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Thursday August 12, 2010 - 21:50:27 GMT
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Forex Market Commentary and Analysis (12 August 2010)

The euro depreciated vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.2780 level and was capped around the $1.2930 level.  The common currency continues to move lower following the Federal Open Market Committee’s decision this week to change the composition of its balance sheet by purchasing U.S. Treasuries with proceeds from maturing mortgage-backed securities debt.  Even though the Fed make it very clear its balance sheet would remain unchanged in size at US$ 2.054 trillion, traders liken its decision to reinvest proceeds in the U.S. Treasury market to Japanese-style monetary tactics.  Some Fed-watchers suggest the Fed is merely monetizing U.S. debt, akin to printing money and underwriting the Obama administration’s fiscal programs.  Two-year U.S. Treasury note yields are trading just above 0.50% and 10-year U.S. note yields are trading below 2.75%, all-time lows.  Many investors are reducing their exposure to higher-yielding currencies like the euro and riskier assets like equities as a result.  Today’s intraday low was right around the 50% retracement of the $1.3690 - $1.1875 range.  Technicians are eyeing the $1.2645 level as the pair’s next significant downside target.  Data released in the U.S. today saw the July import price index expand 0.2% m/m and 4.9% y/y.  Also, weekly initial jobless claims moved higher to a multi-week high of 484,000 and continuing jobless claims moved lower to 4.452 million.  Data to be released tomorrow include July consumer prices, July retail sales, June business inventories, and August University of Michigan consumer sentiment.  In eurozone news, data released today saw EMU-16 industrial production decline 0.1% m/m and climb 8.2% y/y.  Ten-year yields on German bunds declined to record lows and there are reports that Eurosystem central banks are purchasing the bonds of Irish banks.  Credit default swaps on Irish debt are now at seventeen-month highs, underscoring the risk of default there.  The European Central Bank’s monthly bulletin was released today and it reiterated the stress tests on banks confirmed the resilience of eurozone institutions to economic and financial shocks.  The ECB also suggested Q3 economic activity may improve and called on member states to “implement credible medium-term consolidation strategies aimed at restoring fiscal sustainability.”  Euro offers are cited around the US$ 1.3240 level. 

¥/ CNY

The yen depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥85.95 level and was supported around the ¥84.90 level. The pair again traded below the psychologically-important ¥85 figure and many traders are loath to short the pair further on concerns Japanese monetary authorities may conduct yen-selling intervention.  Prime Minister Kan described the yen’s recent surge as “rough” and Bank of Japan was reported to be officially checking levels with commercial banks, sometimes a precursor to actual intervention.  Both BoJ Governor Shirakawa and finance minister Noda verbally intervened, saying they are monitoring exchange rates “very closely.” Noda added “excessive and disorderly movements in currencies can be harmful to the stability of the economy and financial markets.”  Many dealers believe Japanese officials will not undertake unilateral yen-selling intervention and report the likelihood of success of such action is relatively slim.  As expected, Bank of Japan kept its economic assessment unchanged today with an official noting “We are carefully watching which direction the market is heading and how market moves affect Japan’s economy, but we haven’t judged that downside risks have increased.” Data released in Japan overnight saw June industrial production decline 1.1% m/m and climb 17.3% y/y while June capacity utilization fell 2.1% m/m.  Also, July consumer confidence ticked lower to 43.4 from 43.6 in June.  The Nikkei 225 stock index lost 0.86% to close at  ¥9,212.59.  U.S. dollar bids are cited around the ¥85.30 level.   The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥110.90 level and was supported around the ¥109.20 level.  The British pound moved higher vis-à-vis the yen as sterling tested offers around the ¥134.65 level while the Swiss franc moved higher vis-à-vis the yen and tested offers around the ¥82.05 level. In Chinese news, the U.S. dollar appreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.7848 in the over-the-counter market, up from CNY 6.7750.  Notably, new mortgage loans in Shanghai were off 98% y/y in July as the government cracked down on property speculation.  These data contributed to the view that the Chinese economy is slowing and the yuan came off.  Data released in China this week saw July money supply aggregates slow, producer prices growth slow to +4.8% y/y, July retail sales growth slow to +17.9% y/y, and   July industrial production growth decelerate to +13.4% y/y. 

£

The British pound depreciated vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.5560 level and was capped around the US$ 1.5710 level.  Cable’s intraday low was right around the 50% retracement of the $1.6875 - $1.4230 range.  Yesterday, Bank of England released its Quarterly Inflation Report in which it projected U.K. inflation will fall well below its 2% inflation target in two years even if interest rates remain at record lows.  BoE cited “highly uncertain” prospects and it appears likely the Monetary Policy Committee will keep rates unchanged for some time.  BoE revised higher its 2011 inflation forecast but now estimates 2012 inflation will be around 1.4%.  Similarly, economic growth is expected to be just above 3% in two years’ time, down from its estimate of  “around” 3.6% in its May Quarterly Inflation Report.  BoE Governor King said the Bank may conduct additional quantitative easing if required and can hold, tighten, or loosen policy.  Data released in the U.K. this week saw July Nationwide consumer confidence decelerate to +56 from the prior reading of +63.  Also, the July claimant count was unchanged at 4.5% with the net change off 3,800 and the ILO unemployment measure steady at 7.8%.  Additionally, June average weekly earnings were up 1.3% y/y.  Cable bids are cited around the US$ 1.5385 level.  The euro appreciated vis-à-vis the British pound as the single currency tested offers around the £0.8265 level and was supported around the £0.8200 figure.

CHF

The Swiss franc appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.0465 level and was capped around the CHF 1.0625 level.  Data to be released in Switzerland tomorrow include July producer and import prices.  Data released in Switzerland this week saw the July SECO consumer confidence measure climb to +16 from the prior reading of +14.  U.S. dollar offers are cited around the CHF 1.0980 level.  The euro depreciated vis-à-vis the Swiss franc as the single currency tested bids around the CHF 1.3460 level while the British pound moved lower vis-à-vis the Swiss franc and tested bids around the CHF 1.6300 figure.

 

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