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Thursday October 28, 2010 - 18:31:36 GMT
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Forex Market Commentary and Analysis (28 October 2010)

The euro depreciated vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.3770 level and was capped around the $1.3880 level. Technically, today’s intraday high was right around the 76.4% retracement of the $1.5140 – 1.1875 range.  Traders continue to speculate as to the size and timing of the Federal Reserve’s next round of monetary stimulus, dubbed “QE2” for a second round of quantitative easing.  Some traders believe the Federal Open Market Committee will next week announce US$ 500 billion in new purchases of U.S. Treasuries securities while others believe the Fed may purchase US$ 100 billion monthly and expand its balance sheet by as much as US$ 2 trillion.  Some economists are speculating the Fed’s policy may be a little more gradualist than the financial markets are currently anticipating and traders who are embracing this view are buying back U.S. dollars.   New York Fed President Dudley reported the U.S. will continue to face a “long and bumpy” economic recovery and reiterated additional monetary stimulus is “likely to be warranted.”  Data released in the U.S. today saw weekly initial jobless claims fall to 434,000 from the the revised prior print of 455,000 while continuing jobless claims call to 4.356 million from the revised prior print of 4.478 million.  Many data will be released tomorrow including Q3 gross domestic product and final University of Michigan consumer sentiment.  In eurozone news, the common currency remains pressured on renewed evidence the eurozone sovereign credit crisis is far from over.  Greek finance minister Papaconstantinou reported a decline in tax revenue is limiting the government’s ability to reduce the deficit.  As a result, Greek debt has soared to above 10%.  Portugal’s government and the main opposition party ended talks related to the largest planned budget cuts in more than 30 years.  European Central Bank member Honohan reported Ireland’s fiscal deterioration is worse than most other countries.  Bank of Ireland, Ireland’s largest bank, yesterday paid a premium to sell the first public benchmark bond by an Irish government-guaranteed lender in six months, evidencing the lack of confidence that investors continue to exhibit.  ECB President Trichet yesterday said the central bank’s bond purchase program has not changed and today said it is better to reduce spending than raise taxes.  Trichet also noted eurozone banks have been seeking less liquidity from the ECB and cited ongoing foreign exchange volatility.  ECB member Stark warned again that keeping rates too low for too long poses risks.  German Chancellor Merkel is facing stiff opposition across the European Union for her calls to remove EU voting rights from high deficit countries.  ECB member Weber said German economic growth is based on increasing domestic demand.  Data released in the eurozone saw EMU-16 September M3 money supply growth tick lower to +1.0% y/y.  Also, the EMU-16 October business climate indicator moved higher and economic confidence and industrial confidence both increased.  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 ¥80.85 level and was capped around the ¥81.75 level. Technically, today’s intraday low was above the 76.4% retracement of the ¥80.40 – 81.95 range.  Bank of Japan roiled the markets overnight with its announcement that it is accelerating the date of its next Policy Board meeting to 4-5 November, right after the Federal Open Market Committee meeting on 2-3 November.  This is a firm indication the BoJ is increasing its flexibility so that it can be responsive to the likely monetary easing the Fed will announce on 3 November.  BoJ also reported it will purchase corporate debt with lower credit ratings than it previously purchased, including BBB rated corporate bonds and some commercial paper.  Notably, the central bank also kept its consumer price inflation forecast unchanged at 0.1% for the fiscal year starting April 2011 with a 0.6% increase for the following year.  The BoJ also speculated the yen’s ongoing strength will result in “lingering effects” on economic growth next year.  At its prior Policy Board meeting, BoJ moved its overnight call rate target to a range of 0% to 0.1% and announced new plans to purchase ¥5 trillion in assets including Japanese government bonds, exchange-traded funds, and real estate investment trusts.  Bank of Japan Deputy Governor Nishimura this week cautioned against too many financial reforms, saying “Balance sheet adjustments in the United States and Europe are still underway, and many advanced economies are facing the zero lower bound on short-term interest rates, as well as the need for fiscal consolidation.  Under these conditions, it is essential for us to be especially wary that the regulatory reforms currently under discussion do not undermine the recovery of the global economy as a whole.”  Intervention jitters continue to limit the pair’s downside following the government’s massive yen-selling intervention several weeks ago.  Data released in Japan saw September retail trade off 3.0% m/m and up 1.2% y/y while September large retailers’ sales ticked higher to -1.7%.  Many data will be released overnight including consumer price inflation and employment numbers.    The Nikkei 225 stock index lost 0.22% to close at ¥9,366.03.  U.S. dollar offers are cited around the ¥84.60 level.   The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥112.90 level and was supported around the ¥112.15 level.  The British pound moved higher vis-à-vis the yen as sterling tested offers around the ¥129.35 level while the Swiss franc moved lower vis-à-vis the yen and tested bids around the ¥82.15 level. In Chinese news, the U.S. dollar appreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.6870 in the over-the-counter market, up from CNY 6.6805.  Chinese Commerce Minister Chen Deming reported the Fed’s “uncontrolled” issuance of dollars is adding to inflation risks.  The October MNI business conditions survey will be released overnight.    

£

The British pound appreciated sharply vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.5975 level and was supported around the US$ 1.5760 level.  Stops were triggered above the $1.5915 level, representing the 23.6% retracement of the $1.5295 – 1.6105 range.  Bank of England Deputy Governor Bean this week reported investment “has indeed fallen sharply” while MPC member Posen reported economic fundamentals “are sound” and added inflation is not inhibiting the U.K. economic recovery.  Bean also noted the BoE cannot predict economic recessions.  The markets were stunned this week when it was reported that Q3 gross domestic product came in stronger-than-expected at +0.8% q/q and +2.8% y/y.   The quarterly increase was twice what was expected and sterling appreciated sharply on the news as traders speculated Prime Minister Cameron’s fiscal austerity measures did not have much of a negative output on overall economic output last quarter.  Data released in the U.K. today saw October Nationwide house prices off 0.7% m/m and up 1.4% y/y while October CBU reported sales fell sharply to +36 from the prior level of +49.  Cable bids are cited around the US$ 1.5645 level.  The euro depreciated vis-à-vis the British pound as the single currency tested bids around the £0.00 figure and was capped around the £0.8770 level.

CHF

The Swiss franc appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 0.9815 level and was capped around the CHF 0.9905 level.  Technically, today’s intraday high was right at the 38.2% retracement of the CHF 1.0625 – 0.9460 range.  Swiss National Bank Chairman Hildebrand warned “The longer monetary policy remains expansive, the greater the risk that it will have undesirable consequences.  Already there are some warning signs. Especially on the real estate market there’s a risk of imbalances if rates are maintained at a very low level for a long period of time.”  Hildebrand reported monetary policy cannot resolve all problems while SNB member Danthine warned Swiss economic growth will be hurt by the franc’s strength.  Data released in Switzerland this week saw the September UBS consumption indicator decline to 1.698 from the revised prior reading of 1.945.  This represented the index’s lowest print in six months and indicates the Swiss economic recovery may be facing headwinds.  UBS reported “Low interest rates and an improvement in the labour market, as we all as the ongoing strong increase in the permanent resident population, should continue to support private consumption.”  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 1.3705 level while the British pound moved higher vis-à-vis the Swiss franc and tested offers around the CHF 1.5735 level.

 

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