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Monday December 1, 2008 - 15:28:03 GMT
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Forex Market Commentary and Analysis (1 December 2008)

The euro moved lower vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.2580 level and was capped around $1.2710 level.  The common currency lost ground on declining risk appetite that stemmed from bad economic data worldwide.  Eurozone data saw EMU-15 manufacturing activity fall to its lowest level ever since the inception of the euro, igniting speculation the European Central Bank may cut rates by at least 75bps on Thursday.  Some dealers are speculating the ECB may cut rates by 100bps, especially as inflation pressures continue to ease.  The ECB has reduced interest rates twice since early October to 3.25%. The EMU-15 PMI manufacturing index fell to 35.6 in November, well below the 36.2 flash estimate and the sixth consecutive monthly decline.  These data follow last week’s data that EMU-15 inflation has eased to 2.1%, just above the ECB’s ceiling target of 2.0%, while EMU-15 unemployment rose to a two-year high of 7.7% and input price pressures at a seven-year low.  ECB member Orphanides reported “Although I hope that the worst is behind us as regards the international financial crisis in the euro zone, in part due to the continuous interventions by the ECB, the impact of this turmoil on the real economy will start from now and in the coming year to become more intense and to be reflected in the growth rate of the world economy.  2009 is expected to be a more difficult year. I don't have the ability to make a prediction on when there will be an exit from the crisis. I hope that the worst is behind us. We cannot rule out a further worsening of the situation but I would place a smaller probability on this. I hope that there will be a gradual improvement of the situation.”  Other data released in the eurozone saw German retail sales fall 1.6% m/m. Eurogroup Chairman Juncker expects eurozone countries to “make maximum coordinated efforts on fiscal package.”  In U.S. news, October construction spending was unchanged while November ISM manufacturing fell to 36.2 from 38.9 in October.  Euro bids are cited around the US$ 1.2135 level.



¥/ CNY

The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥93.55 level and was capped around the ¥95.55 level.  Bank of Japan’s Policy Board will hold an emergency meeting tonight.  BoJ Governor Shirakawa reported “Financial markets in Japan, which had remained stable relative to those in the United States and Europe, have also drastically changed since the bankruptcy filing by Lehman Brothers. Interest rates applied to funding in the market, such as issuing commercial paper and corporate bonds, are rising, reflecting growing risk aversion among investors such as investment trust companies and life insurance companies. The issuing rates on corporate bonds have been rising, especially for those with low credit ratings, and issuing rates on CP, which had been creeping up since the summer, have risen rapidly since September. Although the level of these interest rates is somewhat lower than in 1998 and 1999, when corporate financing experienced a period of increased pressure, the so-called credit crunch, the pace at which these rates are rising is comparable to that in 1998 and 1999. Nevertheless, corporate profits are under strong pressure...This seems to indicate that the level of funding rates relative to profitability is becoming less accommodative. …Under these circumstances, it seems that firms' attitudes are becoming increasingly defensive against the backdrop of the deceleration in global economic growth and the turmoil in financial markets as well as increased future uncertainty, and this is leading to a growing number of firms hoarding liquidity. To sum up, financial conditions in Japan seem to have become less accommodative at an accelerating pace, particularly in terms of availability of funds, reflecting the turmoil in global financial markets. Data released last week, such as industrial output, showed the economy in a severe state. Sluggishness in economic activity has increased rapidly. Overseas economies are experiencing the same kind of rapid change.”  Some traders expect the Policy Board will reduce the overnight interest rate from its current 0.30% level while others believe the central bank will enact quantitative easing measures overnight to help stimulate the money markets and economy.  Data released in Japan overnight saw October wage earners’ total cash earnings fall 0.1% y/y, the first decline in ten months, while overtime pay was off 3.1% y/y, the third consecutive monthly decline.  Pessimistically, Economy minister Yosano talked about deflation saying “We are moving to the next phase of shrinking consumption -- some call it deflation -- production going down and prices going down.” The Nikkei 225 stock lost 1.35% today to close at ¥8,397.22.  U.S. dollar offers are cited around the ¥104.15 level.  The euro moved lower vis-à-vis the yen as the single currency tested bids around the ¥118.20 level and was capped around the ¥121.45 level.  The British pound and Swiss franc moved lower vis-à-vis the yen as the crosses tested offers around the ¥140.25 and ¥77.40 levels, respectively.  The Chinese yuan depreciated sharply vis-à-vis the U.S. dollar today as the greenback closed at CNY 6.8848 in the over-the-counter market, up from CNY 6.8349.  This represented the first time ever the yuan has closed at the limit of its daily trading band and fueled speculation People’s Bank of China may adjust the trading band in the near future.  Data released in China overnight saw CLSA November PMI decline to a new low of 40.9 while CFLP November manufacturing PMI fell to 38.8 from 44.6 in October. 

The British pound depreciated sharply vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.4930 level and was capped around the $1.5395 level.  Sterling came off significantly for a variety of reasons. First, a European Union official reported this weekend that the U.K. would be better of if it abandoned the pound in favour of the euro, noting the eurozone economy has performed much better than the U.K.’s in the current economic crisis.  European Commission President Barroso said that even though most U.K. residents want to keep the pound, high-level talks between Brussels and London remain ongoing.  Second, Hometrack reported house prices were off 8.1% y/y, the latest evidence of the beleaguered state of the U.K. housing sector.  Third, EEF reported U.K. manufacturers are facing their most difficult time in two decades.  Fourth, the government reported October mortgage approvals fell to their lowest level in more than a decade at 32,000.  Fifth, the headline CIPS manufacturing PMI figure fell to 34.4 from 41.5 in October, the lowest reading since January 1992.  Sixth, the PMI input price index fell to 44.2 from 54.5, the latest evidence of deflationary pressures in the U.K. economy.  Seventh, the PMI manufacturing orders sub-index fell to a record low of 29.7 from 37.0 with a decline in the output sub-index to 31.9.  Eighth, a small U.K. financial institution called London Scottish Bank collapsed overnight. Ninth, October net consumer lending fell to ₤1.3 billion.  Collectively, these factors increase the likelihood that Bank of England’s Monetary Policy Committee will reduce the headline Bank Rate by at least 100bps to 2.00% on Thursday.  Royal Bank of Scotland reported it will permit households to default on mortgages for up to six months before moving to foreclose homes. Cable bids are cited around the US$ 1.4315 level. The euro moved sharply higher vis-à-vis the British pound as the single currency tested offers around the ₤0.8465 level and was supported around the ₤0.8240 level.


The Swiss franc appreciated vis-à-vis the U.S. dollar today
as the greenback tested bids around the CHF 1.2060 level and was capped around the CHF 1.2150 level.  Data released in Switzerland overnight saw the November PMI manufacturing index decline to 35.2 from 47.0 in October.  Many trades expect Swiss National Bank will announce additional interest rate cuts on 11 December.  U.S. dollar offers are cited around the CHF 1.2350 level.  The euro moved lower vis-à-vis the Swiss franc as the single currency tested bids around the CHF 1.5260 level while the British pound weakened vis-à-vis the Swiss franc and tested bids around the CHF 1.8060 level.


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