Forex Market Commentary and Analysis (25 May 2010)
The euro depreciated sharply vis-√†-vis the U.S. dollar
today as the single currency tested bids
around the US$ 1.2175 level and was capped around the $1.2370 level. The situation in Europe worsened dramatically
overnight.First, yieds on German
government 10-year bunds reached a record low, reflecting the safe haven play
that many nervous investors and traders are seeking.Yields on French 10-year debt also reached a
record low overnight.Second, the German
government has now proposed a ban on the naked short-selling of all German
equities, a broad expansion of the plan announced two weeks ago.In addition, Germany‚Äôs plan calls for a ban
on the short-selling of certain types of eurozone bonds and certain types of
credit default swaps.Other eurozone
countries have not yet followed suit with similar banks and the common currency
is suffering as a result of the perception of a lack of cohesion with regard to
policymaking.Third, there is a sense
that more European banks will fail.Yesterday, four regional Spanish savings banks announced a plan to
combine forces to stave off concernsfollowing
the nationalization of one savings bank.The yield spread between Spanish 10-year bonds and German 10-year bunds
widened fourteen basis points to 154 bps, the highest levels since 7 May.Fourth, there is talk the European Union will
introduce a new up-front tax on banks to help stabilize the financial
system.European Central Bank member
Nowotny reiterated the ECB is ‚Äúfiercely independent‚ÄĚ and said it is not
engaging in quantitative easing.Data
released in the eurozone today saw EMU-16 March industrial new orders up 5.2% m/m
and 19.8% y/y.In U.S. news, the March Case-Sehiller home price index was off a
marginal 0.05% m/m and up 2.35% y/y.Other data to be released today include the May Richmond Fed
manufacturing index and March house price index.St. Louis Fed President Bullard reported the
trajectory of U.S. interest rates depends on the economic recovery into
2011.Euro offers are cited
around the US$ 1.2620 level.
The yen appreciated vis-√†-vis the U.S. dollar today as the
greenback tested bids around the ¬•89.25 level and was capped around
the ¬•90.30 level. Dealers added to long
yen positions on escalating concerns about the European debt crisis and a
worsening regional situation involving the two Koreas.North Korean leader Kim Jong-Il is said to
have ordered his military on ‚Äúcombat footing‚ÄĚ while South Korea is said to have
restarted ‚Äúpsychological warfare‚ÄĚ against the north.These measures are in response to the sinking
of a South Korean submarine, allegedly by North Korea.Japan strategy minister Sengoku warned the European
economy will not recover soon.Three-month Libor rates for yen loans grew to 0.2456% and three-month
U.S. dollar Libor is now 0.50969%, the highest level since 16 July.Traders await the release of April Bank of Japan
Policy Board meeting minutes overnight along with the April corporate service
price index.The Nikkei 225 stock index
lost 3.06% to close at ¬•9,459.89.U.S.
dollar offers are cited around the ¬•96.85 level.The
euro moved lower vis-√†-vis the yen as the single currency tested bids around
the ¬•108.80 level and was capped around the ¬•111.65 level.The
British pound moved lower vis-√†-vis the yen as sterling tested bids around
the ¬•127.65 level while the Swiss franc moved
lower vis-√†-vis the yen and tested bids around the ¬•76.40 level. In Chinese news, the U.S. dollar appreciated
vis-√†-vis the Chinese yuan as the greenback closed at CNY 6.8315 in the
over-the-counter market, up from CNY 6.8287. Data released in China overnight saw the April
leading index decline to 104.36.The
State Administration of Foreign Exchange indicates China has not had
large-scale ‚Äúhot money‚ÄĚ inflows ahead of the possible revaluation and
appreciation of the yuan.People‚Äôs Bank
of China sold one-year bills at an unchanged yield of 1.9264% in open-market
operations today, the seventeenth consecutive time it has not changed
yields.Some dealers believe PBoC will
increase the yield on its bills to absorb excess liquidity in the money
markets. Chinese yuan forwards came off their most in fifteen months on the
European debt crisis today, bringing into question whether or not China will
revalue the yuan with the global economy on a relatively weak footing.U.S. Treasury Secretary Geithner
characterized U.S.-Chinese talks on the yuan as ‚Äúencouraging.‚ÄĚYesterday, People‚Äôs Bank of China adviser Li
Daokui today said ‚ÄúPolitically it is worthwhile, it makes sense, for the two
sides ‚Äď China and the U.S. ‚Äď to see some progress in renminbi reform in the
British pound depreciated vis-√†-vis the U.S. dollar today as cable tested bids
around the US$ 1.4255 level and was capped around the $1.4420 level. Data released in the U.K. today saw Q1 gross
domestic product up 0.3% q/q and off 0.2% y/y. Bank of England Monetary Policy Committee member
Posen said he cannot rule out deflationary pressures in the U.S. and U.K.
economies.Chancellor of the Exchequer
Osborne yesterday reported the new Cameron government hopes to decrease fiscal
spending by at least ¬£6 billion in what would be an abrupt shift from the
policies of former Prime Minister Brown.Outgoing Bank of England Monetary Policy Committee member Barker
reported more difficult times are ahead for the U.K. economy.Cable bids are cited around the US$ 1.4110
level.The euro depreciated vis-√†-vis the British pound as the single
currency tested bids around the ¬£0.8510 level and was capped around the ¬£0.8585
franc depreciated vis-√†-vis the U.S. dollar today as the greenback tested offers
around the CHF 1.1695 level and was supported around the CHF 1.1580 level.Data released in Switzerland today saw the
April UBS consumption indicator improve to 1.763 from the revised print of 1.682
in March.There is a growing sense among
traders that Swiss National Bank may be unable to keep up with market
speculation and may be forced at some point to abandon its franc-selling
intervention operations on account of the major global bearish sentiment that
overhangs the common currency.U.S.
dollar bids are cited around the US$ 1.1110 level.The
euro lost ground vis-√†-vis the Swiss franc as the single currency tested bids
around the CHF 1.4205 level while the
British pound lost ground vis-√†-vis the Swiss franc and tested bids around
the CHF 1.6585 level.
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