Forex Market Commentary and Analysis (1 June 2010)
The euro depreciated sharply vis-√†-vis the U.S. dollar
today as the single currency tested bids
around the US$ 1.2110 level and was capped around the $1.2310 level. Today‚Äôs intraday low represented a new
four-year low and the common currency moved lower as eurozone unemployment
reached its highest level in April since June 1998, at 10.1%.These data are the latest indication the
eurozone sovereign debt crisis is having a profound impact on the labour
market.The continued depreciation of
the euro means more traders are viewing the common currency as a funding
currency for carry trades.Dealers also dumped
the common currency on escalating concerns Europe‚Äôs credit woes would lead to
larger-than-expected losses at regional banks.Yesterday, the ECB warnedthat
eurozone banks could face as much as ‚ā¨195 billion in additional loan losses
over the next eighteen months on account of the financial crisis.The ECB also reported it increased its
purchases of eurozone government bonds.ECB
member Nowotny said the ECB‚Äôs bond purchase program will continue until there
is financial stability in the eurozone, adding there ‚Äúis no quantitative goal.‚ÄĚ
Yesterday, ECB member Weber said monetary policy has been expanded to include
new measures ‚Äúthat I continue to see in a critical way due to the stability
risks.‚ÄĚWeber also yesterday called for ‚Äúheightened
alertness.‚ÄĚThere are also reported
tensions between Germany and France with the former possibly complaining the
latter is not doing enough to bail out their eurozone member partners.The ECB reported banks deposited ‚ā¨305 billion
with it overnight.Other data released
today saw EMU-16 May PMI manufacturing tick lower to 55.8 while German
provisional May unemployment was lower by 45,000 and the unemployment rate came
in at 7.7%.Also, May PMI manufacturing
improved to 58.4 and German April retail sales were up 1.0% m/m and off 3.1%
y/y.French data released today saw
April producer prices up 1.0% m/m and 4.0% y/y with May PMI manufacturing lower
at 55.8.In U.S. news, data released today saw May ISM manufacturing
decrease to 59.7while the ISM
prices paid index fell to 77.5.Also,
April construction spendingimproved 2.7% m/m.Chicago Fed President Evans yesterday
reported that targeted asset purchases are more effective at addressing
financial crises than straight injections of cash.Some Fed-watchers are expressing concern that
the Fed may be too dovish in calculating that the full rate of employment is
now between 5% and 5.3%.If the Fed
waits until the unemployment rate gets that low before making material
adjustments to short-term interest rates, it could risk fueling inflation.Euro offers are cited around the US$
The yen appreciated vis-√†-vis the U.S. dollar today as the
greenback tested bids around the ¬•90.55 level and was capped around
the ¬•91.25 level. Risk aversion returned
to the market after the long holiday weekend in some trading centers as traders
deliberated a slowdown in Chinese economy activity and a worsening fiscal
situation in Europe.Bank of Tokyo is
now forecasting the euro may weaken to US$ 1.16 by the fourth quarter and some
policymakers are concerned that additional euro weakness could lead to too much
appreciation of the yen.Prime Minister
Hatoyama‚Äôs popularity has reached a new low, less than two months before
parliamentary elections.The Social
Democratic Party left Hatoyama‚Äôs coalition government this weekend in
opposition to Japanese approval to relocate a U.S. base within Okinawa.Bank of Japan Governor Shirakawa yesterday reported
‚Äú‚Ä¶the greatest challenge Japan‚Äôs economy is facing now is the decline in the
potential growth rate as well as the shrinking of the population and sluggish
productivity growth underlying this.‚ÄĚSpeaking about the global increase in fiscal spending, Shirakawa added
‚ÄúFiscal policies are not a cornucopia.Policymakers should work to appropriately conduct policies so as to
maintain sufficient market confidence.In this regard, current events seem to have served as a ‚Äėwakeup call‚Äô to
many countries.‚ÄĚRegarding inflation,
Shirakawa added ‚ÄúConcerning inflation-targeting, there are expectations that
expanding the central bank‚Äôs balance sheets would help Japan escape deflation
and cause inflation rates to rise.But
the central banks of Japan, the U.S., and Europe have expanded balance sheets
only to see drops in inflation rates.Expanding central bank balance sheets does not immediately cause prices
to rise.‚ÄĚRegarding economic growth,
Shirakawa noted ‚ÄúJapan‚Äôs economy is making firm progress toward sustainable
growth.We need to be mindful of upside
and downside risks.‚ÄĚ Data to be released
in Japan overnight include the May monetary base.The Nikkei 225 stock index lost 0.58% today
to close at ¬•9,711.83.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 ¬•109.75 level and was capped
around the ¬•112.30 level.The British pound moved higher vis-√†-vis
the yen as sterling tested offers around the ¬•133.10 level while the Swiss franc moved lower vis-√†-vis
the yen and tested bids around the ¬•77.45 level. In Chinese news, the U.S. dollar appreciated vis-√†-vis the Chinese
yuan as the greenback closed at CNY 6.8306 in the over-the-counter market, up
from CNY 6.8278. Dealers expressed
concern about a sharper-than-expected decline in May PMI manufacturing that saw
the May level decline to 53.9 while the HSBC manufacturing PMI measure weakened
to 52.7 from the revised prior reading of 52.7.Honda Motors reported its automobile production in China will remain
halted until at least 3 June on account of a strike.People‚Äôs Bank of China lifted yields on
one-year bills for the first time in four months as inflation is picking up and
the central bank is attempting to absorb excess cash from the money
market.A PBoC adviser warned China‚Äôs
property problems are more severe than the U.S.‚Äôs real estate problems.Spreads on Chinese property company bonds are
widening away from U.S. Treasuries.
British pound appreciated vis-√†-vis the U.S. dollar today as cable tested offers
around the US$ 1.4615 level and was supported around the $1.4435 level. Sterling partially moved higher on account of
its current retention of its AAA credit rating.In contrast, Spain‚Äôs credit rating was downgraded last week and the U.K.
media today reported France could lose its vaulted rating as well.Data released in the U.K. today saw May PMI
manufacturing remain unchanged at 58.0, beating expectations.Cable bids are cited around the US$ 1.4220
level.The euro depreciated vis-√†-vis the British pound as the single
currency tested bids around the ¬£0.8320 level and was capped around the ¬£0.8475
franc depreciated vis-√†-vis the U.S. dollar today as the greenback tested offers
around the CHF 1.1730 level and was supported around the CHF 1.1525 level. Data released in Switzerland today saw Q1
gross domestic product climb 0.4% q/q and 2.2% y/y while May PMI defied
expectations and rallied to 66.4, up from the prior reading of 65.9.April retail sales data will be released
tomorrow.Swiss National Bank member
Leuthard on Friday said Switzerland is interested in a ‚Äústable euro,‚ÄĚ adding
the central bank‚Äôs euro reserves have risen to 52%.SNB has undertaken significant franc-selling
intervention this year to address the depreciation of the common currency.U.S. dollar bids are cited around the US$ 1.1420
level.The euro lost ground vis-√†-vis the Swiss franc as the single
currency tested bids around the CHF 1.4155 level while the British pound gained ground vis-√†-vis the Swiss franc and
tested offers around the CHF 1.7050 level.
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