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Friday November 5, 2010 - 18:15:03 GMT
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Forex Market Commentary and Analysis (5 November 2010)

The euro depreciated sharply vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.4030 level and was capped around the $1.4250 level.  Stops were triggered below the $1.4170 level, representing the 38.2% retracement of the $1.3730 – 1.4280 range.  The sharp move lower followed the release of better-than-expected U.S. October non-farm payrolls data that saw 151,000 jobs created last month, up from the upwardly-revised -41,000 September total.  Private payrolls expanded 159,000, up from the upwardly-revised 107,000 in September, and the unemployment rate remained steady at 9.6%.  Notably, the labour participation rate fell to a 25-year low of 64.5%, evidencing the decline in workers who continue to look for full-time employment.  Also, October average hourly earnings were up 0.2% m/m and 1.7% y/y while October average weekly hours worked ticked higher to 34.3.  Additionally, September pending home sales data came in weaker-than-expected at -1.8% m/m and -24.9% y/y.  September consumer credit data will be released later during the North American session.  Traders will pay close attention to remarks from Federal Reserve Chairman Bernanke and other Fed officials today and tomorrow.  The Fed is receiving a lot of criticism to expand its quantitative easing program this week by purchasing US$ 600 billion in U.S. Treasuries.  Critics maintain the Fed will unlikely be able to materially improve the U.S. unemployment rate, stimulate economic growth, and create inflation with its latest credit expansion program.  Global leaders will convene in South Korea next week and are expected to discuss exchange rate misalignments.  German finance minister Schaeuble reported he was “dumbfounded” by the Fed’s injection of US$ 600 billion and added it is unlikely to benefit the global economy.  In eurozone news, the European Central Bank kept monetary policy unchanged yesterday, as expected. ECB President Trichet reported price developments “will remain moderate” with inflation expectations “firmly anchored.”  Some traders believe the Fed’s decision to expand policy significantly will render it more difficult for the ECB to unwind policy and the ECB is not expected to follow the Fed by expanding its quantitative easing program.  This divergence between the ECB’s policy and Fed’s policy may support the euro over the medium-term.  In contrast to the Fed’s pessimistic policy statement this week, Trichet noted “The underlying momentum of the recovery remains positive” and noted price risks are “slightly tilted to the upside.”  The euro has largely ignored a deterioration in eurozone government debt prices this week including Irish, Portuguese, and Greek bonds.  These asset prices fell after German Chancellor Merkel pushed to make bondholders assume parts of the financial bailout of euro members. ECB member Stark described the eurozone’s financial situation as “very serious.”  Data released in the eurozone today saw September retail sales off 0.2% m/m and up 1.1% y/y.  Also, German factory orders were off 4.0% m/m and up 14.0% y/y.  Euro bids are cited around the US$ 1.3935 level. 

¥/ CNY

The yen depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥81.45 level and was supported around the ¥80.60 level.  Technically, today’s intraday high was right around the 23.6% retracement of the ¥85.40 - ¥80.25 range.  Bank of Japan’s Policy Board concluded its two-day meeting and announced it will purchase Japanese real estate investment trusts with credit ratings of AA or stronger.  BoJ also reported it will purchase exchange-traded funds that track the Nikkei 225 stock average and the Topix index.  As expected, the Policy Board voted unanimously to keep the overnight call rate target range unchanged between 0% and 0.1%.  Similarly, the BoJ voted to maintain its ¥5 trillion asset purchase fund and ¥30 trillion program to stimulate bank lending.  On 28 October, BoJ announced it will purchase ¥3.5 trillion in government debt, ¥1 trillion in corporate debt, ¥450 billion in exchange-traded funds, and ¥50 billion in real estate investment trusts.  BoJ today reported Japan’s economic “recovery seems to be pausing.”  Last week, the central bank released consumer price growth forecasts of 0.1% in the fiscal year starting April 2011 along with GDP growth around 1.8%.  Finance minister Noda this week verbally intervened, reporting “Excessive volatility in exchange rates have a negative impact on economic and financial stability, and we can’t overlook it.  We will continue to watch foreign exchange developments with great interest and we will take decisive action, including intervention, if needed.”  Prime Minister Kan said the U.S. is pursuing a “weak dollar policy.”  The Nikkei 225 stock index climbed 2.86% to close at ¥9,625.99. The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥115.05 level and was supported around the ¥113.90 level.  The British pound moved higher vis-à-vis the yen as sterling tested offers around the ¥131.95 level while the Swiss franc moved higher vis-à-vis the yen and tested offers around the ¥84.80 level. In Chinese news, the U.S. dollar depreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.6574 in the over-the-counter market, down from CNY 6.6622.  People’s Bank of China Governor Zhou said the Fed’s decision to expand policy further is “unlikely” to benefit the global economy. People’s Bank of China adviser Xia Bin this week reported the Fed’s quantitative easing is “uncontrolled” money printing.  Vice foreign minister Cui reported “Many countries are worried about the impact (of the Fed’s policies to purchase bonds).”  Former People’s Bank of China adviser Fan Gang said China’s asset bubble has “stabilized” and said a property tax “will happen.” Fan also sees inflation growth around 3% to 4% over the next couple years along with gross domestic product growth of 8% - 9%.  Additionally, Fan added the yuan’s appreciation will remain gradual.  Banking giant Standard Chartered is predicting another increase in China’s key lending rate to 5.81% by the end of 2010.


The British pound depreciated vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.6165 level and was capped around the US$ 1.6295 level.  Data released n the U.K. today saw October producer price inflation input up 2.1% m/m and 8.0% y/y while October PPI output was up 0.6% m/m and 4.0% y/y.  Core PPI output was up 0.4% m/m and 3.3% y/y.  As expected, Bank of England’s Monetary Policy Committee this week kept its main Bank rate unchanged at 0.50% and kept its asset purchase target program unchanged at £200 billion.  Chancellor of the Exchequer Osborne reported the BoE has “flexibility” on policy as a result of the government’s plan to reduce its deficit.  Many dealers believe high levels of inflation in the U.K. will prevent the MPC from expanding monetary policy anytime soon while others foresee an expansion of its asset purchase program.  Data released in the U.K. this week saw October Halifax house prices up 1.8% m/m.  Former Bank of England Monetary Policy Committee member Julius this week estimated the chance of a U.K. recession is now “at 10% or less.” Cable bids are cited around the US$ 1.5960 level.  The euro depreciated vis-à-vis the British pound as the single currency tested bids around the £0.8655 level and was capped around the £0.8775 level.


The Swiss franc depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 0.9640 level and was supported around the CHF 0.9545 level.   Swiss National Bank member Danthine reported “We can’t exclude that inflation could temporarily turn negative at the beginning of 2011.  If the downside risks to the economy materialized and then translated into a deflation risk, the SNB would take all measures needed to ensure price stability.”  Danthine also warned the Swiss economy will evidence “weaker” growth in 2011 after growing around 2.5% in 2010.  In September, SNB kept its main interest rate unchanged at 0.25% and reduced its inflation projections through early 2013.  Swiss data released this week saw October consumer price inflation up 0.5% m/m and 0.2% y/y.  Also, September retail sales were up 3.8% y/y, much higher than the prior revised print of +0.1% y/y.  Notably, Swiss core inflation was negative in October for the first time in at least sixteen years.  This renders it likely SNB may be forced to keep interest rates relatively low for quite some time.  Swiss National Bank member Jordan this week reported central banks must maintain a second line of defense and should only “kickstart” a market.  Jordan also cited the Swiss property market as a concern.  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 1.3635 level while the British pound moved higher vis-à-vis the Swiss franc and tested offers around the CHF 1.5625 level.


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