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Monday October 25, 2010 - 13:56:23 GMT
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Forex Market Commentary and Analysis (25 October 2010)

The euro appreciated vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.4080 level and was supported around the $1.3935 level.  Group of Twenty central bankers and finance ministers convened in South Korea this weekend and vowed to refrain from “competitive devaluation” and to let exchange rates be determined by market forces.  Global tensions have been heightened in recent weeks as criticisms mounted that certain countries have been pursuing cheaper currencies to stimulate growth.  G-20 officials failed to embrace a proposal from U.S. Treasury Secretary Geithner that called for a 4% maximum current account balance relative to economic output in major industrialized countries.  Nonetheless, G-20 officials did pledge to seek lower current account deficits and much of their focus was directed to China in a bid to make that country’s yuan currency stronger.  Many dealers do not believe this weekend’s Group of Twenty meeting will end up having a major impact on exchange rates as there were no new major announcements.  Short-term directions in exchange rates are likely to be impacted by the Federal Open Market Committee meeting on 2-3 November followed by the run-up to the G-20 summit of global heads of state in South Korea in November.  G-20 officials this weekend called the global economic recovery “fragile and uneven” and endorsed a plan to render the International Monetary Find more accountable to developing nations.  Many traders believe the Federal Open Market Committee will announce US$ 500 billion in new Treasuries purchases after the next FOMC meeting on 2-3 November while some expect the Fed could purchase as much as US$ 100 billion in debt per month.  Data released in the U.S. today saw the September Chicago Fed national activity index worsen to -0.58 from the prior reading of -0.49.  Other data to be released today include September existing home sales and October Dallas Fed manufacturing activity.  Fed Chairman Bernanke said U.S. regulators are “intensively” reviewing foreclosures.   In eurozone news, data released today saw eurozone August industrial new orders climb 5.3% m/m and 24.4% y/y.  Data to be released in Germany tomorrow include the November GfK consumer confidence survey and September import price index along with French jobseekers data and French October consumer confidence.   German Economy minister Bruederle was openly critical of the Fed’s plan to ease policy further, noting “excessive, permanent money creation in my opinion is an indirect manipulation of an exchange rate.”  European Central Bank President Trichet remains critical of a German and French plan to safeguard economies in the eurozone through fiscal reforms aimed at penalizing excessive borrowing, suggesting the reforms are insufficient.  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 ¥80.40 level and was capped around the ¥81.45 level.  Bank of Japan’s Policy Board convenes this week and many traders believe the central bank will keep monetary policy unchanged.  At its last Policy Board meeting, BoJ reduced rates to near zero per cent and pledged to purchase ¥5 trillion in financial assets.  Some BoJ-watchers believe the central bank may consider purchase BBB-rated corporate bonds and commercial paper at its meeting this week.  Additionally, the BoJ will this week update its forecasts for economic growth and inflation for fiscal years 2010 and 2011 at this week’s meeting.  Moreover, the central bank will publish forecasts for the year ending March 2013 this week and economists are curious to see if policymakers will forecast deflation through that period.  BoJ officials are expected to not downgrade their consumer price inflation forecasts to a negative number for the next fiscal year.  Notably, the central bank is forecasting consumer prices excluding fresh food will decrease 0.4% in the current fiscal year.  Economic minister Kaieda reported the central bank may consider purchasing foreign currency-denominated assets.  Finance minister Noda reported the Group of Twenty did not discuss individual members’ currency policies at this weekend’s meeting, adding Japan’s stance on exchange rates has not changed.  Noda verbally intervened again, reiterated Japan is “ready to take bold action” on currencies.  Data released in Japan overnight saw the September trade balance total increase to ¥797 billion from the revised prior reading of ¥86.0 billion.  The Nikkei 225 stock index lost 0.27% to close at ¥9,401.16.  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 ¥112.85 level and was capped around the ¥113.75 level.  The British pound moved lower vis-à-vis the yen as sterling tested bids around the ¥126.45 level while the Swiss franc moved lower vis-à-vis the yen and tested bids around the ¥82.90 level. In Chinese news, the U.S. dollar depreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.6583 in the over-the-counter market, down from CNY 6.6585.  People’s Bank of China adviser Xia Bin reported there is ongoing pressure to raise interest rates further. 

£

The British pound appreciated vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.5770 level and was supported around the US$ 1.5660 level.  Bank of England released a report on third quarter asset purchase facilities and noted corporate funding markets “continued to stabilize.”  BoE Monetary Policy Committee member Tucker said the economic recovery remains “uneven” and added the central bank’s mandate is to make sure the U.K. economy “doesn’t slip back into a recession.”  The big question on traders’ minds is whether or not Bank of England will expand monetary policy further, possibly by announcing the purchase of additional assets.  BoE’s asset purchase target is currently £200 billion and there is speculation the central bank may opt to purchase more assets, possibly as early as next month.  Last week, Bank of England member Sentance hawkishly said the U.K. economy will survive the largest public spending cuts since World War II and reiterated he favours a gradual rate hike.  The Cameron government made news last 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.”  Bank of England Governor King last week warned the U.K. economy is facing a “sober” decade.  Data released in the U.K. today saw September BBA loans for house purchases come in less-than-expected.  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 £0.8940 level and was supported around the £0.8885 level.

 

CHF

The Swiss franc appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 0.9660 level and was capped around the CHF 0.9785 level.  Technically, today’s intraday high was just above the 38.2% retracement of the CHF 1.0275 – 0.9460 range.  Swiss National Bank last 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 last 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.  Swiss banking giant UBS recently predicted Swiss National Bank will begin lifting its benchmark interest rate in Q1 2011.  SNB Chairman Hildebrand recently 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 depreciated vis-à-vis the Swiss franc as the single currency tested bids around the CHF 1.3595 level while the British pound moved lower vis-à-vis the Swiss franc and tested bids around the CHF 1.5345 level.

 

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