By GCI Fx Research
€
The euro extended recent gains vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.4650 level and was supported around the $1.4515 level. The common currency reached its highest level since 18 December 2008 as negative sentiment continued to surround the U.S. dollar. Data released in the eurozone today saw EMU-16 employment decline 702,000 in the second quarter, up from -1.2 million in the first quarter. Other data released today saw EMU-16 July industrial production decline 0.3% m/m and 15.9% y/y. Many economists believe the Federal Reserve will raise interest rates before the European Central Bank. Interest rate futures are currently indicating the ECB will hike rates later and more slowly than the Fed. Euribor interest rate futures are signaling the ECB will raise rates in Q4 2010 from their current 1.0% level. In contrast, fed funds futures are predicting a 60% chance the Fed will lift interest rates to 0.25% no later than Q2 2010. Most economists continue to predict the U.S. unemployment rate will top out north of 10% and that jobs may slowly be created next year. The U.S. dollar has become a carry trade vehicle as borrowing costs are at record lows and the current interest rate structure is favouring higher-yielding currencies including the euro, Australian dollar, and New Zealand dollar. The Obama administration is currently preparing a plan that would overhaul global financial institutions, an initiative the government will try to gain support for at the upcoming Group of Twenty summit in Pittsburgh. ECB Vice President Papademos reported he will remain at the ECB until the end of his term and ECB President Trichet said that if Lehman Brothers were rescued one year ago it would not have necessarily have prevented the financial crisis from worsening. ECB member Wellink said he expects the economic recovery to be “very slow.” The European Union today maintained its 2009 eurozone inflation forecast at 0.4% and now sees gross domestic product growth off 4% this year. In U.S. news, San Francisco Fed President Yellen reported the Fed should boost employment and curb disinflation. Yellen also warned a major decline in the U.S. dollar could precipitate inflation and said unemployment will likely “remain elevated” for a few years. Euro bids are cited around the US$ 1.3900 figure.
¥/ CNY
The yen depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥91.15 level and was supported around the ¥90.20 level. Bank of Japan’s Policy Board convenes this week and is likely to keep interest rates unchanged. The central bank also likely will not decide at this meeting whether or not to let its liquidity support programs expire at the end of December. BoJ-watchers are curious to see if the central bank will mention the deflationary pressures that are evident in the economy. BoJ Governor Shirakawa will speak after the central bank’s decision is announced on Thursday and could reiterate that deflationary pressures are likely for some time. Data released in Japan today saw the July revised industrial production up 2.1% m/m, better than the preliminary +1.9% print. Ministry of finance official Tango reported the government is paying “close attention” to the yen but did not hint at actual intervention. Notably, Japan’s fiscal half year ends at the end of this month and some of the recent appreciation of the yen could represent companies repatriating their overseas assets. The Nikkei 225 stock index lost 2.32% to close at ¥10,202.06. U.S. dollar offers are cited around the ¥94.75 level. The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥132.90 level and was supported around the ¥131.30 level. The British pound moved lower vis-à-vis the yen as sterling tested bids around the ¥149.90 level while the Swiss franc moved higher vis-à-vis the yen and tested offers around the ¥87.80 level. In Chinese news, the U.S. dollar gained ground vis-à-vis the Chinese yuan as the greenback closed at CNY 6.8224 in the over-the-counter market, up from CNY 6.8220. The Obama administration announced tariffs on Chinese tires and other goods while China announced it is launching an anti-dumping investigation into U.S. chicken and auto products. Most economists do not believe a trade war will ensue.
Daily Market Commentary provided by GCI Financial Ltd.
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