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Friday October 22, 2010 - 12:41:22 GMT
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Forex Market Commentary and Analysis (22 October 2010)

The euro appreciated vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.3970 level and was supported around the $1.3855 level.  U.S. Treasury Secretary Geithner made news in South Korea overnight when he suggested that Group of Twenty members aim to have current account deficits or surpluses of no more than 4% of their gross domestic product.  Geithner’s proposal is designed to reduce tensions over currency misalignments.  Japanese finance minister Noda reported “setting numerical targets would be unrealistic” while Indian finance minister Mukherjee said caps would be difficult to quantify.  Canadian finance minister Flaherty said the proposal is a “step in the right direction” and Australian Treasurer Swan said it is “constructive.”  There is no indication what would happen if members fail to meet their targets and how and when the goals should be realized.  Additionally, G-20 members have vowed to avoid protectionist trade policies but about 400 trade-related measures have been passed in the previous two years against other members.  All eyes will be focused on South Korea this weekend where Group of Seven and Group of Twenty central bankers and finance ministers will convene to discuss the global economy and exchange rates.  There is widespread talk that major economies are engaged in currency wars and officials will likely press the U.S. to reconfirm its commitment to a strong dollar policy.  The U.S. economy remains mired in an environment of very slow growth and the U.S. dollar’s ongoing weakness is likely contributing to net exports growth at a time when final private demand is lagging.  G-20 leaders will hold a comprehensive summit in Seoul next month.    In addition to exchange rates, policymakers will discuss their fiscal and monetary policies.  In the U.S., St. Louis Fed President Bullard yesterday reported he favours US$ 100 billion in long-term U.S. Treasuries purchases as a policy option the Fed should announce early next month.  Bullard suggested the Fed could give indications about future Treasuries purchases in units of hundreds of billions of dollars.  Many traders believe the Federal Open Market Committee will announce US$ 500 billion in new Treasuries purchases after the next FOMC meeting on 2-3 November.  In contrast, Kansas City Fed President Hoenig warned excessive liquidity can lead to “very bad outcomes,” adding he does not believe the U.S. is in a liquidity trap.  Hoenig also warned that fine-tuning inflation expectations is “highly risky” and reiterated he is “not satisfied” with current employment levels.  Data released in the U.S. yesterday saw the October Philadelphia Fed index increase to 1.0 while September leading indicators came in as expected at +0.3%, up from the revised August reading of 0.1%.  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.  ECB member Noyer said the Fed is “certainly not” trying to weaken the U.S. dollar.  ECB’s Bini Smaghi said the ECB does not agree with all Stability Pact changes and said the eurozone’s economic recovery is consistent with expectations.  ECB member Nowotny said the euro’s currency exchange rates are “relatively high” but said the market needs to remain “relaxed” about short-term moves.  Data released in Germany saw the October Ifo business climate index climb to 107.6 while the October current assessment improved to 110.2 and the expectations index climbed to 105.1.   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 ¥81.00 figure and was capped around the ¥81.35 level.  Bank of Japan Governor Shirakawa reported Group of Seven officials this weekend will discuss exchange rates and the global economy, adding Japanese officials will discuss BoJ policy and the Japanese economy.  U.S. Treasury Secretary Geithner this week said the U.S. dollar would not weaken further against the yen or the euro.  His remarks represented the Obama administration’s attempt to satisfy Group of Twenty counterparts who are demanding U.S. authorities promote a strong dollar policy.  Shirakawa verbally intervened against the yen’s strength this week and Bank of Japan Deputy Governor Nishimura 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.”  Notably, Japanese government bonds were lower for the second consecutive week as traders speculated there is less chance the BoJ will ease policy further.  The BoJ Policy Board next meets on 28 October.   Data released in Japan overnight saw September supermarket sales off 0.3% y/y.  The Nikkei 225 stock index climbed 0.54% to close at ¥9,426.71.  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 ¥113.40 level and was supported around the ¥112.60 level.  The British pound moved lower vis-à-vis the yen as sterling tested bids around the ¥127.05 level while the Swiss franc moved lower vis-à-vis the yen and tested bids around the ¥83.05 level. In Chinese news, the U.S. dollar depreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.6585 in the over-the-counter market, up from CNY 6.6499.   Many data were released in China this week.  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.  Many traders expect China to continue raising interest rates over the next couple of years.  PBoC Governor Zhou cited rising inflation and asset bubble risks.  Chinese officials are likely to face criticism at the Group of Twenty meeting this weekend in Seoul regarding the yuan’s exchange rate. 



The British pound appreciated vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.5750 level and was supported around the US$ 1.5655 level.  Bank of England member Sentance hawkishly said the U.K. economy will weather the largest public spending cuts since World War II and reiterated he favours a gradual rate hike.  The Cameron government made news this week 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. Chancellor of the Exchequer Osborne announced the government’s austerity plan has “some caution built into it and there is of course the freedom for the Bank of England to deploy monetary policy tools as well.”  Many traders expect Bank of England’s Monetary Policy Committee will expand its asset purchase target from its current £200 billion target.   Bank of England’s Trends in Lending report this week noted lenders expect house prices to “remain little changed or to decline slightly in 2011.”   Bank of England Governor King warned the U.K. economy is facing a “sober” decade.   Data released in the U.K. this week 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.  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 £0.8880 level and was supported around the £0.8845 level.





The Swiss franc depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 0.9775 level and was supported around the CHF 0.9660 level.  Swiss National Bank this week reported it sold nearly €30 billion for other currencies in the third quarter following massive franc-selling interventions earlier this year.  Data released in Switzerland this week 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.  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 1.3575 level while the British pound moved higher vis-à-vis the Swiss franc and tested offers around the CHF 1.5335 level.


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