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Friday November 26, 2010 - 16:20:40 GMT
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Forex Market Commentary and Analysis (26 November 2010)

The euro depreciated vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.3200 figure and was capped around the $1.3360 level. The common currency extended its recent depreciation and reached its weakest level since 21 September.  Euro bears chased the dollar higher as traders reacted to more uncertainty involving Ireland and were focused on additional credit jitters involving Portugal and other eurozone countries.   Portugal’s parliament today approved its budget for 2011, including the sharpest spending decrease in more than three decades.  Portugal maintains the fourth largest budget gap in the eurozone and Portuguese officials denied talk the European Union is pressuring the country to accept a bailout.  Portuguese finance minister dos Santos said the government’s priority is to unblock “financing channels.”  Some dealers believe Portugal may escape pressure to accept a bailout now because the country does not face a bond redemption until April.   Even though Ireland announced it will accept financial assistance from the European Union and International Monetary Fund, final terms may not be worked out until 28 November.  Senior debt issued by Bank of Ireland and Allied Irish Banks depreciated today on concerns the Irish government will force bondholders to share the cost of bailing out the Irish financial system.  The Irish media today reported EU and IMF negotiators are receiving legal advice on how bondholders can share in the estimated €85 billion bailout without precipitating lawsuits.  It remains to be seen if Irish Prime Minister Cowen can pass his budget plan for 2011 following recent political turmoil.  Spanish finance minister Salgado tried to deflect attention away from the possibility that Spain will require a bailout, noting the country will issue less debt at the remaining auctions in 2010 because the country’s financing requirements for the year are already covered.  Traders also reduced exposure to higher-yielding currencies like the euro after North Korea was quoted as saying South Korean naval exercises and the U.S.’s repositioning of military assets in the region have moved the Korean peninsula “closer to the brink of war.”  European Central Bank member Weber was on the tape earlier this week informing the markets the euro will survive as the financial safety net being patched together will be large enough to fend off speculators.  Data released in the eurozone today saw EMU-16 October M3 money supply growth tick lower to +1.0% y/y.  German data saw the October import price index decrease 0.2% m/m and climb 9.2% y/y.  Also, Germany’s provisional November consumer price index was up 0.1% m/m and up 1.5% y/y with the harmonized component up 0.1% m/m and 1.6% y/y.  French data released today saw October consumer spending off 0.7% m/m and off 0.3% y/y.  French employment data will be released later in the North American session.  In U.S. news, Federal Reserve Chairman Bernanke gave a speech at the European Central Bank conference earlier today and discussed the global economic crisis and the Fed’s policy responses.  Some data released in the U.S. this week saw October durable goods orders fall 3.3% with the ex-transportation component off 2.7% and other core components also lower.  Additionally, October personal income and spending were up 0.5% and 0.4%, respectively.  The October PCE deflator was up 1.3% y/y and October core PCE was up 0.0% m/m and 0.9% y/y.  Weekly initial jobless claims fell to +407,000 from the previous week’s reading of +441,000 and continuing jobless claims tumbled to 4.182 million. These improvements may reflect some holiday seasonality.  Moreover, the final November University of Michigan consumer sentiment indicator rallied to 71.6 and October new home sales were off 8.1% to an annualized 283,000 units with the September house price index off 0.7% m/m.  Euro bids are cited around the US$ 1.3120 level. 

¥/ CNY

The yen depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥83.95 level and was supported around the ¥83.55 level.  The pair reached its strongest level since 5 October as traders reacted to additional military action on the Korean peninsula.  Bank of Japan reported its largest first half loss since 2003 as the strong yen decreased the value of its foreign exchange assets, resulting in a ¥158.8 billion loss as assets increased 3.4% to ¥120.3 trillion.  Japan now holds some US$ 1.1 trillion in foreign exchange reserves as a result of its efforts to weaken the yen.  Bank of Japan Governor Shirakawa reported the central bank is already supplying “ample liquidity,” the latest indication he is resisting government pressure to expand monetary policy further.  Bank of Japan Deputy Governor Nakamura this week reported “When we look at upside and downside risks comprehensively, downside risks appear to be outweighing the upside risks slightly.”  Shirakawa on 5 November noted the economic risks were “roughly balanced” and recent economic performance indicates the economy is slowing.  Nakamura also reiterated the central bank can take “appropriate” action when necessary, an indication he is concerned about risks to the yen and Japanese equity markets.  Data released in Japan overnight saw November Tokyo-area consumer price inflation tick lower to +0.2% y/y with the ex-food and energy component steady at -0.6% y/y.  Also, the October national consumer price index surprised economists by printing at +0.2% y/y at the headline level, up from the prior reading of -0.6% y/y, while the ex-food and energy component improved to -0.8% y/y.  While these data still evidence deflationary pressures, economists are curious to see if the decrease in deflationary pressures is a trend or a one-off occurrence.  Data to be released on Tuesday include October retail trade.  The Nikkei 225 stock index lost 0.40% to close at ¥10,039.56.  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 ¥110.55 level and was capped around the ¥111.80 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 higher vis-à-vis the yen and tested offers around the ¥83.95 level. In Chinese news, the U.S. dollar appreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.6686 in the over-the-counter market, up from CNY 6.6503.  Data released in China overnight saw the November MNI business conditions survey move lower to 64.14 from the prior reading of 65.03.  Speculation is rampant that China will increase interest rates again before the end of the year and this is having a downward effect on asset prices and commodities prices.  News that new bank lending in China will decrease to CNY 7 trillion next year from this year’s target of CNY 7.5 trillion is also having downward pressure on the yuan.  Uncertainty on the Korean peninsula following news that North Korea fired fresh artillery drills overnight is also contributing to a weaker yuan.  People’s Bank of China Assistant Governor Li Dongrong this week cited “upside risks” to domestic inflation, the latest indication the central bank remains seriously concerned with upward price pressures.  Earlier this week, People’s Bank of China adviser Li Daokui reported China may consider selling U.S. Treasuries as “compensation for losses” incurred by the Fed’s decision to purchase US$ 600 billion to inject liquidity into the U.S. economy.  Li said the “very likely” run-up in inflation would erode the value of China’s holdings of U.S. debt and justify such a move by China.  Li also verbally intervened on the yuan, saying its further advances “should be gradual” and not “excessive.” 

£

The British pound depreciated vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.5610 level and was capped around the US$ 1.5770 level.  Cable continued its lunge lower and reached its weakest level since 22 September as traders pared their exposure to higher-yielding currencies.  Data to be released on Monday include the November Hometrack housing survey along with October net consumer credit and October mortgage approvals.  The November GfK consumer confidence survey will be released early Tuesday.  Bank of England Monetary Policy Committee officials spoke over the past couple of days.  MPC member Sentance reiterated U.K. interest rates need to climb while MPC member Posen said he and another MPC member though the MPC’s support of the government’s spending reduction in the May inflation report was “too political.”  BoE Governor King took hear this week for politicizing the MPC’s private views on the government’s plans to reduce its deficit spending.  Cable bids are cited around the US$ 1.5530 level.  The euro depreciated vis-à-vis the British pound as the single currency tested bids around the £0.8420 level and was capped around the £0.8485 level.

 

CHF

The Swiss franc depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.0040 level and was supported around the CHF 0.9985 level.   The pair reached its strongest level since 21 September.  Technically, today’s intraday high was right around the 50% retracement of the CHF 1.0625 – 0.9460 range.  Data released in Switzerland today saw the November KOF Swiss leading indicator decline to 2.12 from the revised prior reading of 2.16.  Data released in Switzerland earlier this week saw the Q3 employment level tick higher to 1.0% and 4.08 million.  Swiss National Bank Chairman Hildebrand verbally intervened this week, saying the European Union will restore stability and adding current exchange rate movements are a “major challenge.”  U.S. dollar offers are cited around the CHF 1.0180 level.  The euro depreciated vis-à-vis the Swiss franc as the single currency tested bids around the CHF 1.3235 level while the British pound moved lower vis-à-vis the Swiss franc and tested bids around the CHF 1.5645 level.

 

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