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Thursday October 21, 2010 - 13:09:14 GMT
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Forex Market Commentary and Analysis (21 October 2010)

The euro appreciated vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.4050 level and was supported around the $1.3870 level. Technically, today’s intraday high was right around the 76.4% retracement of the $1.4160 – 1.3695 range.  Australasian dealers initially pushed the pair lower following comments from U.S. Treasury Secretary Geithner who reported the dollar would not fall further relative to the euro.  Most dealers viewed his comments as verbal intervention and not a threat that U.S. monetary authorities might consider an actual U.S. dollar-buying intervention.  Traders will focus on this weekend’s meeting of Group of Twenty central bankers and finance ministers in South Korea.  Exchange rate misalignments will be a major discussion topic this weekend, especially as the level of global currency intervention has increased dramatically.  The U.S. dollar has been on the defensive for weeks as traders speculate the Federal Reserve will vote to expand its balance sheet at the November Federal Open Market Committee meeting.  A likely scenario involves the purchase of US$ 500 billion in Treasury securities by the middle of next year, possibly with a statement it is prepared to purchase more assets if need be.  The possible adoption of an inflation target by the Fed has been discussed by Fed Chairman Bernanke but many dealers do not believe this will be implemented at the next FOMC meeting.  While a Fed decision to purchase more assets is likely, it is not a foregone conclusion.  Fed officials Lacker, Hoenig, Plosser, and Fisher have expressed skepticism that additional easing would lead to a significant improvement in U.S. unemployment. Data released in the U.S. today saw weekly initial jobless claims decline to +452,000 while continuing jobless claims came in at +4.441 million.  Data to be released later in the North American session include September leading indicators and the October Philadelphia Fed index.  In eurozone news, European Central Bank President Trichet is said to oppose some of the elements of new European Union fiscal rules that have been agreed to by Germany and France.  The new plans calls for tougher sanctions against member countries that violate spending rules.  Data released in the eurozone today saw the EMU-16 October PMI composite fall to 53.4 with manufacturing PMI higher at 54.1 and services PMI lower at 53.2.  October EMU-16 consumer confidence will be released later during the North American session.  German manufacturing PMI rose to 56.1 with services PMI higher at 56.6.  French production and business confidence improved in October while manufacturing PMI fell to 55.2 and services PMI fell to 55.3.  Euro bids are cited around the US$ 1.3670 level. 

¥/ CNY

The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥80.90 level and was capped around the ¥81.80 level.  The pair gained ground during the Australasian session after U.S. Treasury Secretary Geithner was quoted as saying the U.S. dollar would not weaken further against the yen or the euro.  His remarks represent the Obama administration’s attempt to satisfy Group of Twenty counterparts who are demanding U.S. authorities promote a strong dollar policy.  Chief Cabinet Secretary Sengoku reported the Prime Minister and finance minister “have held talks about the rising yen…it wasn’t about whether ¥82 was the line, but that the Finance Ministry will monitor the currency markets and we’ll take decisive measures appropriately at an appropriate timing.”  Finance minister Noda reported Japan’s economy can grow by upgrading the country’s infrastructure and said Japan needs to balance its fight against deflation with fiscal policy.  Bank of Japan Governor Shirakawa verbally intervened against the yen’s strength overnight and Bank of Japan Deputy Governor Nishimura verbally intervened verbally intervened this week, saying “The fact that the recent yen appreciation is causing a deterioration of business sentiment is a big factor in putting downward pressure on economic activity.  There is a risk that the yen’s appreciation will lower consumer prices not only through worsening economic activity but also through changes in import prices.”  Data released in Japan overnight saw the August all-industry activity index reverse course and fall 0.4% m/m.  The Nikkei 225 stock index lost 0.05% to close at ¥9,376.48.  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 ¥113.90 level and was supported around the ¥112.80 level.  The British pound moved lower vis-à-vis the yen as sterling tested bids around the ¥127.50 level while the Swiss franc moved higher vis-à-vis the yen and tested offers around the ¥83.85 level. In Chinese news, the U.S. dollar depreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.6499 in the over-the-counter market, up from CNY 6.6526.  Many data were released in China overnight.  First, Q3 real gross domestic product was up 9.6% y/y, down from the prior 10.3% y/y reading. Second, September producer prices were up 4.3% y/y, matching the August reading.  Third, the September consumer price index ticked higher to 3.6% y/y.  Fourth, September retail sales were up 18.8% y/y.  Firth, September industrial production slowed to +13.3% y/y.  This week, People’s Bank of China shocked the markets 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.  Yields on three-month bills climbed today for the first time since June.



The British pound depreciated vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.5725 level and was capped around the US$ 1.5850 level.  The Cameron government made news yesterday when it reported it would slash as many as 500,000 government jobs in a bid to reduce government spending by as much as £8 billion.  Bank of England Governor King warned the U.K. economy is facing a “sober” decade.  Data released in the U.K. today saw September mortgage approvals print at +44,000.  Also, September headline retail sales were off 0.2% m/m and up 0.5% y/y with the ex-auto fuel component up 0.0% m/m and 1.8% y/y.  Minutes from the MPC’s October meeting were released this week and they reported “Some of the members felt the likelihood that further monetary stimulus would become necessary in order to meet the inflation target in the medium term had increased in recent months.”  MPC member Posen requested additional bond purchases and MPC member Sentance voted for an interest rate increase.  Many dealers believe the MPC will enact additional quantitative easing, possibly as early as next month.  Additional easing could take the form of an expansion in the MPC’s current £200 billion asset purchase plan.  MPC member Weale said second half economic growth is likely to decelerate but added it will not necessarily result in a double-dip recession.  Cable bids are cited around the US$ 1.5645 level.  The euro appreciated vis-à-vis the British pound as the single currency tested offers around the £0.8905 level and was supported around the £0.8770 level.


The Swiss franc depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 0.9680 level and was supported around the CHF 0.9610 level.  Data released in Switzerland today saw the September trade balance climb to CHF 1.69 billion while the September M3 money supply was up 6.8% y/y.  Notably, the October Credit Suisse ZEW expectations survey fell sharply to -27.5 from the prior reading of -5.1.  Swiss National Bank reported currency holdings declined in the third quarter.  Some investment banks are reporting the Swiss franc’s price activity is reacting more to Swiss National Bank’s inflation forecasts than the central bank’s CHF 171 billion in interventions.  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 1.3530 level while the British pound moved lower vis-à-vis the Swiss franc and tested bids around the CHF 1.5145 level.


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