4th of May 2012 - Fundamental Forex Market Overview

DAILY MARKET COMMENTARY
4 May 2012 – 8:00 GMT
Friday

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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's quarterly Statement on Monetary Policy provided further colour on the decision to cut the cash rate by 50 bp on Tuesday. End-2012 forecasts for both core inflation and GDP were modestly downgraded. This came as a minor relief to FX investors, some of whom had feared such a large rate reduction might need substantial forecast downgrades in order to justify it. AUDUSD climbed 20 pips afterwards but eventually gave back all gains. Our analysts team note though that the bank's assessment of domestic growth now appears to be much less upbeat. They also expect next week's budget to confirm suspicions that a very significant amount of fiscal drag is in the pipeline over the coming 12 months. Consequently they now expect another 50 bp of RBA by Q3, up from 25 bp previously. They also lower their year-end forecast for AUDUSD to 1.00 from 1.05.

USDJPY came off its highs on the weaker than anticipated 53.5 April ISM non-manufacturing print, which reflected declines in the key new orders (to 53.5 from 58.8) and employment (to 54.2 from 56.7) sub-indices. Cable shrugged off the soggy services PMI for April of 53.3, as the forward-looking components improved - reinforcing our view that there will be no further QE from the BoE this month. The stage is now set for today's US employment data for April. Here, we would stress that the below-consensus ADP figure of 119k has not altered the above-consensus 170k payrolls forecast of our US economics team. Risks, however, would appear to be skewed to the downside, given the tendency for below-trend April readings in the BLS series with four-week sample periods like this year. Any undershoot on April payrolls compared to the 160k market consensus (89k-210k range), in the context of the weak March results, would certainly put the dollar on the back foot.

EUR
The ECB left rates unchanged as expected. Draghi did not meet dovish market expectations in his press conference and the euro gained as he said the ECB "did not discuss any specific move in interest rates". He said that despite the recent weakness in economic data, ECB's baseline scenario has not changed and it continues to foresee a "gradual recovery in the course of the year".

Draghi stressed that the impact of the LTROs is not fading away yet, noting that the positive effects on credit supply, deposit bases at banks and key stress indicators in the financial markets are still evident.

Regarding Spain, Draghi said that the ECB has "full confidence" that "action will be taken" by Spanish authorities to shore up the banking system and reduce the fiscal deficit. Draghi also stated that Italy has achieved "remarkable fiscal consolidation" and the "government should be encouraged for its efforts".

Spain sold a total EUR2.51 bn in Thursday's auction. Yields were understandably higher than previous auctions, but bid-covers were reasonable, and the event passed with little impact on the FX markets. France sold EUR7.4 bn of bonds, at the top of its target range, amid solid demand. The successful auction led to a rally in OATs and 10-year yields subsequently dropped by 5 bp.

GBP
Nationwide house prices fell in April by 0.2% m/m (consensus: 0.5%, prior: -1.0%) mainly due to the end of the tax break for first-time home buyers. In y/y terms, house prices fell 0.9% (consensus: -0.3%, prior: -0.9%).

The services PMI slipped to 53.3 in April from 55.3 in March, below market expectations of 54.2. Though worse than anticipated, some of the forward-looking indicators such as business expectations and outstanding business improved, suggesting that the growth moderation could be short-lived.

AUD
Our analysts team now expect the RBA's cash rate to trough at 3.25%, down from 3.5% previously. They anticipate next week's budget will introduce a considerable fiscal drag, and this makes it more likely that the RBA will supply more easing to compensate.


A. White
Analyst at Fibosignals.com


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