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Friday October 29, 2010 - 15:43:08 GMT
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Forex Market Commentary and Analysis (29 October 2010)

The euro depreciated vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.3805 level and was capped around the $1.3950 level.  Technically, today’s intraday high was just above 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 Q3 gross domestic product up an annualized 2.0% q/q from the prior print of 1.7% and the GDP price index was up 2.3%.  Also, Q3 core PCE ticked lower to +0.8% q/q and the Q3 employment cost index fell to +0.4%.  The October Chicago purchasing manager index improved to 60.6 and final October University of Michigan consumer sentiment ticked lower to 67.7 from the prior print of 67.9.  In eurozone news, the German initiative to suspend European Union voting rights for countries that fail to curb their high deficits failed.  Eurogroup chairman Juncker suggested the sanctions may be considered in the future but German Chancellor Merkel won support from the European Union to rewrite some treaties to create a permanent debt-crisis mechanism by 2013.  The initiative is likely to resuly in a limited treaty change. Germany was the largest contributor to the €860 billion program to provide loans and pledges during this year’s debt crisis.  Notably, Germany’s unemployment rate is now at an eighteen-year low, a stark contrast with other eurozone countries where the jobless rate is well above 10%.  European Central Bank member Weber reported Germany’s deficit may drop below 3% of gross domestic product in 2011.  Data released in the eurozone today saw the EMU-16 flash October consumer price index tick higher to +1.9% y/y while September unemployment remained steady at 10.1%.  Also, German September retail sales were off 2.3% m/m and up 0.4% y/y. 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 ¥80.55 level and was capped around the ¥81.05 level.  Bank of Japan is facing new criticism that it is behind the curve in fighting deflation with economists noting the central bank is unlikely to meet its own guidelines for price stability.  Bank of Japan is now forecasting Japan’s economy will expand 2.1% in the year through March 2011 and 1.8% in the year through March 2012, down from +2.6% and +1.9%, respectively.  BoJ Governor Shirakawa cited the “pessimistic” change in the U.S. economic outlook as the main reason for the downgrade.  Bank of Japan surprised the markets yesterday 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.  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.  Intervention jitters continue to limit the pair’s downside following the government’s massive yen-selling intervention several weeks ago but the government confirmed it did not sell yen in October.  Data released in Japan overnight saw October manufacturing PMI move lower to 47.2.  Also, the September jobless rate ticked lower to 5.0% and September overall household spending moved lower to +0.0% y/y.  Also, the September national consumer price index rose to -0.6% y/y with the ex-food and energy component off 1.5% y/y.  The October Tokyo-are consumer price index climbed +0.3% y/y and the October ex-food and energy measure increased to -0.6% y/y.  Moreover, September industrial production was off 1.9% m/m and up 11.1% y/y.  Finally, September housing starts were up 17.7% y/y to an annualized rate of 837,000 and September construction orders were off 15.0% y/y.  The Nikkei 225 stock index lost 1.75% to close at ¥9,202.45.  U.S. dollar offers are cited around the ¥84.60 level.   The euro moved lower vis-à-vis the yen as the single currency tested bids around the ¥111.50 level and was capped around the ¥112.95 level.  The British pound moved lower vis-à-vis the yen as sterling tested bids around the ¥127.95 level while the Swiss franc moved lower vis-à-vis the yen and tested bids around the ¥81.40 level. In Chinese news, the U.S. dollar depreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.6705 in the over-the-counter market, down from CNY 6.6870.  The yuan appreciated on comments from People’s Bank of China adviser Li Daokui who reported China can withstand a 3% to 5% appreciation of the yuan.  Li also said China should reduce its trade surplus “dramatically.”  Chinese Commerce Minister Chen Deming reported the Fed’s “uncontrolled” issuance of dollars is adding to inflation risks.  Data released in China overnight saw the October MNI business conditions survey decline to 65.03 from the prior reading of 69.54.  Chinese consumer prices are now climbing at their fastest pace in two years, fueled by expectations of additional yuan appreciation and economic growth around 10% per annum.

£

The British pound appreciated vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.5965 level and was supported around the US$ 1.5875 level.  Technically, today’s intraday high was right around the 76.4% retracement of the $1.6105 – 1.5650 range.  Dealers are speculating Bank of England’s Monetary Policy Committee may expand its asset purchase program target by £50 billion, possibly as early as next week.  Bank of England Deputy Governor Bean this week reported investment “has indeed fallen sharply” while MPC member Posen reported economic fundamentals “are sound” and added inflation is not inhibiting the U.K. economic recovery.  Bean also noted the BoE cannot predict economic recessions.  Data released in the U.K. today saw October GfK consumer confidence improve to -19 while September mortgage approvals were up 47,500.  September net consumer credit increased to £300 million and September net lending secured on dwellings fell to £100 million.  Also, the M4 money supply was off 0.2% m/m and up 1.0% y/y.  Cable bids are cited around the US$ 1.5645 level.  The euro depreciated vis-à-vis the British pound as the single currency tested bids around the £0.8680 level and was capped around the £0.8740 level.

CHF

The Swiss franc depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 0.9910 level and was supported around the CHF 0.9825 level.  Technically, today’s intraday high was right at the 38.2% retracement of the CHF 1.0625 – 0.9460 range.  Data released in Switzerland today saw the October KOF Swiss leading indicator decline to 2.17 from the prior reading of 2.20.  Swiss National Bank Chairman Hildebrand this week 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.  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 1.3735 level while the British pound moved higher vis-à-vis the Swiss franc and tested offers around the CHF 1.5790 level.

 

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