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Thursday September 16, 2010 - 11:20:00 GMT
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Forex Market Commentary and Analysis (16 September 2010)

The euro appreciated vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.3085 level and was supported around the $1.2975 level.  Stops were reached above the US$ 1.3050 level as traders took out a key technical level and eyed the $1.3120 area as another major upside target.  Traders continue to punish the U.S. dollar on the expectation that U.S. interest rates will continue to move lower.  U.S. bond market giant PIMCO and some U.S. investment banks are forecasting a 10-year U.S. Treasury Note yield of 1.75% in Q1 2011, lower than the current level of 2.72%.  There is growing speculation the Federal Reserve will resort to additional monetary easing measures, perhaps as early as late Q4, that might include another wave of massive asset purchases.  The FOMC noted at its most recent meeting that it would keep the size of its balance sheet around US$ 2.054 trillion and reinvest mortgage bond proceeds into the U.S. Treasury market.  Additional credit easing policies, if enacted by the Fed, could likely have a downward impact on the U.S. dollar and dealers are reducing long dollar exposure now as a result.  Data to be released in the U.S. today include August producer prices, weekly initial jobless claims, continuing jobless claims, the Q2 current account balance, July TICS flows, and the September Philadelphia Fed activity index.  A further improvement in jobless claims might evidence a little bit of traction in the U.S. labour market that is badly needed.  The current account balance is expected to be as wide as –US$ 125 billion.  In eurozone news, data released today saw the EMU-16 July trade balance climb to €6.7 billion from the revised prior reading of €2.2 billion.  Data to be released tomorrow include EMU-16 July current account numbers, EMU-16 July construction figures, and August producer prices.  German Chancellor Merkel is pressing for sanctions against eurozone countries that do not comply with Growth and Stability Pact spending or deficit measures.  European Union leaders met today in Brussels and squabbled over ways to manage the eurozone’s US$ 12 trillion economy.  Euro bids are cited around the US$ 1.2995 level. 

 

¥/ CNY

The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥85.20 level and was capped around the ¥85.75 level.  Today’s intraday range was tight following yesterday’s massive yen-selling intervention by Bank of Japan.  While it is not known how much yen was sold, this represented the country’s first official intervention since March 2004 and there is speculation BoJ may continue to intervene.  Some estimates suggest Japan may have sold as much as ¥1.86 trillion yesterday and if so, this would exceed the previous estimated record of ¥1.66 trillion from 9 January 2004.  The Ministry of Finance will confirm on 30 September how much it expended on intervention.  There was talk yesterday that the intervention would remain unsterilized in Japanese money markets, serving as a de facto monetary easing.  Now that the government has decided to intervene again, its options for additional economic stimulus remain limited given Japan’s bloated financial deficits and an interest rate policy that is already near zero per cent.  Furthermore, the BoJ’s ability to purchase additional Japanese government bonds may already be limited by the amount of national debt on its balance sheet from existing Japanese government bond purchases.  Some traders believe Japan’s interventions, if continued, will remain unilateral because other countries are trying to supplement weak domestic consumption with an improved foreign trade position resulting from weakness in their own currencies.  The Obama administration appears unlikely to join any yen-selling intervention at current levels.  Others believe the central bank’s intervention success will be limited and that the dollar will move lower to test lifetime lows below the psychologically-important ¥80 level.  The Japanese intervention could also precipitate a round of intervention throughout Asian countries, especially in South Korea where the won moved lower on speculation the government may sell won to support the export sector.  The won has gained about 3.2% in September vis-à-vis the U.S. dollar.  Bank of Japan Governor Shirakawa reiterated the central bank is monitoring downside risks to the economy and said Japanese export activity has reached a plateau.  Democratic Party of Japan officials are urging the central bank to convene another emergency meeting now to enact additional easing measures by buying more JGBs.  Data to be released in Japan overnight include August Nationwide department sales and August Tokyo-area department store sales.  The Nikkei 225 stock index was off 0.07% to close at ¥9,509.50.  U.S. dollar bids are cited around the ¥84.60 level.   The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥112.10 level and was supported around the ¥110.65 level.  The British pound moved lower vis-à-vis the yen as sterling tested bids around the ¥132.95 level while the Swiss franc moved lower vis-à-vis the yen and tested bids around the ¥85.00 figure. In Chinese news, the U.S. dollar depreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.7250 in the over-the-counter market, down from CNY 6.7433.  Today’s price activity represents the pair’s all-time low and evidences the Chinese government’s attempt to satisfy U.S. Congressional lawmakers who are calling for trade sanctions against China for not allowing its currency to appreciate enough.  It is being reported that China will impose tougher capital adequacy requirements on its bank, perhaps as much as 15%.  This measure could reduce loan growth to 12% from around 20% now.  Chinese banks made a record US$ 1.4 trillion in new loans last year.

 

£

The British pound depreciated vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.5535 level and was capped around the US$ 1.5645 level.  Data released in the U.K. today saw August retail sales defy expectations by dropping 0.5% m/m and climbing 0.4% y/y, considerably lower than expectations and July’s readings.  Core readings were also lighter-than-expected and these data suggest final private demand in the U.K. may be waning.  Other data saw the CBI September total orders index decline to -17 from the prior reading of -14.  Bank of England and GfK reported their one-year inflation expectations survey is now evidencing higher inflation expectations.  BoE Governor King spoke yesterday and acknowledged the bank made mistakes that led to the financial crisis, adding the economic recovery “will not be straight.” Cable bids are cited around the US$ 1.5115 level.  The euro appreciated vis-à-vis the British pound as the single currency tested offers around the £0.8390 level and was supported around the £0.8310 level.

 

CHF

The Swiss franc appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 0.9995 level and was capped around the CHF 1.0035 level.   Swiss National Bank’s interest rate decision will be released today and most economists believe its three-month franc Libor target rate will remain unchanged at 0.25%.  Traders are curious to see if SNB Chairman Hildebrand makes any comments about the franc’s resurgent strength given the dollar’s move below parity.  The euro is up from a recent low of CHF 1.2765 and this may limit Hildebrand’s comments about exchange rates.  Data released in Switzerland today saw Q2 industrial production up 5.7% q/q and 7.8% y/y.  As expected, the Swiss government overnight raised its economic growth forecast for this year and now sees GDP growth of 2.7% in 2010, up from the previous forecast of 1.8% from June.  The government also sees 2011 GDP growth of 1.2%, down from the previous forecast of 1.6%.  U.S. dollar offers are cited around the CHF 1.0290 level.  The euro appreciated vis-à-vis the Swiss franc as the single currency tested offers around the CHF 1.3120 level while the British pound moved lower vis-à-vis the Swiss franc and tested bids around the CHF 1.5580 level.

 

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