By GCI Fx Research
€
The euro appreciated vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.4580 level and was supported around the $1.4455 level. Traders are trying to digest one report that suggests the Obama administration is going to impose a major tax on banks that borrowed funds under the Troubled Asset Relief Program. Another report suggests the Obama administration is considering extending capital gains tax relief, a move that could support the equity market. Data released in the U.S. today saw MBA mortgage applications up 14.3% from the prior reading of 0.5%. The Federal Reserve’s Beige Book was released today and confirmed improvements in business conditions in ten of the twelve Fed districts but noted the labour market is “generally weak” in most of the Fed districts. Data to be released in the U.S. tomorrow include the December import price index, December retail sales, weekly initial jobless claims, continuing claims, and November business inventories followed by many data on Friday including consumer price inflation, industrial production, and more. Chicago Fed President Evans today reported the U.S. economy may expand 3% to 5% in 2010 and sees a “stable” outlook for prices. Philadelphia Fed President Plosser spoke overnight and hawkishly said “This increase in rates must occur well before the unemployment rate or other measures of resource slack have diminished to acceptable levels.” In eurozone news, German gross domestic product growth data confirmed the economy fell 5.0% in 2009, a sharp reversal from 2008’s +1.3% expansion. This represented the first contraction in six years and the largest decline since World War II. French data released today saw the November current account gap narrow to €3.8 billion. European Union President Van Rompuy reported Greece’s fiscal problems are a major concern the entire European Union but reported the Greek government is “already taking the necessary further steps to address the situation.” Euro bids are cited around the US$ 1.3885 level.
¥/ CNY
The yen depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥91.50 level and was supported around the ¥90.90 level. Today’s range was relatively tight as dealers continued to focus on China and weigh the impact of its recent policy moves on the yen. Data released in Japan overnight saw December corporate bankruptcy cases off 0.35% m/m and 16.59% y/y. The yen also continues to weaken a little bit on uncertainty regarding Japan Airlines, a company whose stock has declined to ¥7 and could be delisted. Global risk aversion is also moving lower and this is negatively impacting the yen as traders move into higher-yielding assets. Japan’s economic problems continue. First, bank lending continued to move lower in December, probably on account of weakening business confidence. Second, Japan remains mired in a deflationary cycle that will require the central bank to maintain its ultra-easy monetary policy. Dealers are also paying close attention to comments from new finance minister Kan following his recent appointment and comments that moved the yen last week. The Nikkei 225 stock index lost 1.32% to close at ¥10,735.03. 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 ¥133.05 level and was supported around the ¥131.50 level. The British pound moved higher vis-à-vis the yen as sterling tested bids around the ¥148.75 level while the Swiss franc moved higher vis-à-vis the yen and tested offers around the ¥90.00 figure. In Chinese news, the U.S. dollar depreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.8267 in the over-the-counter market, down from CNY 6.8275. Traders are still talking about People’s Bank of China’s decision to lift reserve requirements at commercial banks by 50bps from 15.50% to 16.00%, effective 18 January. This is PBoC’s most effective weapon to enact implement a contractionary monetary policy and follows a move to reduce monetary accommodation last week by selling one-year bills at higher rates. China Investment Corporation executive Peng moved the markets this week when he said “I think the dollar is at its bottom now. There will be very limited space for the dollar to drop further. The yen is what, I think, has the worst outlook. The yen will continue to drop, unlike the dollar, which will not serve for long as a source of funding carry trades.”
₤
The British pound appreciated sharply vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.6295 level and was supported around the $1.6135 level. Bank of England Monetary Policy Committee member Sentance moved the markets today when he said “At some point you have to say we have increased the amount of stimulus enough. It doesn’t mean you are going to withdraw it but you don’t have to keep adding to it. The Bank is approaching the point where we need to hold back and wait and see how that’s flowing into the recovery.” Data released in the U.K. today saw November manufacturing production flat m/m and off 5.4% y/y while November industrial production was up 0.4% m/m and off 6% y/y. Cable bids are cited around the US$ 1.5730 level. The euro gained ground vis-à-vis the British pound as the single currency tested offers around the ₤0.8965 level and was supported around the ₤0.8915 level.
Daily Market Commentary provided by GCI Financial Ltd.
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