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Tuesday October 19, 2010 - 21:11:36 GMT
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Forex Market Commentary and Analysis (19 October 2010)

The euro depreciated sharply vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.3720 level and was capped around the $1.4005 level.  Technically, today’s intraday low was right around the 50% retracement of the $1.3285 – 1.4160 range.  China’s surprise decision to raise interest rates overnight contributed to a round of U.S. dollar short covering across the board and saw the dollar test some short-term resistance.  The greenback had been given for weeks on speculation the Federal Open Market Committee will enact additional monetary easing, possibly to be announced at its 3 November meeting.  Many Fed officials spoke today.  Dallas Fed President Fisher indicated the U.S. economy is expanding near “stall speed” but added “there is abundant liquidity in our economy,” adding the “efficacy of further accommodation using nonconventional policies is not all that clear.”  Chicago Fed President Evans noted “price-level targeting in the current environment would call for a series of large-scale asset purchases to recover the shortfall in inflation.”  New York Fed President Dudley reiterated his statement from 1 October regarding the probable need to take additional action “still stands” on account of unemployment that is “unacceptably high” and inflation that is “too low.”  Minneapolis Fed President Kocherlakota noted banks have “nearly US$ 1 trillion of excess reserves” and added additional easing measures may not boost the economy.  Data released in the U.S. today saw September housing starts up 0.3% m/m to 610,000 annualized units while September building permits were off 5.6% m/m to 539,000 annualized units.  The Fed will released its monthly Beige Book tomorrow.  In eurozone news, EMU-16 data released saw the August current account balance print at -€10.5 billion while the October ZEW survey of economic sentiment fell to +1.8.  Also, EMU-16 August construction spending was off 0.4% m/m and off 8.5% y/y.  German October ZEW economic sentiment worsened to -7.2 while the ZEW current situation sub-index rallied to 72.6.  European Central Bank member Stark described Portuguese austerity measures as “bold.”  ECB member Weber said stricter bank capital rules may restrict credit conditions.  ECB President Trichet said inflation objectines remain “firmly anchored.  Euro bids are cited around the US$ 1.3670 level. 

¥/ CNY

The yen depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥81.90 level and was supported around the ¥81.15 level.  China’s surprise interest rate hike shook up the markets and led to U.S. dollar strength across the board.  Former Bank of Japan official Hirano reported there is “an extreme sense of crisis” at the central bank, adding BoJ “could expand the amount of the asset purchase program.”  Hirano cited the strong yen and an “overseas environment that is worse than the BoJ had been expecting with high downside risks” as factors that have led to additional BoJ easing.  He added the central bank “could expand the amount of the asset purchase program if conditions worsen.” Group of Twenty central bankers and finance ministers will convene in South Korea later this week and will discuss currency rate misalignments.  Some traders believe Japanese monetary authorities will be reluctant to conduct additional yen-selling intervention ahead of the G-20 meetings so as to avert additional criticism.  Japan’s Cabinet Office reduced its monthly economic assessment overnight for the first time in twenty months, citing the yen and a decline in exports and production and noting the overall economy “appears to be pausing recently.”  Data to be released in Japan overnight include the August coincident index, August leading index, and September convenience store sales.  The Nikkei 225 stock index gained 0.43% to close at ¥9,539.45.  U.S. dollar bids are cited around the ¥84.60 level.   The euro moved lower vis-à-vis the yen as the single currency tested bids around the ¥112.65 level and was capped around the ¥113.65 level.  The British pound moved lower vis-à-vis the yen as sterling tested bids around the ¥128.25 level while the Swiss franc moved lower vis-à-vis the yen and tested bids around the ¥83.85 level. In Chinese news, the U.S. dollar appreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.6446 in the over-the-counter market, up from CNY 6.6443.  People’s Bank of China shocked the markets overnight by raising its benchmark one-year lending rate to 5.56% from 5.31% and its deposit rate to 2.5% from 2.25%, its first rate hike since 2007.  Policymakers are clearly trying to reduce China’s asset bubble and reduce lending but there’s a risk that higher interest rates will actually exacerbate the situation by encouraging more inflows.  China continues to struggle absorbing liquidity from last year’s CNY 9.59 trillion credit expansion.  China’s move has broad-reaching implications for the markets and precipitated a round of U.S. dollar-related short covering in the asset markets.  Commodities were also pressured lower on the heels of China’s move.  U.S. Treasury Secretary Geithner yesterday said the yuan is “significantly undervalued.”




The British pound depreciated vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.5680 level and was capped around the US$ 1.5940 level.  Stops were triggered below the US$ 1.5700 figure, representing the 50% retracement of the $1.5295 – 1.6105 range.  Data released in the U.K. today saw October CBI business optimism decline to +2 while the CBI October trends total orders balance worsened to -28 from the prior reading of -17.  Bank of England Governor King today said major economist must agree on a “grand bargain” of policies to rebalance the global economy or face increasing protectionism.  King also said spare capacity could push consumer price inflation below target.  Cable bids are cited around the US$ 1.5645 level.  The euro depreciated vis-à-vis the British pound as the single currency tested bids around the £0.8760 level and was capped around the £0.8825 level.


The Swiss franc depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 0.9755 level and was supported around the CHF 0.9575 level.  Data to be released in Switzerland this week include September trade balance data on Thursday followed by the October ZEW survey.  Last week, Swiss banking giant UBS predicted Swiss National Bank will begin lifting its benchmark interest rate in Q1 2011.  SNB Chairman Hildebrand last week reported “One of the biggest challenges for the global economy is the reduction of imbalances.  It is very important that this adjustment process happens in a cooperative way.  It shouldn’t happen through currency wars.  We should avoid using protectionist instruments to achieve this goal.”  Hildebrand added the risk of deflation in Switzerland was averted in June.  U.S. dollar offers are cited around the CHF 0.9925 level.  The euro appreciated vis-à-vis the Swiss franc as the single currency tested offers around the CHF 1.3450 level while the British pound moved higher vis-à-vis the Swiss franc and tested offers around the CHF 1.5330 level.


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