By GCI Fx Research
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The euro appreciated sharply vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.4555 level and was supported around the $1.4405 level. The common currency was propelled higher on stronger-than-expected Chinese exports and imports data that helped support the view the global economy is continuing to recover. The U.S. dollar fell on these news under the premise that the global economy will become less dependent on the U.S. economy, including the U.S. dollar’s net import balance. Additionally, the common currency moved higher on dovish remarks from St. Louis Fed President Bullard who noted U.S. interest rates “may remain low for quite some time.” Atlanta Fed President Lockhart speaks later in the North American session. Friday’s weaker-than-expected and disappointing U.S. December non-farm payrolls data dented the view that the Fed may raise interest rates by the middle of the year. European Central Bank President Trichet called on global governments to reduce excessive budget deficits to satisfy investors. Trichet noted he sees a “progressive normalization of the economy” but called on market participants to “strengthen risk management significantly.” ECB member Nowotny said new risk-taking by some market participants is a concern for central bankers and regulators and that risk-taking needs to be limited by increases in capital requirements. Nowotny also confirmed there will be “sluggish” economic growth in the eurozone this year. Data released in the eurozone today saw French November industrial output climb +1.1% and October’s print was upwardly revised. In U.S. news, Bullard also noted the U.S. should maintain its purchases of mortgage-backed securities to provide liquidity to the markets, and stressed quantitative easing programs administered by the Fed have supported the market. Data to be released in the U.S. tomorrow include November trade balance figures with estimates running around –US$ 34.5 billion. Euro bids are cited around the US$ 1.3885 level.
¥/ CNY
The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥91.80 level and was capped around the ¥92.65 level. Bank of Japan official Shinobu Nakagawa reported it is “possible” that official Japanese interest rates will remain near zero per cent until 2011 on account of the poor economic outlook. Nakagawa also reported the appreciating yen helps to support demand for Japanese government bonds. There is increasing speculation BoJ could increase its bond purchase activity to avert a relapse into another recession. Currently, the central bank purchases around ¥1.8 trillion in Japanese government bonds every month and it may decide to up its purchases to counter intense deflationary pressures. A new announcement could be made as early as H1 2010. An anonymous Ministry of Finance official reported finance minister Kan and U.S. Treasury Secretary Geithner agree on exchange rate policy. New finance minister Kan last week said it is his responsibility to respond to moves in the currency market but added the markets should determine rates. Last Thursday, Kan indicated the yen should be weaker whereas his predecessor, Fujii, green-lighted a stronger yen when he first took office last year. Chief Cabinet Secretary Hirano said the government should not make any comments that could impact the markets. Prime Minister Hatoyama last week said rapid exchange rate moves are “not good” and “unwelcome.” Most traders believe the Japanese government will probably try to orchestrate a weaker yen to help counter deflationary pressures and stimulate foreign trade. The Nikkei 225 stock index climbed 1.09% to close at ¥10,798.32. 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 ¥134.35 level and was supported around the ¥133.40 level. The British pound moved higher vis-à-vis the yen as sterling tested offers around the ¥149.60 level while the Swiss franc moved higher vis-à-vis the yen and tested offers around the ¥91.05 level. In Chinese news, the U.S. dollar depreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.8263 in the over-the-counter market, down from CNY 6.8276. Last week, People’s Bank of China guided interest rate expectations higher by selling three-month bills at higher rates for the first time in nineteen weeks. This evidences the central bank’s attempt to tighten liquidity. PBoC-watchers believe the central bank may lift interest rates for the first time in three years by September. There is increasing speculation that China’s economy could slow dramatically this year. Last week, People’s Bank of China yesterday reported it will support “relatively fast” economic growth and manage inflation expectations. Additionally, PBoC noted it will target “moderate” loan growth in 2010. Data released in China overnight saw December exports climb 17.7% y/y, the latest evidence that China remains the key driver of global economic growth. These data also mean that China has overtaken Germany as the world’s largest exporter.
₤
The British pound appreciated sharply vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.6190 level and was supported around the $1.6045 level. Former Bank of England Monetary Policy Committee member Buiter reported the central bank may start to raise interest rates by the middle of the year, possibly taking the Bank Rate to 0.75% to 1.00%. Buiter suggested the BoE’s rate hike could come before the European Central Bank contemplates one. The big news in the U.K. remains the general election that is scheduled to be called before June. Prime Minister Brown is attempting to rally the Labour Party following widespread discontent from within his own ranks. Tory opposition leader Cameron is pledging earlier and deeper deficit reductions. CBI today reported the U.K. services sector evidenced its second consecutive increase in activity in the fourth quarter but projects business activity should slow in the coming months. Cable bids are cited around the US$ 1.5730 level. The euro gained ground vis-à-vis the British pound as the single currency tested offers around the ₤0.9025 level and was supported around the ₤0.8970 level.
CHF
The Swiss franc appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.0130 level and was capped around the CHF 1.0240 level. Data released in Switzerland today saw November real retail sales up 0.6%. Swiss National Bank is expected to keep interest rates unchanged for at least the next couple of months. U.S. dollar offers are cited around the CHF 1.0615 level. The euro came off vis-à-vis the Swiss franc as the single currency tested bids around the CHF 1.4720 level while the British pound moved lower vis-à-vis the Swiss franc and tested bids around the CHF 1.6315 level.
Daily Market Commentary provided by GCI Financial Ltd.
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