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Tuesday January 26, 2010 - 23:21:59 GMT
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Forex Market Commentary and Analysis (26 January 2010)

The euro depreciated vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.4055 level and was capped around the $1.4180 level.  Traders are evaluating a significant amount of factors that are driving exchange rates. First, the Federal Open Market Committee will issue its interest rate decision tomorrow.  While the FOMC is expected to keep rates largely unchanged, there is speculation the Fed may adopt a new benchmark interest rate to replace the benchmark federal funds rate.  The Fed has been largely unsuccessful in controlling the federal funds rate since Lehman Brothers’ bankruptcy in September 2008.  The Fed may opt to target the interest paid on excess bank reserves with the federal funds rate an additional spread on top of that.  Banks’ excess reserves – the deposits they hold with the Fed above their required amounts – totaled US$ 1 trillion in the two weeks ended 13 January, down from US$ 2.2 billion at the start of 2008.  A shift in policy such as this would be closer to the Bank of England rate model that measures the amount it pays on commercial banks’ reserves.  Second, dealers largely now expect Fed Chairman Bernanke to be reappointed by the Senate, a move that many traders view as a net positive, including bond giant PIMCO.  Third, dealers are sifting through a mixed batch of earnings reports in the U.S.  Fourth, U.S. President Obama will deliver his State of the Union address to Congress tomorrow.  Dealers expect Obama will champion some semblance of a limited middle class tax cut and greater regulatory oversight with significant changes to the U.S. banking sector.  There is also talk that Obama is considering a freeze on public spending though details are opaque at best.  Fifth, U.S. economic data continues to be mixed.  Data released there today saw the S&P/ CaseShiller November home price index decline 5.32% y/y, more-than-expected but up from the revised October print of -7.27%.  Also, the Richmond Fed January manufacturing index came in lighter-than-expected at -2 and January consumer confidence rallied to 55.9 from a revised 53.6.  In eurozone news, German Ifo’s Nerb said the German economic recovery “is definitely continuing but is still not a self-supporting upswing.”  The Ifo business climate index improved to 95.8 in January from a revised 94.6 in December, the highest level since July 2008.  Other data saw the EMU-16 current account register a current account surplus of €0.1 billion in November, up from October’s €4.6 billion deficit.  ECB member Stark reported he is “seriously concerned about forecasts of strong rises in government deficits and the indebtedness of countries in the euro zone.”  Euro bids are cited around the US$ 1.3885 level.

¥/ CNY

The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥89.35 level and was capped around the ¥90.55 level.  As expected, Bank of Japan’s Policy Board kept its overnight call rate unchanged at 0.1% and kept its economic assessment intact.  The central bank upwardly revised its deflation forecast for the fiscal year that begins in April and is now eyeing a decline of 0.5%, better than the 0.8% decline in prices it predicted in October.  Data released in Japan overnight saw the overall December corporate services prices index flat m/m and off 1.5% y/y.  The yen shook off a report from Standard & Poors that it placed a negative outlook on Japan’s ‘AA’ sovereign long-term credit rating from stable and noting it may issue a downgrade to AA-.  S&P expressed concern with Japan’s falling economic policy flexibility, escalating debt levels, and growing deflationary pressures.  Finance minister Kan reacted by saying “"I am aware that it is extremely important to maintain fiscal discipline and move ahead with fiscal reforms to retain the trust of international markets.”  The Lower House of Parliament enacted a ¥7.2 trillion supplementary budget yesterday to bolster the weak economy and the measure will likely be voted on by the Upper House on Thursday.  Kan also said he “still wants more” from the BoJ to support economic growth.  The Nikkei 225 stock index lost 1.78% to close at ¥10,325.28.  U.S. dollar offers are cited around the ¥94.75 level.  The euro moved lower vis-à-vis the yen as the single currency tested bids around the ¥125.90 level and was capped around the ¥128.35 level.  The British pound moved lower vis-à-vis the yen as sterling tested bids around the ¥144.05 level while the Swiss franc moved lower vis-à-vis the yen and tested bids around the ¥85.55 level. In Chinese news, the U.S. dollar depreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.8268 in the over-the-counter market, down from CNY 6.8269.  Data released in China last week saw inflation accelerate 1.9% in December with gross domestic product climbing to 10.7% and this renders it likely People’s Bank of China will tighten monetary policy this year.  PBoC yesterday reported it asked lenders to avoid excessive credit concentration and manage the pace of loan growth.  Bank of China and Construction Bank of China have started restricting new loans.  People’s Bank of China is said to have lifted some Chinese banks – possibly including China Citic Corp and Industrial and Commercial Bank of China – to lift their reserve ratios by an additional 50bps today, following a decision on 12 January for all banks to lift by 50bps to 16.00%.

 

The British pound moved sharply lower vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.6095 level and was capped around the $1.6265 level.  Data released in the U.K. today saw the economy expand 0.1% in Q4 2009, ending six consecutive quarters of contraction and technically removing the U.K. from a recession.  Q4 growth, however, was weaker-than-expected and the opposition Tories – who are largely expected to win this year’s general election – said the country needs new economic stewardship.  Other data released today saw December BBA mortgage applications increase to 45,900.  Bank of England Governor King was quoted as saying he favours “radical reform” of the U.K. banking sector.  Cable bids are cited around the US$ 1.6030 level.  The euro moved lower vis-à-vis the British pound as the single currency tested bids around the ₤0.8665 level and was capped around the ₤0.8750 level.

CHF

The Swiss franc depreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.0375 level and was capped around the CHF 1.0475 level.  Data released in Switzerland today saw the December UBS consumption indicator fall to 1.2 from 1.26 in November.  Swiss National Bank President Hildebrand recently reported he is “extremely interested” in the Obama administration’s bank proposals.  The euro moved higher vis-à-vis the Swiss franc as the single currency tested offers around the CHF 1.4725 level while the British pound moved lower vis-à-vis the Swiss franc and tested bids around the CHF 1.6805 level. 

 

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