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Thursday November 18, 2010 - 13:42:44 GMT
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Forex Market Commentary and Analysis (18 November 2010)

The euro appreciated vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.3665 level and was supported around the $1.3525 level.  Technically, today’s intraday high was right around the 38.2% retracement level of the $1.2645 – 1.4280 range.  The common currency moved higher after Irish central bank Governor Honohan reported the country may seek “tens of billions” in aid, an indication the country was creeping closer to agreeing on financial assistance terms.  Similarly, Irish finance minister Lenihan added “If these talks were to result in a substantial contingency capital funding” (availability that did not need to be drawn down now), that “would be a very desirable outcome.” There is market chatter that Ireland’s bailout facility may include a 5% loan.  European Central Bank, European Union, and International Monetary Fund officials convened in Dublin today as Ireland edged closer to announcing a bailout of its national finances and troubled banking system.  Irish Prime Minister Cowen maintains the Irish government is fully funded through June 2011 but there is intense market speculation a deal will be announced before the end of the weekend. European officials are concerned that Ireland’s sovereign credit woes are spilling over to other eurozone members through contagion.  Speculation is focusing on a package worth €100 billion for Ireland.  In May, ECB member Weber warned the ECB’s independence would be eroded by any country that is reluctant to accept a bailout from the Eurosystem, as is currently the case.  This is also forcing the ECB to increase its bond purchases in the secondary market and lend more money to troubled banking systems.  ECB member Constancio said Ireland’s acceptance “would stabilize the situation” while ECB’s Stark said the ECB “will continue” to phase outs its emergency measures in the new year.  Germany’s Bundesbank today reported the Germany economic recovery is broadening.  ECB Governor Trichet will speak in Brussels today and his comments about Ireland will be closely monitored.  Data released in the eurozone today saw the EMU-16 September current account narrow to -€9.2 billion.  In U.S. news, Federal Reserve officials continue to defend the Fed’s decision to expand its quantitative easing policy. Fed Chairman Bernanke met with Republicans yesterday and defended the Fed’s decision to provide additional monetary stimulus this month.  Bernanke also suggested the U.S. economy could gain 700,000 jobs as a result of its quantitative easing policy.  Fed officials including Boston Fed President Rosengren, New York Fed President Dudley, Atlanta Fed President Lockhart, and Vice Chairman Yellen have defended the Fed’s decisions and noted the U.S. is not trying to devalue the U.S. dollar.  Data released in the U.S. today saw weekly initial jobless claims climb 439,000 while continuing jobless claims fell to +4.295 million. Other data to be released today include Q3 mortgage delinquencies, October leading indicators, and the November Philadelphia Fed index.  Euro bids are cited around the US$ 1.3280 level.

¥/ CNY

The yen depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥83.40 level and was supported around the ¥83.10 level. Technically, today’s intraday low was right around the 50% retracement of the ¥85.95 – 80.25 range.  Kyodo is reporting Bank of Japan may seek to boost its capital before it purchases riskier assets.  BoJ Governor Shirakawa reported “unstable moves” remain in the international financial markets.  The Cabinet’s monthly economic report was released today in which the government reported “The economic movements appear to be pausing recently. It is also in a difficult situation such as a high unemployment rate.”  Bank of Japan Deputy Governor Yamaguchi this week warned the “drivers” of Japanese economic growth are slowing along with the deceleration in the global economic expansion.  Data released in Japan this week saw the September coincident index tick higher to 102.1 while the September leading index ticked lower to 98.6.  Moreover, it was reported that Q3 gross domestic product was up 0.9% q/q, up from the 0.4% prior level, and was up 3.9% on an annualized basis from the revised prior reading of 1.8%.  This represented the fourth consecutive quarter of expansion and was better than expected.  On a negative note, however, export growth decelerated to +2.4% q/q, down from a revised 5.6% in the previous quarter.  Bank of Japan recently downgraded its economic assessment for November, reporting the economic expansion is “pausing.”  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.  The Nikkei 225 stock index climbed 2.06% to close at ¥10,013.63.   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 ¥113.80 level and was supported around the ¥112.50 level.  The British pound moved higher vis-à-vis the yen as sterling tested offers around the ¥133.40 level while the Swiss franc moved higher vis-à-vis the yen and tested offers around the ¥84.50 level. In Chinese news, the U.S. dollar depreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.6334 in the over-the-counter market, down from CNY 6.6432.  There is increasing speculation China may impose temporary price controls on account of the recent run-up in inflation.  People’s Bank of China adviser Zhou Qiren warned rate hikes alone cannot curb inflation and called on the government to broaden international investment channels.  Chinese Premier Wen Jiabao this week reported his cabinet is drafting anti-inflation policies to combat the fastest inflation the country has seen in two years.  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. 

£

The British pound appreciated vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.6020 level and was supported around the US$ 1.5885 level. Technically, today’s intraday high was above the 38.2% retracement level of the $1.6300 – 1.5840 range.  Data released in the U.K. today saw October retail sales up 0.5% m/m and off 0.1% y/y while the October ex-auto and fuel component was up 0.3% m/m and 1.2% y/y.  Also, the October public sector net cash requirement fell sharply to £2.4 billion and October public sector net borrowing slipped to £9.8 billion.  Additionally, November CBI total orders improved to -15 from the previous reading of -28.  Minutes from BoE’s Monetary Policy Committee meeting earlier this month were released this week in which rate-setters voted 1-7-1 to keep the Bank rate unchanged at 0.5% and its asset purchase plan unchanged at £200 billion.  MPC member Posen supported additional asset purchases of £50 billion while MPC member Sentance voted to hike rates by 25bps.  MPC member Tucker said the BoE is “absolutely determined” to reduce inflation to its 2% goal.   Bank of England Governor King this week reiterated the central bank “could do further quantitative easing if that turned out to be necessary,” adding “there are significant risks to inflation undershooting.”  Cable bids are cited around the US$ 1.5795 level.  The euro appreciated vis-à-vis the British pound as the single currency tested offers around the £0.8550 level and was supported around the £0.8500 figure.

CHF

The Swiss franc appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 0.9855 level and was capped around the CHF 0.9920 level.   Technically, today’s intraday low was right around the 23.6% retracement of the CHF 0.9465 – 0.9975 range.  Data released in Switzerland today saw the October trade surplus expand to CHF 2.1 billion from the revised prior reading of CHF 1.68 billion as exports climbed 6.2%.  Also, the November Credit Suisse ZEW expectations index weakened to -30.9 from the prior reading of -27.5.  Swiss National Bank Chairman Hildebrand speaks about the future of central banking later today.  Swiss National Bank is expected to keep monetary policy unchanged when its quarterly interest rate decision is announced next month.  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 1.0045 level.  The euro appreciated vis-à-vis the Swiss franc as the single currency tested offers around the CHF 1.3485 level while the British pound moved higher vis-à-vis the Swiss franc and tested offers around the CHF 1.5805 level.

 

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