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Wednesday June 23, 2010 - 18:33:54 GMT
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Forex Market Commentary and Analysis (23 June 2010)

The euro depreciated vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.2210 level and was capped around the $1.2305 level.  As expected, the Federal Open Market Committee voted to keep its federal funds target rate between 0% and 0.25% The FOMC reported “Information received since the Federal Open Market Committee met in April suggests that the economic recovery is proceeding and that the labor market is improving gradually. Household spending is increasing 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 continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad. Bank lending has continued to contract in recent months. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be moderate for a time.  Prices of energy and other commodities have declined somewhat in recent months, and underlying inflation has trended lower. 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. 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.”  Kansas City Fed President Hoenig dissented, arguing that “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 a build-up of future imbalances and increase risks to longer-run macroeconomic and financial stability, while limiting the Committee’s flexibility to begin raising rates modestly.”  Some traders are speculating the Fed will not raise rates until 2011 on account of ongoing unemployment trends while more dovish Fed-watchers are speculating the Fed may not lift rates until 2012.  The Fed’s most recent forecasts are predicting the unemployment rate will end 2010 around 9.1% and 9.5% and decline between 8.1% and 8.5% next year.  The Fed now sees the “longer run” unemployment rate to be between 5.0% and 5.3% and currently see the “longer run” PCE inflation rate to be between 1.7% and 2.0% with inflation not reaching the upper end of that rate until 2012.  Data released in the U.S. today saw MBA mortgage applications decline in the latest week by 5.9% while May new home sales were off a surprising 32.7% m/m to 300,000 annualized units, down from the downwardly-revised 446,000 annualized units in April.  This decrease was not expected but the downturn could worsen if the U.S. government does not announce new homebuyer subsidies or tax credits.  Data to be released tomorrow include May durable goods orders and weekly initial jobless claims.  A statement written by Philadelphia Fed President Plosser was published today in which he notes “Rather than seek ways to politicize the Fed, we should seek ways to ensure its independence from short-term political pressures while reducing the temptation to use the central bank as an inappropriate tool for conducting fiscal policy.”  Plosser warned the Fed’s purchase of US$ 1.25 trillion in mortgage-backed securities could be “viewed as a form of fiscal policy.”  In eurozone news, data released today saw EMU-16 June PMI services index tick lower to 55.4 while the PMI manufacturing index ticked lower to 55.6 and the composite index fell to 56.0.  The German July GfK consumer confidence survey remained steady at 3.5 and both German PMI services and manufacturing indices were lower.  Additionally, French June business confidence was lower and both June PMI services and manufacturing moved lower.  Collectively, these PMI data for the eurozone evidence a moderation in economic activity.  Famed currency trader Soros reported Germany is “endangering the European Union” and has brought European Union integration to a “screeching halt.” Portuguese banks’ financing activities at the European Central Bank doubled in May to €35.8 billion, reflective of some of the stresses they are undergoing.  The ECB reported its €60 billion covered bond purchase program is nearing completion as the amount purchased as of yesterday totaled €59.283 billion.  Euro offers are cited around the US$ 1.2570 level. 

¥/ CNY

The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥90.15 level and was capped around the ¥90.60 level.  Bank of Japan Deputy Governor Nishimura reported Europe’s sovereign debt crisis continues to require “sufficient attention” and added Japan’s economy remains on a “moderate” recovery path.  He added overcoming deflation remains a “critical challenge” for the central bank and cited capital spending as a positive improvement.  Moody’s this week affirmed its AA2 rating on Japan and maintained its stable outlook on the country.  There is some speculation the government plans to nearly double its growth projection for the current fiscal year to 2.6% following January’s estimate of 1.4%.  Notably, Japan’s economy contracted 2.0% during its last fiscal year and 3.7% the preceding fiscal year.  Many data will be released in today tonight include May foreign trade and the May corporate service price index.  The Nikkei 225 stock index lost 1.87% to close at ¥9,923.70.   The euro moved lower vis-à-vis the yen as the single currency tested bids around the ¥110.60 level and was capped around the ¥111.35 level.  The British pound moved higher vis-à-vis the yen as sterling tested offers around the ¥134.95 level while the Swiss franc moved lower vis-à-vis the yen and tested bids around the ¥81.25 level. In Chinese news, the U.S. dollar appreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.8140 in the over-the-counter market, up from CNY 6.8130. The yuan has retained some of the gains it earned this week following People’s Bank of China’s decision to eventually end its two-year peg to the U.S. dollar and internationalize the yuan.  China’s move to liberalize the yuan should help to counter inflationary pressures and cause China to rely less on foreign trade and focus more on domestic final private demand.  Group of Twenty officials will meet with President Hu in Toronto this week.  Notably, inflation printed at 3.1% in May, above the government’s target of 3.0%.  May industrial profits data will be released tomorrow along with June PMI business conditions.


The British pound appreciated vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.4940 level and was supported around the US$ 1.4800 figure.  Minutes from Bank of England’s June Monetary Policy Committee meeting were released today and they evidenced a 7-to-1 vote to keep the benchmark interest rate unchanged at 0.5%.  MPC member Sentance favoured a 25bps tightening to 0.75%, noting that inflation has proven to be “resilient” since the end of the recession.  In contrast to Sentance’s position, “other members thought that changes to the balance of risks were insufficient to warrant a change in the stance.” U.K. consumer price inflation reached a seventeen-month high in April. Sterling reacted to the surprise vote by moving higher on expectations there could be more members voting for higher rates in the future.  Data released in the U.K. today saw May BBA loans for house purchases climb higher to £36.7 billion.  Also, the June CBI distributive trades survey balance improved to -5 from -18 in May, evidencing stronger retail sales activity.  Cable bids are cited around the US$ 1.4620 level.  The euro depreciated vis-à-vis the British pound as the single currency tested bids around the £0.8215 level and was capped around the £0.8285 level.


The Swiss franc depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.1135 level and was supported around the CHF 1.1050 level.  Swiss National Bank will publish its quarterly bulletin on Friday.  Data released in Switzerland this week saw the May trade balance decline sharply to CHF 820 million from the upwardly-revised April total of CHF 2.06 billion.  This decline reflects the impact of the strong franc and the limited success Swiss National Bank has had in blunting the impact of the stronger franc through euro-buying intervention.  SNB member Jordan this week said deflation risks have largely gone away and said there is currently no need for intervention.  Swiss National Bank this week 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.  U.S. dollar offers are cited around the CHF 1.1470 level.  The euro appreciated vis-à-vis the Swiss franc as the single currency tested offers around the CHF 1.3610 level while the British pound moved higher vis-à-vis the Swiss franc and tested offers around the CHF 1.6560 level.


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