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Tuesday August 17, 2010 - 20:32:40 GMT
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Forex Market Commentary and Analysis (17 August 2010)

The euro appreciated vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.2915 level and was supported around the $1.2805 level.  The common currency stopped short of testing the $1.2930 level, representing the 50% retracement of the move from $1.2525 to $1.3335.  Minneapolis Fed President Kocherlakota reported a “modest” U.S. economic recovery is under way and said the markets may have concluded the economy is weaker than is actually the case based on the Federal Open Market Committee’s policy statement dated 10 August.  Kocherlakota also said unemployment is likely to exceed 8% into 2012 and said “persistent deflation” is unlikely.  The Fed today purchased US$ 2.551 billion in Treasuries in its first outright purchase of U.S. government debt since October.  St. Louis Fed President Bullard is said to support asset purchases if inflation declines more.   Data released in the U.S. today saw the July producer price index climb 0.2% m/m and 4.2% y/y at the headline level and 0.3% m/m and 1.5% y/y at the ex-food and energy level.  Also, July housing starts were up 1.7% m/m to an annualized 546,000 and July building permits were off 3.1% m/m to an annualized 565,000.  Additionally, July industrial production was up 1.0% and capacity utilization ticked higher to 74.8%.  MBA mortgage applications data will be released tomorrow.  In eurozone news, data released today saw the EMU-16 June current account narrow to -€4.6 billion from the prior reading of -€7.4 billion.  Also, the EMU-16 August ZEW survey of economic sentiment improved to 15.8 from the prior reading of 10.7.  Also, the German August ZEW economic sentiment index declined to 14.0 from the prior reading of 21.2 while the current situation index improved to 44.3.  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 ¥85.65 level and was supported around the ¥85.10 level.  The pair retraced some of yesterday’s losses as risk appetite approved overnight, culminating in less demand for yen, selling pressure on U.S. Treasuries, and solid gains in U.S. equity markets.  Economics minister Arai confirmed the Japanese government will deliberate new fiscal stimulus measures on Friday.  Japan’s ability to increase fiscal spending is restrained by the highest debt-to-gross domestic product ratio among industrialized countries.  Some dealers are already speculating Bank of Japan could ease policy further if the government increases fiscal spending also.  A coalition member of Kan’s coalition government, The People’s New Party, is requesting an economic stimulus package valued around ¥11 trillion.  Traders are still talking about the possibility of actual yen-selling intervention by Japanese monetary authorities.  Former MoF official “Mr Yen” Sakakibara cautioned “Without the support of the United States, intervention on the part of the Japanese government wouldn’t be effective.”  He added “The Bank of Japan could do a little to ease monetary policy further, to buy government bonds and provide liquidity.  Japanese monetary policy is already quite easy, so additional easing really wouldn’t have much of an impact on the exchange rate.”  Speaking about the exchange rate, he added “In real terms the yen is not really that strong compared to 1995 when it broke 80. The real rate we have now, even at 80, is much, much weaker.  Eighty in 1995 is comparable to 60 or 70 today so we shouldn’t be too much worried about the yen being 85 or 80 at this moment.  In 1995, we were in crisis.  Now, given the fact that the U.S. economy is faltering and the Japanese economy is doing relatively better, I think this situation is not what you call a crisis situation.  We have not seen any explicit exit from the euro crisis, so I think this crisis would prolong and it may spread beyond Greece to Spain, Portugal and the rest of Europe.  As far as euro-yen is concerned, I think it is quite possible that euro-yen would break 100.”  Prime Minister Kan and BoJ Governor Shirakawa will convene a meeting on 23 August.  The Nikkei 225 stock index lost 0.38% to close at ¥9,161.68.  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 ¥110.40 level and was supported around the ¥109.05 level.  The British pound moved lower vis-à-vis the yen as sterling tested bids around the ¥133.05 level while the Swiss franc moved lower vis-à-vis the yen and tested bids around the ¥81.70 level. In Chinese news, the U.S. dollar depreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.7920 in the over-the-counter market, down from CNY 6.8073.  Data released in China overnight saw July actual foreign direct investment up 29.2% y/y.  Government official Zhang Ming reported China will continue to reduce its holdings of U.S. Treasuries.  China reported it will permit overseas financial institutions to invest in the domestic yuan interbank bond market.  Central Huijin Investment Co plans to sell CNY 54 billion of bonds on 24 August. 

£

The British pound depreciated vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.5550 level and was capped around the US$ 1.5695 level.  Data released in the U.K. today saw July consumer price inflation off 0.2% m/m and up 3.1% y/y, down from June’s +3.2% y/y level.  Core CPI growth decelerated to +2.6% y/y from the prior level of +3.1% and these data are consistent with Bank of England projections that speculated price pressures may begin to abate.  Minutes from Bank of England’s August Monetary Policy Committee meeting will be released tomorrow and traders will be curious to see if there was a three-way split in voting this month.  BoE Governor King today told Chancellor Osborne that he is “surprised” by the recent elevated level of inflation and warned headline inflation may continue to print above 3.0% for some time.  King also reiterated the central bank is prepared to expand or reduce monetary stimulus as required.  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 £0.8275 level and was supported around the £0.8185 level.

CHF

The Swiss franc depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.0445 level and was supported around the CHF 1.0360 level. Data to be released on Thursday include July trade balance numbers and the August Credit Suisse ZEW survey.  Swiss National Bank verbally intervened late last week saying the central bank would intervene if price stability is threatened, adding the SNB was successful in averting deflation through its massive franc-selling interventions.  Swiss National Bank today reported a CHF 2.78 billion loss for the first half of the year on account of a decrease in the value of its foreign currency reserves.  SNB’s euro reserves tripled in the first half of the year as the central bank conducted significant franc-selling intervention.  U.S. dollar offers are cited around the CHF 1.0980 level.  The euro appreciated vis-à-vis the Swiss franc as the single currency tested offers around the CHF 1.3455 level while the British pound moved lower vis-à-vis the Swiss franc and tested bids around the CHF 1.6220 level.

 

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