By GCI Forex Research
Fundamental Outlook at 1500 GMT (EDT + 0500)
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The euro appreciated vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.3755 level and was supported around the $1.3585 level. The common currency snapped higher despite lingering concerns about eurozone sovereign credit risk. Traders expressed some satisfaction today, however, with the hard line approach that eurozone officials are showing Greece. The European Union today announced it is providing Greece with 30 days to confirm it is serious about improving its fiscal problems. Eurogroup Chairman Juncker said a financial lifeline for Greece “depends on how far Greece agrees to additional measures in case those are warranted.” Greece will likely be forced to curtail fiscal spending and raise taxes to qualify for credit assistance from eurozone members. U.K. Chancellor of the Exchequer Darling called on Greece to “resolve its own budget problems.” Eurozone finance ministers today nominated Portgual’s Constancio – a known monetary dove – to become the next Vice President of the ECB and some believe this heightens the likelihood that Germany’s Weber – a monetary hawk – will become the new ECB President in 2011. Data released in the eurozone today saw the German February ZEW economic sentiment survey decline to 45.1 from 47.2 in January while the EMU-16 economic sentiment index receded to 40.2 from 46.4 in January. In U.S. news, it was reported that foreign demand for U.S. Treasury securities fell by its largest amount on record in December after China reduced its holdings by US$ 34.2 billion. Net long-term TIC flows fell to US$ 63.3 billion from US$ 126.4 billion in December. Japan is now officially the largest holder of U.S. Treasuries with US$ 768.8 billion in its war chest, more than China’s official tally of US$ 755.4 billion. For 2009 as a whole, foreign holdings of U.S. Treasuries fell by US$ 500 million whereas foreign holdings of U.S. Treasuries expanded by US$ 456 billion in 2008. Other data released today saw the February Empire manufacturing survey print at 24.91, up from the January reading of 15.92, while the February NAHB housing market index printed at +17, up from +15 in January. Minneapolis Fed President Kocherlakota reported the “nascent” U.S. economic recovery will “slowly continue” while Kansas City Fed President Hoenig reported the U.S. must take “difficult” steps to reduce spending and increase revenue so that the Fed is not forced to finance the “unsustainable” federal deficit. Euro bids are cited around the US$ 1.3530 level.
¥/ CNY
The yen depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥90.30 level and was supported around the ¥89.70 level. Bank of Japan Governor Shirakawa reported the central bank is ready to act “decisively” and is “always ready to provide abundant funds” adding it will maintain low interest rates “persistently.” Finance minister Kan suggested the BoJ should adopt some sort of inflation-targeting measure, reporting a CPI around 1% should be a “policy target.” Shirakawa also reported the central bank has expanded its balance sheet more than the Federal Reserve and European Central Bank have. BoJ’s balance sheet was equivalent to about 26% of Japanese gross domestic product in December, compared with 21% at the ECB at 16% in the U.S. He also noted Japan’s previous quantitative easing measures have had a “very limited” impact on reducing deflation but added BoJ policy alone cannot end deflation. Traders are awaiting Bank of Japan Policy Board’s monetary policy decision this week with most expecting no change in policy despite an apparent intensification of deflationary pressures. The central bank is likely to keep its bank lending program and intact along with its monthly purchases of Japanese government bonds. Despite a recent 4.6% annualized increase in Q4 gross domestic product, some prices declined more than they have in more than 50 years and others dealers believe this decrease will result in additional easing measures from the central bank this week. The GDP deflator tumbled 3% – the largest drop since at least 1955 – and the domestic demand deflator was off 2.9%. The Nikkei 225 stock index climbed 0.21% to close at ¥10,034.25. 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 ¥123.85 level and was supported around the ¥122.30 level. The British pound moved higher vis-à-vis the yen as sterling tested offers around the ¥141.40 level while the Swiss franc moved higher vis-à-vis the yen and tested offers around the ¥84.40 level. In Chinese news, the U.S. dollar remained steady vis-à-vis the Chinese yuan as the greenback closed at CNY 6.8333 in the over-the-counter market. Chinese financial markets were closed for the Chinese New Year holiday. Last week, People’s Bank of China reconfirmed it will “gradually guide monetary conditions back to normal levels from the counter-crisis mode” but then the central bank lifted reserve requirements by 0.5%, effective 25 February. The central bank is clearly trying to contain inflationary pressures and avert asset bubbles. Some China-watchers believe the central bank could allow the yuan to appreciate some 5% in the coming months.
₤
The British pound moved higher vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.5745 level and was supported around the $1.5625 level. Data released in the U.K. today saw January consumer price inflation decline 0.2% m/m and rise 3.5% y/y, the highest level since November 2008 and consistent with economists’ forecasts. Bank of England Governor King last week prepared the market for a temporary spike in inflation, noting it should be back at target in two years’ time. Yields on ten-year U.K. gilts are actually higher than Spanish and Italian ten-year debt, suggesting dealers are unhappy about the U.K. debt level or its prospects for inflation. Other data released today saw December DCLG house prices expand 2.2%. Chancellor Darling today said he “strongly supports” the central bank’s determination to curb inflation. Cable bids are cited around the US$ 1.5340 level. The euro moved higher vis-à-vis the British pound as the single currency tested offers around the ₤0.8745 level and was supported around the ₤0.8675 level.
CHF
The Swiss franc appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.0675 level and was capped around the CHF 1.0790 level. Many dealers believe the Swiss National Bank will not be able to prevent the Swiss franc from appreciating too much in the wake of the euro’s widespread depreciation. There is speculation the central bank has intervened at least eight times in recent weeks by selling francs for euro. SNB member Jordan was quoted as saying “central banks need to be independent and have a clear mandate to ensure price stability.” Data released in Switzerland yesterday saw January producer price inflation climb 0.3% m/m and decline 1.3% y/y. Swiss financial markets will likely be closed for most of the week for Carnival holidays. U.S. dollar offers are cited around the CHF 1.0810 level. The euro moved higher vis-à-vis the Swiss franc as the single currency tested offers around the CHF 1.4685 level while the British pound depreciated vis-à-vis the Swiss franc and tested bids around the CHF 1.6780 level.
Forex Daily Market Commentary provided by GCI Financial Ltd.
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