By GCI Fx Research
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The euro depreciated vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.3725 level and was capped around the $1.3815 level. As expected, the Federal Open Market Committee yesterday kept its benchmark federal funds target rate unchanged at 0.25% and global equity markets received the news well under the premise that inflation will not be a problem for some time. The markets are largely speculating the Fed will not begin to raise interest rates until Q4 at the earliest with many economists expecting no change until 2011. Kansas City Fed President Hoenig dissented again, reporting that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to the buildup of financial imbalances and increase risks to longer-run macroeconomic and financial stability.” Fed Chairman Bernanke is expected to testify before Congress soon and tell legislators that the Fed is the ideal oversight regulator for large and small banks alike. Traders are also awaiting to see if the Obama health care initiative can be passed by Congress before the Easter break and how financial regulatory regulation materializes, possibly encompassing the so-called “Volcker Rule.” Comptroller of the Currency Dugan said he has “significant concerns” with Senator Dodd’s proposed financial regulation overhaul. Data released in the U.S. today saw MBA mortgage applications decline 1.5% while headline February producer price inflation was off 0.6% m/m and up 4.4% y/y. The ex-food and energy core index was up 0.1% m/m and 1.0% y/y. In eurozone news, EMU-16 construction output fell 2.2% m/m in January, down from +0.5% growth in December, and was off 12.5% y/y compared with a 3.1% y/y decline in December. Eurozone finance ministers this week reiterated their plan to “take coordinated action” but did not provide much additional information other than to suggest any assistance would take the form of bilateral loans rather than loan guarantees. Euro bids are cited around the US$ 1.3335 level.
¥/ CNY
The yen depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥90.70 level and was supported around the ¥90.00 figure. Bank of Japan expanded its quantitative easing program overnight, as expected. The central bank doubled its three-month lending facility to ¥20 trillion. The move is not likely to have a significant impact on the real economy and may marginally increase liquidity. By and large, the central bank made the move to satisfy ongoing calls from the Japanese government to ease policy further. The government’s ability to enact more fiscal spending to stimulate final private demand is limited on account of Japan’s massive indebtedness. BoJ Governor Shirakawa said the economy is “improving a bit more than we expected” but warned “The Bank of Japan’s policy alone can’t beat deflation. I wish there was a miracle, but all we can do is persist with our efforts.” There were two dissenters on the BoJ Policy Board. The central bank seems to be suffering from a “liquidity trap” whereby there is little discernible benefit no matter how much liquidity the central bank infuses. Data released in Japan overnight saw the January tertiary industry index improve to +2.9% from -0.9%. The Nikkei 225 stock index climbed 1.17% to close at ¥10,846.98. 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 ¥125.05 level and was supported around the ¥124.05 level. The British pound moved higher vis-à-vis the yen as sterling tested offers around the ¥139.35 level while the Swiss franc moved higher vis-à-vis the yen and tested offers around the ¥86.15 level. In Chinese news, the U.S. dollar depreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.8259 in the over-the-counter market, down from CNY 6.8260. People’s Bank of China yesterday reported inflation expectations are rising in a quarterly survey released today and this could render it difficult for the government to meet its 3% annual inflation target. Higher inflation expectations will likely propel interest rates higher. The World Bank today called on China to reduce its stimuli programs so that it does cause new asset bubbles.
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The British pound appreciated vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.5380 level and was supported around the $1.5205 level. Bank of England reported it is considering an extension of the eligible collateral at its discount window. BoE MPC Fisher said the move would “enhance facilities.” Minutes from the March MPC meeting were released today in which policymakers voted unanimously to keep its asset-purchase program unchanged at ₤200 billion. Data released in the U.K. today saw the February claimant count decrease to 4.9% from 5.0% in January while the ILO three-month unemployment rate was unchanged at 7.8%. Bank of England Monetary Policy Committee member Barker this week reported the U.K. economy could recede again, adding the economic recovery will continue to be “bumpy and fragile.” Cable bids are cited around the US$ 1.4455 level. The euro moved lower vis-à-vis the British pound as the single currency tested bids around the US$ 0.8950 level and was capped around the $0.9065 level.
Daily Market Commentary provided by GCI Financial Ltd.
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