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Monday March 17, 2008 - 15:46:55 GMT
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Forex Market Commentary and Analysis (17 March 2008)

The euro appreciated vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.5905 level and was supported around the $1.5675 level.  The common currency rocketed to a new lifetime high following another bout of unprecedented activity from the Federal Reserve.  The Fed reduced its discount rate to 3.25% from 3.5% and availed the discount window to firms other than depository institutions.  The March federal funds futures contract is now implying about a 115% chance the Fed will reduce its federal funds target rate to 2% from 3% after tomorrow’s Federal Open Market Committee meeting, and about a 92% chance they’ll take it lower to 1.75%.  The Fed also provided immediate approval to JPMorgan Chase’s purchase of Bear Stearns in an all-stock deal that values the troubled investment bank at 1% of what it was trading at just sixteen days ago.  The Fed also announced it was availing US$ 30 billion to cover Bear Stearns’s less liquid assets.  The Fed’s creation this weekend of a Primary Dealer Credit Facility will allow the Fed’s primary dealers to engage in overnight lending with a range of collateral including mortgage-backed securities.  Some market-watchers are suggesting the U.S. economy is one or two bank failures away from the type of widespread contagion that enveloped the country in the late 1920s and early 1930s during the U.S. Depression.  Traders are also paying very close attention to the heightened risk of a concerted global monetary intervention to slow the depreciation of the beleaguered U.S. dollar.  Conspiracy theorists were wagging their tongues today when it was reported that European Central Bank officials Noyer and Weber cancelled speeches today, citing personal reasons.  Data released in the U.S. today saw February industrial production fall 0.5% with capacity utilization printing at 80.9% - the lowest level since November 2005.  Also, February’s Treasury International Capital flows data revealed that foreign investors significantly trimmed their holdings of U.S. securities in January, revealing a net outflow of long-term securities.  Monthly net purchases by overseas investors were only US$ 37.4 billion, down from December’s print of US$ 72.7 billion, while net foreign purchases of long-term securities were –US$ 19.2 billion. Additionally, the March Empire State manufacturing index fell to -22.23, much worse than expected, while the Q4 current account deficit narrowed to US$ 172.9 billion from a revised $177.4 billion in Q3, the lowest quarterly account deficit since Q3 2005.  Traders are also paying close attention to media reports that Goldman Sachs will announce up to US$ 3 billion in write-downs this week.  In eurozone news, European Central Bank member Liebscher said “Everything must be done to avoid exaggerated exchange rate fluctuations.” In contrast, ECB’s Liikanen hawkishly said the ECB will work to preserve price stability.  Data released in the eurozone today saw Q4 employment up 0.2% q/q and 1.7% y/y. Euro bids are cited around the US$ 1.5610 level.

¥/ CNY

The yen extended recent gains vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥95.70 level and was capped around the ¥99.10 level.  The pair fell in a stunning show of force in the Australasian session as traders continued to unwind short yen carry trades amidst escalating risk aversion and heightened volatility.  Traders are on high alert for yen-selling intervention from Japanese monetary authorities, cognizant of the fact that the last overt intervention in Japan took place five years ago today.  Some dealers believe actual yen-selling intervention may not stop the flight to the yen because many of the issues that are causing the yen appreciation are borne from U.S. financial market problems.  Vice finance minister Tsuda said he is “concerned about excessive foreign exchange movements” while finance minister Nukaga said “we are watching with great interest.”  Prime Minister Fukuda said the yen’s ascent was “not desirable” but would not comment on intervention prospects.  Data released in Japan overnight saw the January leading index upwardly revised to 36.4 from a revised 30.0.  Also, the January tertiary index rose 0.7% m/m and Japan confirmed that its demand-supply gap stood a +0.7% in the October – December quarter, the latest indication that deflationary pressures are continuing to ease.  Monday marked exactly five years since Japan's monetary authorities last intervened on the currency markets. They have since allowed the yen to find its own level against the dollar. The Nikkei 225 stock index lost 3.71% to close at ¥11,787.51.  Dollar offers are cited around the ¥100.65 level.  The euro moved lower vis-à-vis the yen as the single currency tested bids around the ¥151.80 level and was capped around the ¥155.45 level.  The British pound and Swiss franc came off vis-à-vis the yen as the crosses tested bids around the ¥192.60 and ¥98.00 figures, respectively.  The Chinese yuan appreciated vis-à-vis the U.S. dollar as the greenback closed at CNY 7.0830 in the over-the-counter market, down from CNY 7.0894, the pair’s weakest close since the yuan revaluation of July 2005.  Data released in China overnight saw February wholesale prices up 9.2% y/y from January’s 8.4% y/y increase.  People’s Bank of China Governor Zhou said the central bank still has room to tighten monetary policy, noting “Not only interest rates but also the reserve requirement have room to increase.”

 



The British pound depreciated sharply vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.9990 level and was capped around the $2.0230 level.  Bank of England announced an fine-tine open market operation design to reduce short-term money market rates.  BoE executed a ₤5 billion three-day repo that was oversubscribed five times and there is a growing belief among traders that the central bank may be forced to enact additional extraordinary measures.  This action evidences the U.K.’s vulnerability to dislocations in the credit markets and many traders believe the BoE will continue to lower rates in the next two months. Data released in the U.K. today saw London like-for-like retail sales up 10.5% y/y in February.  Cable bids are cited around the US$ 1.9910 level.  The euro gained ground vis-à-vis the British pound as the single currency tested offers around the ₤0.7910 level and was supported around the ₤0.7765 level.

CHF

The Swiss franc appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 0.9645 level and was capped around the CHF 0.9970 level.  The pair fell precipitously overnight as short franc carry traders were unwound further and risk aversion grew, leading to a flight to safety.  Data released in Switzerland overnight saw January retail sales up 1.3% y/y.  KOF kept its 2008 GDP forecast for the Swiss economy unchanged at 2.1% and lifted its 2009 forecast to 2.0%.  U.S. dollar offers are cited around the CHF 1.0105 level.  The euro and British pound came off vis-à-vis the Swiss franc as the crosses tested bids around the CHF 1.5325 and CHF 1.9420 levels, respectively.

 

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