Forex Market Commentary and Analysis (21 June 2010)
The euro depreciated vis-Ă -vis the U.S. dollar today as the single currency tested bids around the US$ 1.2350
level and was capped around the $1.2465 level. European Central Bank officials spoke today
and offered their latest views regarding the ongoing European credit
crisis.President Trichet defended the
central bankâ€™s commitment to price stability, saying statements that price
expectations have come unanchored are â€śunfounded.â€ťTrichet also noted the economic recovery is
likely to â€śremain moderate and uneven.â€ťHe also called for â€śbetter instruments to prevent excessive deficitsâ€ť
and wants sanctions against countries to become â€śquasi-automatic.â€ťTrichet cited â€śmore stringent reporting
requirements or even a limitation of suspension of voting rightsâ€ť as possibilities.Additionally, he said the ECBâ€™s purchase of
bonds are not engendering inflation risks.ECB member Gonzalez-Paramo warned about the proposed bank global bank
tax, saying it could â€śhamper the flow of credit to the real economy.â€ťECB member Stark said the ECB â€świll not embark
on a dimension in size of government bond purchases as it was done by other
central banksâ€ť and called the ECBâ€™s purchases â€śtemporary in nature.â€ťThe ECB has spent about â‚¬51 billion
purchasing government and corporate debt in the secondary market to keep a lid
on yields and improve liquidity.In
contrast, the Fed has purchased US$ 1.42 trillion in housing debt and US$ 300
billion in U.S. Treasuries whereas Bank of England has invested about ÂŁ200
billion.Gonzalez-Paramo also said
stress tests on European banks will cover both liquidity and capital
positions.Stark added â€śno (eurozone)
country will defaultâ€ť on its debts.Bundesbankâ€™s
monthly bulletin said the weak euro may offset fiscal tightening.ECB member Noyer called for â€śrigorousâ€ť
budgetary discipline and said some banks are facing â€śincreasingâ€ť funding
problems.In U.S. news, data to be released tomorrow include May existing
home sales, April house prices, and the June Richmond Fed manufacturing
index.Group of Twenty officials will
convene in Toronto this week and weekend to discuss global policy and could
announce a global bank tax.The Federal
Open Market Committeeâ€™s interest rate decision will be released this week and
many traders believe it will contain its â€śextended periodâ€ť rhetoric to describe
the ongoing accommodation of monetary policy.Euro offers are cited around the US$ 1.2570 level.
The yen depreciated vis-Ă -vis the U.S. dollar today as the
greenback tested offers around the ÂĄ91.45 level and was supported around
the ÂĄ90.25 level. The pair moved higher
after China gave some indication it was moving to liberalize its yuan
currency.Bank of Japan Governor
Shirakawa met Prime Minister Kan overnight ahead of the G20 summit.There is some speculation the government
plans to nearly double its growth projection for the current fiscal year to
2.6% following Januaryâ€™s estimate of 1.4%.Notably, Japanâ€™s economy contracted 2.0% during its last fiscal year and
3.7% the preceding fiscal year.The
government is expected to release new growth estimates as early as tomorrow.BoJ will soon release its June quarterly
survey of consumer sentiment and it is expected to evidence a fifth consecutive
quarter of improved confidence.Also,
big firms are expected to expand capital spending by 4.9% this fiscal year.Data released in Japan overnight saw the
April all-industry activity index climb 1.8% m/m, up from the previous print of
-0.7%.Also, May Nationwide department
store sales were off 2.1% y/y and May Tokyo-area department store sales were
off 1.8% y/y with May convenience store sales off 3.2% y/y.These weak sales data evidence the lack of
final private demand in Japan and the economyâ€™s ongoing bout with
deflation.The Nikkei 225 stock index climbed
2.43% to close at ÂĄ10,238.01.The euro moved higher vis-Ă -vis the yen
as the single currency tested offers around the ÂĄ113.40 level and was supported
around the ÂĄ112.05 level.The British pound moved higher vis-Ă -vis
the yen as sterling tested offers around the ÂĄ136.00 figure while the Swiss franc moved higher vis-Ă -vis
the yen and tested offers around the ÂĄ82.50 level. In Chinese news, the U.S. dollar depreciated vis-Ă -vis the Chinese
yuan as the greenback closed at CNY 6.7969 in the over-the-counter market, down
from CNY 6.8261. The sharp move lower
followed Chinaâ€™s decision to end a two-year U.S. dollar peg ahead of this weekâ€™s
Group of Twenty summit in Toronto.Todayâ€™s
CNY gains were the largest since July 2005 when China revalued the yuan.Notably, the twelve-month non-deliverable
yuan forward rose 1.1% to 6.6425 and this implies traders are speculating on a
2.3% yuan appreciation.Peopleâ€™s Bank of
China reported a stronger yuan will help curb inflation and focus investment on
service industries from export manufacturing industries.Most dealers expect the appreciation will be
relatively gradual with some forecasts calling for about a 4-5% appreciation
this year and around a similar amount next year.During the past two years, Chinese monetary
authorities bought dollars to prevent the yuan from strengthening too
much.The CNY appreciation some 21%
during the three years after China introduced its managed float against a
basket of currencies in July 2005.The
yuan has jumped some 16% vis-Ă -vis the euro this year and that may temper the
yuanâ€™s upside.PBoC is estimated to have
accumulated some US$ 2.4 trillion in foreign reserves while intervening in the
currency markets.If the central bank is
going to intervene less, it may have less U.S. dollars to recycle into U.S.
Treasuries and related investments.PBoC
suggested Chinaâ€™s balance of payments means there is no need for â€ślarge changesâ€ť
in the yuanâ€™s value because it is â€śnot too far from equilibrium levels.â€ťChinaâ€™s current account surplus was around
US$ 297 billion in 2009.A stronger yuan
will likely reduce Chinaâ€™s rate of inflation that measured 3.1% last
month.Todayâ€™s announcement by the
central bank will have bought China time ahead of this weekendâ€™s Group of
Twenty summit in Toronto.
British pound appreciated vis-Ă -vis the U.S. dollar today as cable tested offers
around the US$ 1.4935 level and was supported around the US$ 1.4805 level. Traders await the release of the U.K. Budget
Report tomorrow, especially considering Prime Minister Cameronâ€™s recent fiscal
cuts.Inflation remains above Bank of
Englandâ€™s 2% target rate and is expected to moderate in the medium-term.Cable bids are cited around the US$ 1.4620
level.The euro depreciated vis-Ă -vis the British pound as the single
currency tested bids around the ÂŁ0.8330 level and was capped around the ÂŁ0.8380
franc depreciated vis-Ă -vis the U.S. dollar today as the greenback tested offers
around the CHF 1.1110 level and was supported around the CHF 1.0995 level. Data
released in Switzerland today saw the May M3 money supply up 7.1% y/y and data
to be released tomorrow include the May trade balance.Swiss National Bank today reported that its
foreign currency investments rose to CHF 239 billion in May from CHF 153.6
billion in April, indicative of the significant amount of franc-selling
intervention the central bank has been conducting to protect the Swiss export
sector.Last week, Swiss National Bank
kept its three-month Swiss franc Libor target rate unchanged at 0.25% this week.
Swiss National Bank Chairman Hildebrand effectively eased its stance on the
Swiss franc, saying the risks of deflation have â€ślargely disappeared.â€ťSNB also warned it cannot keep interest rates
at a record low in the medium term without engendering inflation.U.S. dollar offers are cited around the CHF
1.1470 level.The euro appreciated vis-Ă -vis the Swiss franc as the single
currency tested offers around the CHF 1.3765 level while the British pound moved higher vis-Ă -vis the Swiss franc and tested
offers around the CHF 1.6510 level.
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