Forex Daily Market Commentary

November 26, 2010

Fundamental Outlook at 0800 GMT (EDT + 0400)

The dollar made strong gains during the Asia session after an article in the Financial Times Deutschland claimed that the ECB and a majority of Eurozone nations are urging Portugal to accept a bailout. Sentiment was not helped either by reports of further firing on the Korean peninsula. Finally, RBA Governor Stevens provided extensive policy guidance, effectively ruling out any further rate hikes in the near future. This dulled the allure of the risk-on trade, also causing the NZD to weaken. EURUSD traded 1.3294-1.3376 and USDJPY 83.56-83.92. Despite the lack of US economic data there remains plenty of event risk today, with Portugals budget in focus. Parliamentary approval is expected but there are larger forces at work at present for the euro and the market will probably continue to trade on a risk-averse note. If negotiations between Ireland, the IMF, the EU and the ECB result in an agreement over the weekend, this could offer the euro some support on Monday. But any relief rally is likely to be short-lived given uncertainty surrounding the Irish budget vote which is currently scheduled for Dec. 7.

The common view is that by resisting currency appreciation against the US dollar, Asian central banks are importing the Federal Reserves interest rate policy and generating asset price inflation. While theres clearly truth in this, the difficulty is that during any transition to a more orthodox policy in Asia, capital inflows could actually accelerate in the first few years before current account deficits of sufficient size emerged to relieve upward pressure on money and credit aggregates.

A German government spokesman noted that both it and France have agreed that the current Eurozone rescue mechanism should remain unchanged until mid-2013, but Germany authorities continue to stress that private market bond holders are expected to bear losses under the new framework.

Peripheral bond spreads remain wide but even bunds are now suffering as investors begin to contemplate the cost of any Eurozone bailout to Germany and its own sovereign condition.

Funding concerns remain in the Eurozone as investors have noted a sharp rise in usage of the ECBs marginal lending facility, while the basis swap market is pointing to renewed demand for dollars, despite the presence of central bank swap lines.

Headline CPI turned positive in October for the first time in almost two years, reaching +0.2% y/y, in line with consensus. However, our Japan economist notes that this was largely due to a hike in tobacco tax. The core CPI reading remains in negative territory at -0.6% y/y for the twentieth consecutive month.

MPC members King, Tucker, Dale, Posen and Sentance appeared before UK lawmakers today and the Governor affirmed his view that inflation risks are balanced, but the BoE would be ready to act if necessary.

RBA Governor Stevens commented extensively on the outlook for monetary policy and clearly signaled the RBA is in no hurry to hike the cash rate. He said it is reasonable for the market to assume that the next hike will likely come around the middle of next year. Stevens maintained a tightening bias though, noting that the medium-term risks on inflation lie in the direction of it being too high, rather than too low.

The KoF leading indicator is due in Switzerland and we expect a decline to 2.12 from last months 2.17. Nonetheless the Swiss economy is expected to continue outperforming the Eurozone and we still expect EURCHF to trend lower in the current environment.

TECHNICAL OUTLOOK

AUDUSD targets 0.9652 support.

EURUSD BEARISH Momentum is negative; break of 1.3235 would expose 1.2988. Resistance at 1.3634.

USDJPY BULLISH Climb above 83.99 would expose 85.93. Initial support at 82.40 ahead of 81.66 reaction low.

GBPUSD BEARISH Violation of 1.5650 would open up the way towards 1.5297. Near-term resistance at 1.5838.

USDCHF BULLISH Rise above 0.9998 exposes 1.0183. Near-term support at 0.9849.

AUDUSD BEARISH The pair targets 0.9652 with scope for 0.9542 next. Resistance at 0.9954.

USDCAD BEARISH Holds below 1.0374 keeping our focus on the downside. Initial support defined at 1.0076 ahead of 0.9978.

EURCHF BEARISH Pullback from 1.3674 eyes 1.3229 support, break of the level would expose 1.3072. Near-term resistance at 1.3488.

EURGBP BEARISH Push below 0.8449 exposes 0.8390 next. Initial resistance at 0.8543.

EURJPY BEARISH Break of 109.35 would expose 107.73 ahead of 105.44. Near-term resistance at 113.67.

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