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Friday November 12, 2010 - 13:25:48 GMT
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Forex Market Commentary and Analysis (12 November 2010)

The euro appreciated vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.3745 level and was supported around the $1.3575 level.  European dealers took the pair to a multi-week low dating to 30 September before the common currency established an intraday high right around the 23.6% level of the $1.4280 – 1.3575 range.  The euro was bid higher on market talk that European Union officials were fleshing out a rescue package for Ireland that could be implemented as early as next week.  Yields on credit default swaps and sovereign bond yields fell for peripheral eurozone sovereign names like Ireland, Greece, Spain, and Portugal as a result.  Ireland later denied the bailout chatter and the euro came off early in the North American session.  The European Union also reported Ireland has not officially asked for any financial assistance.  Most traders, however, believe it is only a matter of time before Ireland is forced to seek financial assistance from Brussels, similar to the way Greece took a bailout package.  There is a distinct risk that other eurozone countries could follow Ireland as a result of contagion with Spain and Portugal being two of the most likely candidates.  The European Union established a €750 billion backstop in May called the European Financial Stability Fund to prevent further sovereign crises in the eurozone and there is concern that may be insufficient if countries other than Ireland are forced to seek aid.  The recent run-up in eurozone sovereign yields is a problem because these countries have more debt they need to sell by the end of the year and next year and the debt servicing costs may prove to be prohibitively excessive.  Even though Ireland is indicating that its funding needs have been met through the middle of 2011, there is still a perception the EU will need to provide aid just to push down Irish and other sovereign yields.  Irish banks hold about 8% of Ireland’s public debt while Spanish banks and pension funds hold about 48% of Spanish debt.  European Central Bank member Liikanen reported excessive foreign exchange volatility is “damaging” and said Ireland must resolve its own economic problems.  Group of Twenty leaders convened in South Korea at their summit and agreed to pursue more market-based exchange rates and to enhance exchange rate flexibility “to reflect underlying economic fundamentals and refrain from competitive devaluations.”  Moreover, the G-20 noted they are “committed to reducing excessive imbalances and maintaining current account imbalances at sustainable levels.”  Data released in the eurozone today saw EMU-16 Q3 gross domestic product up 0.4% q/q and 1.9% y/y while EMU-16 September industrial production was off 0.9% m/m and up 5.2% y/y.  German Q3 GDP was up 0.7% q/q and 3.9% y/y while French Q3 GDP was up 0.4% q/q and 1.8% y/y.  In U.S. news, data to be released today include the mid-November University of Michigan consumer sentiment index that is expected to improve from the prior reading of 67.7.  Atlanta Fed President Lockhart reported the U.S. labour market is suffering from uncertainty in fiscal, regulatory, and tax policies. Former Fed Chairman Greenspan made news this week when he reported the U.S. is pursuing a weaker dollar policy. U.S. Treasury Secretary Geithner, in contrast, said the U.S. will “never seek to weaken our currency as a tool to gain competitive advantage or to grow the economy.”  Fed Chairman Bernanke and the Fed remain under massive criticism for its announcement last week that it will expand the purchase of U.S. Treasury securities by US$ 600 billion.  Euro bids are cited around the US$ 1.3505 level. 

¥/ CNY

The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥81.65 level and was capped around the ¥82.55 level.  The pair retraced some of its recent losses as traders reacted to the G-20 summit in South Korea and other factors.  Technically, today’s intraday high was right around the 61.8% retracement of the ¥83.95 – 80.25 range and today’s intraday low was right around the 38.2% retracement of the same range.  Traders await the release of gross domestic product data for the three months ending 30 September on Monday with expectations the economy expanded at an annualized 2.5% pace.  Economic growth last quarter is expected to have been driven by consumer spending but is expected to decelerate toward the end of the year on account of the strong yen’s impact on exports.  Some forecasts are indicating the economy may have slowed to a 0.3% annualized pace of expansion in the October – December quarter.  The government reported last month that industrial production has slowed significantly with exports expanding at their slowest pace in 2010.  Notably, Bank of Japan lowered its economic assessment in November, reporting the economic expansion is “pausing.”  Economists are waiting to see if Japan will enter a double-dip recession.  Yesterday,  Bank of Japan Governor Shirakawa was called on to do more to combat deflation by his former economics professor, Koichi Hamada, who said the central bank should expand its asset purchase program to ¥20-25 trillion. There is speculation that global opposition and criticism of the Fed’s latest quantitative easing program may render Bank of Japan less likely to adopt further aggressive monetary easing steps.  BoJ Governor Shirakawa last week said the central bank would, if needed, expand an existing ¥5 trillion asset purchase fund.  Deflation remains rampant in Japan and the central bank may decide to only expand policy further if the yen strengthens sharply from current levels.  The Nikkei 225 stock index lost 1.39% to close at ¥9,724.81.  U.S. dollar offers are cited around the ¥83.10 level.  The euro moved lower vis-à-vis the yen as the single currency tested bids around the ¥111.05 level and was capped around the ¥112.90 level.  The British pound moved lower vis-à-vis the yen as sterling tested bids around the ¥130.95 level while the Swiss franc moved lower vis-à-vis the yen and tested bids around the ¥83.70 level. In Chinese news, the U.S. dollar appreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.6383 in the over-the-counter market, up from CNY 6.6233.  Many economists believe People’s Bank of China will be forced to raise interest rates within weeks following a sharp acceleration in inflation last month to its fastest pace in 25 months.  The benchmark one-year lending rate could hit 5.81% by the end of the year according to some economists, a move that would represent a 25bps tightening.  PBoC lifted some banks’ reserve requirements twice in one day this week and there is new speculation a rate hike could be announced as early as this weekend.  This speculation caused China’s benchmark Shanghai Composite Index to slide more than 2.5% in intraday action.  Many data were released in China this week.  First, China’s October money supply expanded significantly, underscoring the amount of liquidity in the banking system.  Second, October new yuan loans exploded higher to CNY 587.7 billion.  Third, the October producer price index was up 5.0% y/y while the October consumer price index was up 4.4% y/y.  Fourth, October retail sales ticked lower to 18.6% y/y.  Fifth, October industrial production was up 13.1% y/y.  U.S. President Obama said the yuan is “undervalued,” adding China spends and “enormous” amount of money to keep the yuan’s value depressed.


The British pound depreciated vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.5985 level and was capped around the US$ 1.6130 level.  European dealers pushed the pair to intraday lows before cable reclaimed some lost ground early in the North American session.  Data released in the U.K. overnight saw October Nationwide consumer confidence tick lower to +52.  Bank of England released its Quarterly Inflation Report this week and was more hawkish than expected, having upwardly revised its consumer price inflation forecast.  BoE warned inflation may accelerate above its 2% target range and this reduced speculation the central bank may increase its £200 billion asset purchase program.  The report noted Monetary Policy Committee members are having a “vigorous debate” over the risks of inflation.  Prior to the release of the report, many dealers believed there was an asymmetrical bias to ease but the MPC’s admission that inflation will be above target for 2011 could mean the MPC is more symmetrically-positioned, meaning no easing or tightening bias.  BoE Governor King added to this view when he reported inflation risks are “balanced.”  BoE also reported gross domestic product growth should remain “a little more likely” above the historical average.  Cable bids are cited around the US$ 1.5960 level.  The euro appreciated vis-à-vis the British pound as the single currency tested offers around the £0.8560 level and was supported around the £0.8450 level.



The Swiss franc depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 0.9780 level and was supported around the CHF 0.9720 level.  Technically, today’s intraday high was right around the 38.2% retracement of the CHF 1.0275 – 0.9460 range.  Swiss National Bank reported a loss of CHF 8.5 billion for the first nine months of 2010, primarily on account of exchange rates and the franc’s appreciation.  SNB conducted massive franc-selling intervention this year and in June stopped that practice, reporting deflation risks have “largely disappeared.”  Data released in Switzerland this week the October SECO consumer confidence index fall to +7 from the prior reading of +16.  Other Swiss data released this week saw the October jobless rate tick lower to 3.6% from the September level of 3.7%, the lowest level since May 2009.  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.  In September, SNB kept its main interest rate unchanged at 0.25% and reduced its inflation projections through early 2013.  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 1.3390 level while the British pound moved lower vis-à-vis the Swiss franc and tested bids around the CHF 1.5565 level.


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