By GCI Forex Research
Fundamental Outlook at 1400 GMT (EDT + 0400)
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The euro depreciated sharply vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.2690 level and was capped around the $1.2855 level. The common currency reached its lowest level since March 2009 as traders found big stops below the US$ 1.2740 level, representing a major technical retracement level. Dealers dumped the pair after European Central Bank President Trichet reported the Governing Council did not discuss bailouts for other eurozone countries including Spain and Portugal and did not discuss buying eurozone debt in the secondary market in a new quantitative easing policy. Trichet countered that Spain and Portugal “are not Greece” yet the spread between Greek bunds and Spanish 10-year debt continues to widen. The threat of additional sovereign credit contagion in the eurozone is significant and may eventually require additional ECB policies, an International Monetary Fund bailout, or other measures. Moody’s warned sovereign credit risk may spread to other banking systems including Spain, Italy, Portugal, Ireland, and the United Kingdom. Eurozone officials continue to signal that Greece will not default on its debt and the IMF indicated its bailout package gives Greece about eighteen months of financial assistance. Money is moving into U.S. Treasuries on the heels of the European debt crisis with the yields on 10-year U.S. Treasury Notes at a four-month low of 3.53%. As expected, the European Central Bank kept its main refinancing rare unchanged at 1.00% overnight. Data released in Germany today saw March factory orders up 5.0% m/m and 26.1% y/y, an improvement from February’s prints. March industrial production data will be released tomorrow. In U.S. news, data released today saw Q1 non-farm productivity print at 3.6%, down from the downwardly-revised +6.3% prior reading. Q1 unit labour costs came in at -1.6%, up from the revised -5.6%. Weekly initial jobless claims printed at 444,000, down from the revised prior reading of 451,000, and continuing jobless claims printed at 4.594 million, down from the revised prior reading of 4.653 million. Also, ICSC chain store sales fell significantly to +0.8% from the prior reading of +9.0%. Tomorrow’s April non-farm payrolls data will be closely scrutinized. Non-farm payrolls growth is expected to print around +190,000 while the unemployment rate is expected to print around 9.7%. Fed Chairman Bernanke reported he “sees some reasons for optimism” even though bank credit remains tight. Richmond Fed President Lacker noted “My worry is that we will let the obvious slack in the economy lull us into a false sense of security regarding inflation.” Boston Fed President Rosengren warned it “is likely to take years” before the economy attains “full employment” again. Euro bids are cited around the US$ 1.2295 level.
¥/ CNY
The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥93.30 level and was capped around the ¥93.95 level. Japanese financial markets reopened after the Golden Week holiday. Some Democratic Party of Japan legislators indicated the government should send the message that it will require Bank of Japan to continue “bold” monetary easing to counter deflation. Traders continue to move into yen as a safe haven play on account of the global sovereign credit crisis. Last week, Bank of Japan kept monetary policy unchanged overnight and reported it will help lenders provide credit, possibly using methods from 1998-1999 when lenders gave cash to lenders to address the credit squeeze. The headline overnight unsecured call rate target was maintained at 0.1%. BoJ Governor Shirakawa directed the central bank to stimulate lending “with a view to strengthening the foundations for economic growth.” He added “The government is also trying to map out an economic growth strategy, and the Bank of Japan hopes to give a boost to such efforts with new policy measures.” Last week’s data released in Japan evidence an improving economy that is mired in a deflationary spiral and the central bank’s enhanced rhetoric last week reflects that dichotomy. The new forecast for inflation suggests deflation will end during the next fiscal year with CPI at +0.1%. April monetary base data will be released tonight. The Nikkei 225 stock index lost 3.27% to close at ¥10,695.69. U.S. dollar offers are cited around the ¥96.85 level. The euro moved lower vis-à-vis the yen as the single currency tested bids around the ¥118.85 level and was capped around the ¥120.70 level. The British pound moved lower vis-à-vis the yen as sterling tested bids around the ¥140.20 level while the Swiss franc moved higher vis-à-vis the yen and tested offers around the ¥84.70 level. In Chinese news, the U.S. dollar depreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.8266 in the over-the-counter market, up from CNY 6.8263. The State Administration of Foreign Exchange reported “As the global economy recovers, cross-border capital inflows will increase in 2010 because of yuan appreciation expectations, interest rate differentials between Chinese and foreign currencies, and domestic asset prices. China will prevent abnormal capital inflows from enlarging asset bubbles through in-depth analysis and precise crackdowns.” People’s Bank of China is expected to revalue its yuan currency at any time. Ratings agency Fitch reported Chinese banks may need to be bailed out “if we do see a pretty serious correction in the property market.”
£
The British pound depreciated vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.4925 level and was capped around the $1.5145 level. Attention is focused on today’s General Election in the U.K. with most pollsters predicting David Cameron and the Tory party will win a minority government. If Cameron wins, the size of his victory will become crucial and will likely determine which party he tries to form a majority government with. At the very least, today’s likely election result suggests the Blair-Brown Labour movement of the past fifteen years has runs its course. A Cameron victory could be positive for sterling as the Tories voted against the Labour initiative years ago to join the euro and accede Economic and Monetary Union. Data released in the U.K. today saw April PMI services fall back to 55.3 from the prior reading of 56.5. Cable bids are cited around the US$ 1.4335 level. The euro depreciated vis-à-vis the British pound as the single currency tested bids around the £0.8425 level and was capped around the £0.8520 level.
CHF
The Swiss franc appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.1085 level and was capped around the CHF 1.1245 level. The franc went on a rampage today as the Swiss National Bank was deemed to have been absent from the market. The central bank may have deemed that euro sentiment is so negative that it would have been futile to buy euro for francs today. The CHF 1.4320 level on the cross has been talked about a lot as a key level the SNB has supported recently. Data released in Switzerland today saw April consumer price inflation climb 0.9% m/m and 1.4% y/y. Higher inflation rates are troubling for the SNB because if they lead to higher interest rates, they could engender further strength in the franc. April unemployment and March retail sales data will be released tomorrow. U.S. dollar offers are cited around the CHF 1.1270 level. The euro moved lower vis-à-vis the Swiss franc as the single currency tested bids around the CHF 1.4105 level while the British pound depreciated vis-à-vis the Swiss franc and tested bids around the CHF 1.6705 level.
Forex Daily Market Commentary provided by GCI Financial Ltd.
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