing the Noda administration. Indeed, the Prime Minister's approval ratings slipped 2pp from March to just 25%, while the disapproval rating rose 4pp to 52%. Furthermore, 51% of the respondents voiced their opposition to the planned consumption tax hike, with 55% against the restart of certain nuclear reactors.

AUD
RBA minutes from the April 3 policy meeting were consistent with the dovish policy statement, repeating that growth is 'somewhat below trend'. However the minutes tilted even further towards the dovish side of the spectrum, noting that 'a case could be made for a further easing of monetary policy' provided slower growth leads to 'a more moderate inflation outcome'. Our Australian economics team sees this as an attempt to flag a modest downgrade to the RBA's inflation forecast into year end, and the team still expects a cut to the cash rate on May 1 provided underlying Q1 CPI (due next week) is less than 0.7% y/y.


A. White
Analyst at Fibosignals.com


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