Forex Market Commentary and Analysis (16 March 2010)
The euro appreciated vis-Ă -vis the U.S. dollar today as the single currency tested offers around the US$ 1.3770
level and was supported around the $1.3655 level. As expected, the Federal Open Market Committee
kept its benchmark federal funds target rate unchanged at 0.25%.The FOMC reported â€śInformation
received since the Federal Open Market Committee met in January suggests that
economic activity has continued to strengthen and that the labor market is
stabilizing. Household spending is expanding at a moderate rate but remains
constrained by high unemployment, modest income growth, lower housing wealth,
and tight credit. Business spending on equipment and software has risen
significantly. However, investment in nonresidential structures is declining,
housing starts have been flat at a depressed level, and employers remain
reluctant to add to payrolls. While bank lending continues to contract,
financial market conditions remain supportive of economic growth. Although the
pace of economic recovery is likely to be moderate for a time, the Committee
anticipates a gradual return to higher levels of resource utilization in a
context of price stability. With
substantial resource slack continuing to restrain cost pressures and
longer-term inflation expectations stable, inflation is likely to be subdued
for some time. The Committee will
maintain the target range for the federal funds rate at 0 to 1/4 percent and
continues to anticipate that economic conditions, including low rates of
resource utilization, subdued inflation trends, and stable inflation expectations,
are likely to warrant exceptionally low levels of the federal funds rate for an
extended period. To provide support to mortgage lending and housing markets and
to improve overall conditions in private credit markets, the Federal Reserve
has been purchasing $1.25 trillion of agency mortgage-backed securities and
about $175 billion of agency debt; those purchases are nearing completion, and
the remaining transactions will be executed by the end of this month. The
Committee will continue to monitor the economic outlook and financial
developments and will employ its policy tools as necessary to promote economic
recovery and price stability. In light of improved functioning of financial
markets, the Federal Reserve has been closing the special liquidity facilities
that it created to support markets during the crisis. The only remaining such
program, the Term Asset-Backed Securities Loan Facility, is scheduled to close
on June 30 for loans backed by new-issue commercial mortgage-backed securities
and on March 31 for loans backed by all other types of collateral.â€ť Kansas City
Fed President Hoenig dissented with the decision, arguing â€śthat continuing to
express the expectation of exceptionally low levels of the federal funds rate
for an extended period was no longer warranted because it could lead to the
buildup of financial imbalances and increase risks to longer-run macroeconomic
and financial stability.â€ť Data released in the
U.S. today saw February housing starts off 5.9% to an annualized 575,000 units
while February building permits were off 1.6% m/m to an annualized
612,000.Also, the February import price
index was off 0.3% m/m and up 11.2% y/y.Data to be released in the U.S. tomorrow include February producer price
inflation data.In eurozone news, Standard & Poorâ€™s affirmed Greeceâ€™s BBB+
credit rating and removed the country from â€ścreditwatch negative.â€ťEurozone finance ministers last night
reiterated their plan to â€śtake coordinated actionâ€ť but did not provide much
additional information other than to suggest any assistance would take the form
of bilateral loans rather than loan guarantees.Data released in the eurozone today saw the EMU-16 consumer price index
expand 0.3% while the core consumer price index expanded 0.4% m/m, up from
-0.1% in January; consumer prices were also up 0.9% y/y.Also, the EMU-16 March ZEW economic sentiment
survey fell to 37.9 from the prior reading of 40.2.The German March ZEW surveyâ€™s economic
sentiment and current situation indices improved to 44.5 and -51.9,
respectively.European Central Bank
member Stark called on more regulation for credit default swaps and called on
countries to improve their fiscal finances.Euro bids are cited around the US$ 1.3335 level.
The yen appreciated vis-Ă -vis the U.S. dollar today as the
greenback tested bids around the ÂĄ90.00 figure and was capped around the ÂĄ90.75
level. Traders await Bank of Japan
Policy Boardâ€™s interest rate decision tonight with strong expectations of
additional monetary easing.The central
bank may expand a ÂĄ10 trillion fund that provides funding to banks when
policymakers convene on 16-17 March and this is important because an unlimited
uncollateralized loan facility expires on 31 March.Some BoJ-watchers believe the facility could
expand by at least ÂĄ5 trillion. The central bank remains under significant
pressure to do more to combat the deflation problem further. Finance minister
Kan today reported â€śFiscal policy focusing on stimulating demand will have some
impact against deflation.The central
bank can make an inflationary impact with monetary policyâ€¦I want to overcome
deflation as soon as possible in cooperation with monetary policies.â€ťNational Strategies Minister Sengoku called
on the central bank to enact policies that will be positive for â€śproduction
activity, capital investment, and consumer spending.â€ťFormer MoF mouthpiece â€śMr Yanâ€ť Sakakibara
reported deflation is a â€śstructural problemâ€ť that monetary policy cannot remedy.Data released in Japan overnight saw February
machine tool orders climb 217.4% y/y and dealers await the release of January
tertiary index data.The Nikkei 225 stock
index lost 0.28% to close at ÂĄ10,721.71.U.S. dollar offers are cited around the ÂĄ94.75 level.The
euro moved higher vis-Ă -vis the yen as the single currency tested offers around
the ÂĄ124.60 level and was supported around the ÂĄ123.20 level.The
British pound moved higher vis-Ă -vis the yen as sterling tested offers
around the ÂĄ137.45 level while the Swiss
franc moved higher vis-Ă -vis the yen and tested offers around the ÂĄ85.80 level.
In Chinese news, the U.S. dollar depreciated
vis-Ă -vis the Chinese yuan as the greenback closed at CNY 6.8260 in the
over-the-counter market, down from CNY 6.8262. Peopleâ€™s Bank of China reported inflation
expectations are rising in a quarterly survey released today and this could
render it difficult for the government to meet its 3% annual inflation target.Higher inflation expectations will likely
propel interest rates higher.
British pound appreciated vis-Ă -vis the U.S. dollar today as cable tested offers
around the US$ 1.5200 figure and was supported around the $1.4975 level. Data released in the U.K. today saw the DCLG
January house price index expand 6.2% y/y, the highest increase since February
2008.Bank of England Monetary Policy
Committee member Barker yesterday reported the U.K. economy could recede again,
adding the economic recovery will continue to be â€śbumpy and fragile.â€ťCable continues to suffer from political
uncertainty ahead of the upcoming mandatory General Election.Prime Minister Brown is expected to lose to
Tory leader Cameron but Cameron may not be able to form a majority government
if he wins, and this could lead to a weaker pound. Many data will be released in the U.K. including
February jobless claims along with the BoE MPC meeting minutes.Cable
bids are cited around the US$ 1.4455 level.The euro moved lower
vis-Ă -vis the British pound as the single currency tested bids around the US$
0.9045 level and was capped around the $0.9120 level.
The Swiss franc appreciated vis-Ă -vis the U.S. dollar today as the
greenback tested bids around the CHF 1.0545 level and was capped around the CHF
1.0625 level.Notably, the franc
rocketed to its highest level vis-Ă -vis the euro since October 2008 as the
common currency plumbed the CHF 1.45 handle. Traders are speculating Swiss
National Bank will be less inclined to intervene by selling francs as the Swiss
economic recovery strengthens.SECO released
economic forecasts today that are calling for economic growth of about 1.4% in
2010, up from the +0.7% forecast issued in December.Unemployment is expected to decline to 4.3%
from 4.9% in 2010 and private spending is expected to ramp up.Data released in Switzerland yesterday saw
February producer and import prices decline 0.3% m/m and fall 1.0% y/y.U.S. dollar offers are cited around the CHF
1.1045 level.The euro moved lower vis-Ă -vis the Swiss franc as the single
currency tested bids around the CHF 1.4505 level while the British pound moved higher and tested offers around the CHF 1.6050
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