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Tuesday August 25, 2009 - 20:24:41 GMT
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Forex Market Commentary and Analysis (25 August 2009)

The euro moved higher vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.4335 level and was supported around the $1.4250 level.  While there are growing indications the global economic freefall may be abating, there is now some talk that the global economy may have come too far, too fast and resulted in overvalued equities markets.  The euro has been highly correlated with equities prices and a move lower in share prices could put the common currency on the backfoot. Data released in the eurozone today saw German second quarter gross domestic product growth expand 0.3%, confirming the provisional estimate from 13 August.  These data followed four consecutive months of contraction and reflected a 0.4% increase in government spending and a 0.7% increase in private consumption.  Yesterday, it was reported that eurozone industrial new orders registered their strongest gain in nearly nineteen months in June.  As a whole, EMU-16 GDP growth was off 0.1% in Q2.  European Central Bank policymakers continue to manage expectations regarding the sustainability of a broad economy recovery in the eurozone.  ECB rate-setters will next convene on 3 September and are unlikely to change monetary policy at that time.  One month EONIA interest rate futures prices have a downward slope between the front-month August 2009 contract and the July 2010 contract and this indicates the market anticipate a small degree of monetary tightening between now and then.  This weekend, European Central Bank President Trichet was rather cautious in his remarks at the Kansas City Federal Reserve’s annual Jackson Hole symposium.  Trichet reported “we see some signs confirming that the real economy is starting to get out of the period of freefall” but added this “does not mean at all that we do not have a very bumpy road ahead of us.”  Some ECB policymakers are thought to be questioning the sustainability of the recent improvement in eurozone economic data.  ECB’s Liikanen this weekend said there is “no need” for the ECB to reassess its policy stance and added unemployment will rise more. ECB’s Nowotny suggested the ECB won’t reverse its policy stance anytime soon.   Likewise, ECB’s Gonzalez-Paramo reported “the situation is still very uncertain” and called EMU-16 interest rates appropriate.  ECB member Mersch warned against “succumbing to optimism” about the economic recovery.  In U.S. news, it was reported the Obama administration will nominate Fed Chairman Bernanke for a second term atop the Federal Reserve. Bernanke’s star has risen in recent months as some U.S. economic problems have moderated but it does not mean he will not face a contentious fight during his congressional approval hearings.  Data released in the U.S. today saw the June S&P/ Case-Shiller home price index off 14.92% from a revised 19.11% while August consumer confidence rallied to 54.1 from a revised 47.4.  Also, the August Richmond Fed manufacturing index was unchanged at +14 and June house prices were up 0.5% m/m from a revised +0.6% in May.  Euro bids are cited around the US$ 1.3900 figure.

¥/ CNY

The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥93.80 level and was capped around the ¥94.60 level.  The yen was stronger across the board as risk appetite weakened on escalating concerns that some asset prices are overvalued.  China Construction Bank Chairman Guo Shuqing reported excess cash has resulted in asset bubbles.  Traders also pared risk after Atlanta-based SunTrust Banks warned U.S. financial institutions may report additional credit losses stemming from commercial real estate. A greater resumption of risk appetite could result in more demand for short yen carry trades in which the yen is used as a financing vehicle to invest in assets with greater yield spreads.  Vice finance minister Tango yesterday reported Japan needs to limit Japanese government bond sales as much as possible.  Tango’s comments are topical because the Liberal Democratic Party of Japan may lose this weekend’s general election with the Aso government conceding the LDP’s stronghold on power to the rival Democratic Party of Japan.  DPJ leader Hatoyama was on the tape yesterdat saying the DPJ does not plan to increase JGB issuance, contrary to public chatter that the liberal DPJ will expand public works projects.  Bank of Japan Governor Shirakawa spoke at the Fed’s Jackson Hole symposium this weekend and said monetary policy “should avoid inflating asset bubbles by keeping interest rates low for too long.”  The Nikkei 225 stock index lost 0.79% to close at ¥10,497.36.  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 ¥133.95 level and was capped around the ¥135.25 level.  The British pound moved lower vis-à-vis the yen as sterling tested bids around the ¥153.60 level while the Swiss franc moved lower vis-à-vis the yen and tested bids around the ¥88.30 level. In Chinese news, the U.S. dollar lost ground vis-à-vis the Chinese yuan as the greenback closed at CNY 6.8267 in the over-the-counter market, down from CNY 6.8267.  Chinese Premier Wen yesterday said the markets need to avoid being “blindly optimistic” about the global economic recovery and added China must maintain its “moderately loose” monetary policy and “active” fiscal policy.  PBoC reported it will ensure “reasonable and ample” liquidity.



The British pound came off vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.6340 level and was capped around the $1.6425 level.  Sterling has been weaker for three consecutive trading days and has fallen from its perch above the $1.70 handle this month. Sterling is still on the defensive after minutes from Bank of England Monetary Policy Committee’s meeting from August revealed BoE Governor King voted unsuccessfully in the minority to expand its bond-buying program by ₤75 billion to ₤200 billion.  Instead, the central bank voted to expand the quantitative easing operation by ₤50 billion to ₤175 billion.  August GfK consumer confidence will be released on Thursday.  Cable bids are cited around the US$ 1.6215 level.  The euro moved higher vis-à-vis the British pound as the single currency tested offers around the ₤0.8745 level and was supported around the ₤0.8705 level.


The Swiss franc appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.0570 level and was capped around the CHF 1.0640 level.  Swiss National Bank Governing Board member Hildebrand said the derivatives market needs to be regulated better.  Swiss National Bank’s next interest rate decision is expected on 17 September. The three-month Swiss franc Libor target is currently at 0.325 and the front-month September 2009 futures implied rate is trading at 0.290.  Data released in Switzerland yesterday saw the July UBS consumption indicator fell to 0.77 from a revised 0.95 in June.  UBS warned “unemployment is likely to continue to increase significantly in the coming months.”  U.S. dollar offers are cited around the CHF 1.0670 level.  The euro moved lower vis-à-vis the Swiss franc as the single currency tested bids around the CHF 1.5150 level while the British pound came off vis-à-vis the Swiss franc and tested bids around the CHF 1.7325 level.


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