Friday August 17, 2007 - 16:24:16 GMT
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Forex and Commodity Market Commentary and Analysis (17 August 2007)
The euro gained ground vis-√†-vis the U.S. dollar today as the single currency tested offers around the US$ 1.3545 level and was supported around the $1.3370 level. Technically, today‚Äôs intraday high was right around the 38.2% retracement of the move from $1.3840 to $1.3360. The Federal Reserve reduced the discount window borrowing rate by +50bps to 5.75%. The Fed reported ‚ÄúTo promote the restoration of orderly conditions in financial markets, the Federal Reserve Board approved temporary changes to its primary credit discount window facility. The Board approved a 50 basis point reduction in the primary credit rate to 5-3/4 percent, to narrow the spread between the primary credit rate and the Federal Open Market Committee's target federal funds rate to 50 basis points. The Board is also announcing a change to the Reserve Banks' usual practices to allow the provision of term financing for as long as 30 days, renewable by the borrower. These changes will remain in place until the Federal Reserve determines that market liquidity has improved materially.‚ÄĚ Fed policymakers also released a statement reading ‚ÄúFinancial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward. In these circumstances, although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably. The Committee is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets.‚ÄĚ Many traders now believe the Federal Open Market Committee will lower the federal funds target rate by +25bps or +50bps no later than the FOMC‚Äôs next scheduled meeting on 18 September. Some dealers believe the Fed will make an emergency inter-meeting rate cut while other dealers believe today‚Äôs action will suffice and the Fed will not need to cut next rates next month. The Fed also injected US$ 6 billion of liquidity into the markets after cutting the discount rate today. The Fed‚Äôs statement that downside risks to future economic growth have ‚Äúincreased appreciably‚ÄĚ evidence policymakers‚Äô concern with the ongoing global liquidity glut. Monetary policy is a crude instrument with which changes can be effected in the financial markets. To support the U.S. mortgage market and housing sector, the cap on asset holdings at Fannie Mae and Freddie Mac may need to be lifted ‚Äď something outside of the Fed‚Äôs purview. Data released in the U.S. today saw the mid-August University of Michigan preliminary consumer sentiment index fall to 83.3, its lowest print this year and down from 90.4 in July. The current economic conditions index and consumer expectations index also moved lower. In eurozone news, European Central Bank member Weber reiterated the ECB will ‚Äúdo all that is necessary to preserve price stability‚ÄĚ but did not use the word ‚Äúvigilance,‚ÄĚ a hint the central bank may decide to not tighten monetary policy next month. Data released in Germany today saw the July producer price index off 0.1% m/m and up 1.1% y/y. Euro bids are cited around the US$ 1.3360 level.
The yen appreciated marginally vis-√†-vis the U.S. dollar today as the greenback tested bids around the ¬•111.60 level and was capped around the ¬•114.90 level. Technically, today‚Äôs intraday high was right around the 23.6% retracement of the move from ¬•124.15 to ¬•112.00. There is increasing speculation that Bank of Japan intervened overnight or will intervene to slow the yen‚Äôs rapid ascent. Bank of Japan injected ¬•1.2 trillion into the banking system today after yesterday‚Äôs injection of ¬•400 billion. The central bank has been reacting to a strong demand for funds that has driven the overnight call rate above the BoJ‚Äôs target rate of +0.50%. Most traders believe the BoJ will keep the overnight call rate unchanged at +0.50% next week when its Policy Board meets and instead opt for a +25bps hike to +0.75% later in the year. Data released in Japan saw revised average pay off 0.9% y/y in June while the June index of leading economic indicators was downwardly revised to 72.7 and the coincident index was upwardly revised to 80.0. Also, July department store sales were off 4.3% y/y. The Nikkei 225 stock index lost 5.42% to close at ¬•15,273.68. Dollar bids are cited around the ¬•110.25 level. The euro appreciated vis-√†-vis the yen as the single currency tested offers around the ¬•155.30 level and was supported around the ¬•149.25 level. The British pound and Swiss franc gained ground vis-√†-vis the yen as the crosses tested offers around the ¬•228.95 and ¬•95.25 levels, respectively. The Chinese yuan appreciated vis-√†-vis the U.S. dollar today as the greenback closed at CNY 7.5951 in the over-the-counter market, down from CNY 7.6040.
The British pound gained marginal ground vis-√†-vis the U.S. dollar today as cable tested offers around the US$ 1.9935 level and was supported around the $1.9650 level. Technically, today‚Äôs intraday high was just above the 50% retracement of the move from $1.9180 to $2.0655. Data released in the U.K. today saw IRS pay deals climb 3.5% in the three months to the end of July, up from 3.2% in the three months to May and June. U.K. Chancellor of the Exchequer Darling today reported the U.K. economy is ‚Äústrong.‚ÄĚ Cable bids are cited around the US$ 1.9530 level. The euro appreciated vis-√†-vis the British pound as the single currency tested offers around the ‚ā§0.6810 level and was supported around the ‚ā§0.6760 level.
The Swiss franc appreciated vis-√†-vis the U.S. dollar today as the greenback tested bids around the CHF 1.1995 level and was capped around the CHF 1.2180 level. The franc continues to benefit from turbulence in the financial markets and has a safe haven bid. Many traders believe Swiss National Bank will delay its expected +25bps monetary next month. Dollar offers are cited around the CHF 1.2140 level. The euro and British pound lost ground vis-√†-vis the Swiss franc as the crosses tested bids around the CHF 1.6175 and CHF 2.3760 levels, respectively.
The Australian dollar extended recent losses vis-√†-vis the U.S. dollar today as the Aussie tested bids around the US$ 0.7675 level and was capped around the $0.8010 level. The pair reached its lowest level since November 2006 and the Aussie suffered its largest ever one-day decline since the currency floated freely in 1984. Reserve Bank of Australia intervened a couple of times in the market to slow the pair‚Äôs descent. RBA Governor Stevens reported ‚ÄúOn occasions when market conditions are disorderly, we are prepared to intervene from time to time if that is a useful thing to do.‚ÄĚ RBA also injected A$ 3.87 billion into the money market today. Australian dollar bids are cited around the US$ 0.7455 level. The New Zealand dollar appreciated vis-√†-vis the U.S. dollar today as the kiwi tested offers around the US$ 0.7010 level and was supported around the $0.6640 level. New Zealand dollar bids are cited around the US$ 0.6440 level.
The Canadian dollar appreciated sharply vis-√†-vis the U.S. dollar today as the greenback tested bids around the C$ 1.0560 level and was capped around the C$ 1.0790 level. Data released in Canada today saw June wholesale trade rise 0.2%. The loonie gained ground on the Fed‚Äôs announcement more than other currencies did because there have been ongoing liquidity concerns regarding the Canadian dollar over recent sessions. U.S. dollar offers are cited around the C$ 1.0750 level.
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