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Tuesday September 16, 2008 - 19:07:23 GMT
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Forex Market Commentary and Analysis (16 September 2008)

The euro extended recent losses vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.4115 level and was capped around the $1.4305 level.  Technically, today’s intraday low was right around the 23.6% retracement of the move from $1.4910 to $1.3880.  The Federal Open Market Committee voted to not change monetary policy, contrary to many expectations. The FOMC reported “The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent. Strains in financial markets have increased significantly and labor markets have weakened further. Economic growth appears to have slowed recently, partly reflecting a softening of household spending. Tight credit conditions, the ongoing housing contraction, and some slowing in export growth are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth. Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain. The downside risks to growth and the upside risks to inflation are both of significant concern to the Committee. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.” The Federal Reserve has pumped about US$ 140 billion into the financial system over the past couple of days in a bid to bring some calm to the financial markets.  Traders believe U.S. insurance giant AIG may be the next domino to fall with widespread speculation the company could file for bankruptcy as early as tomorrow absent any sort of solution to keep the company financially viable.  There is a growing consensus that there may not be a private sector solution available to salvage AIG and that a government bailout is required.  A government bailout is a very sticky subject in many financial quarters because the U.S. government refused to bail out Lehman Brothers and the firm filed for bankruptcy early yesterday.  The financial markets had fully priced in at least a 25bps cut by the Fed today and the lack of a rate cut may suggest the Fed will announce additional extraordinary liquidity provision measures in the immediate future.  Earlier today, interest rates on overnight interbank funds soared to 6.4375%, the highest level since January 2001 and three times above the official federal funds target.  Data released in the U.S. today saw the August consumer price index fall 0.1% m/m, the first monthly decline in nearly two years, while core CPI was up 0.2%.   TICS data saw foreign purchases of U.S. long-term securities total –US$ 25.6 billion in July, evidence that the U.S. failed to finance its current account deficit two months.  In eurozone news, Germany’s ZEW survey of economic expectations improved to -41.1 in September from -55.5 in August while German July retail sales were revised down to -1.5% m/m.  EMU-15 August consumer price inflation fell 0.1% m/m and rose 3.8% y/y and this means annualized inflation is still well above the European Central Bank’s 2.0% ceiling target.  Core inflation were up 0.3% m/m and 1.9% y/y. ECB member Nowotny warned Lehman Brothers’ demise could “inflict further damage” on the Europe’s economies.  Euro bids are cited around the US$ 1.3840 level.

¥/ CNY

The yen depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥104.90 level and was supported around the ¥103.55 level.  Technically, today’s intraday high was right around the 38.2% retracement of the move from ¥95.70 to ¥110.65.  The yen gained ground across the board and the U.S. dollar’s gains suggest it is benefiting from the significant deleveraging that was associated with earlier short U.S. dollar trades.  Bank of Japan Governor Shirakawa overnight said “The Bank of Japan will carefully monitor the recent situation surrounding U.S. financial institutions and its impact.”  BoJ injected upwards of ¥2.5 trillion in two repo operations overnight, its largest infusion in six months and the overnight call rate fell to around 0.45% from 0.55% - 0.56% before the repo operation. Data released in Japan overnight saw August consumer confidence decline to 30.1 in August from 31.4 in July, the lowest print since June 1982 and the fifth consecutive decline.  Commenting on the yen’s recent movements, finance minister Ibuki reported they have “probably been within expectations.”  The Nikkei 225 stock index lost 4.95% to close at ¥11,609.72.  U.S. dollar bids are cited around the ¥102.45 level.  The euro moved lower vis-à-vis the yen as the single currency tested bids around the ¥147.00 figure and was capped around the ¥149.50 level.  The British pound and Swiss franc moved lower vis-à-vis the yen as the crosses tested bids around the ¥184.45 and ¥92.95 levels, respectively.  The Chinese yuan came off vis-à-vis the U.S. dollar as the greenback closed around CNY 6.8490 in the over-the-counter market, up from CNY 6.8450.  Data released in China overnight saw August property prices in 70 major Chinese cities up 5.3% y/y.

The British pound fell sharply vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.7735 level and was capped around the $1.8010 level.  Technically, today’s intraday high and low were right around the 38.2% and 50.0% levels of the respective retracements of the move between $1.7440 to $1.8125.  Data released in the U.K. today saw consumer price inflation reach a sixteen-year high of 4.7%, more than double Bank of England’s inflation target of 2.0% and the highest level in sixteen years.  The government also reported house prices were off 0.3% y/y in July.  BoE Governor King wrote a letter of explanation to Chancellor of the Exchequer Darling to explain why inflation was more than one percentage point away from the 2.0% inflation target.  King reported “The fall in the value of sterling pushes up on import price inflation, which, in the latest data for the second quarter of 2008 was around 12% - its fastest rate of growth in over twenty years.  Import price inflation is likely to remain high as the effects of the exchange rate continue to pass through.”  Notably, core CPI was up 2.0% in August, the highest level since January 1997.  The markets are pricing in additional sterling depreciation with the one-year forward rate at $1.75.  Cable bids are cited around the $1.7605 level.  The euro moved higher vis-à-vis the British pound as the single currency tested offers around the ₤0.7980 level and was supported around the ₤0.7905 level.


The Swiss franc depreciated vis-à-vis the U.S. dollar today
as the greenback tested offers around the CHF 1.1250 level and was supported around the CHF 1.1045 level.  Technically, today’s intraday low was right around the 50% retracement of the move from CHF 1.2465 to CHF 0.9645.  Data released in Switzerland today saw Q2 industrial orders rise 5.4% y/y.  Swiss finance minister Merz reported ongoing U.S. financial market turbulence “will not have any direct impact on Swiss economy.”  U.S. dollar offers are cited around the CHF 1.1430 level.  The euro and British pound moved lower vis-à-vis the Swiss franc as the crosses tested bids around the CHF 1.5750 and CHF 1.9760 levels, respectively.


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