By GCI Forex Research
Fundamental Outlook at 1400 GMT (EDT + 0400)
€
The euro depreciated sharply vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.2360 level and was capped around the $1.2575 level. Dealers pushed the common currency lower on rumours that French President Sarkozy threatened France would leave the euro if Germany supported any additional bailout packages. French finance minister Lagarde later characterized the rumours as “rubbish” but the pair fell to within twenty pips of their lowest level since April 2009. Some euro bears continue to speculate the pair will move to parity and many dealers are selling the euro on moves higher. Eurozone sovereign credit concerns remain at very elevated levels and are negatively impacting many asset classes and markets. There remains speculation that Greece or other eurozone countries may default on debt obligations, perhaps even this year despite the significant bailout packages that have been appropriated. European Central Bank member Weber reported unconventional measures have been a “success” and said there is “no alternative” to a credible fiscal consolidation. In U.S. news, data released today saw April retail sales decline to +0.4% from an upwardly-revised prior reading of +2.1% while the ex-autos component fell to +0.4% from an upwardly-revised +1.2%. Also, April industrial production improved to +0.8% from the revised reading of +0.2% and capacity utilization climbed to 73.7%. Other data saw March business inventories print at +0.4% while mid-May University of Michigan consumer sentiment improved to 73.3 from the prior reading of 72.2. Chicago Fed President Evans said the Fed’s provision of swap lines with European counterparties “will limit” the contagion impact of European spillover effects “greatly.” On the U.S. monetary policy front, Evans said he is comfortable with his assessment that “accommodation continues to be appropriate.” Evans expects the economy to expand about 3.5% this year but sees the jobless rate remaining high “for a number of years.” Euro bids are cited around the US$ 1.2585 level.
¥/ CNY
The yen depreciated sharply vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥91.80 level and was capped around the ¥93.10 level. Data released in Japan today saw April bankruptcies decline 13.2% y/y while April machine tool orders were up 220.5% y/y. Also, the April economy watchers survey was released overnight and the current index improved to 49.8 from the prior reading of 47.4 while the outlook improved to 49.9 from the prior reading of 47.0. Bank of Japan Deputy Governor Yamaguchi this week said the central bank has “no need to alter the outlook in our semi-annual economic report” following recent market volatility. Finance minister Kan this week reported equity and currency markets will “start to stabilize.” Minutes from last month’s BoJ Policy Board meeting were released yesterday and policymakers observed “balance sheet adjustments in the banking sector and the fiscal deficit problem in some European countries might further slow the pace of economic recovery” in the region. The Nikkei 225 stock index declined 1.49% to close at ¥10,462.51. 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 ¥113.50 level and was capped around the ¥117.00 figure. The British pound moved lower vis-à-vis the yen as sterling tested bids around the ¥133.15 level while the Swiss franc moved lower vis-à-vis the yen and tested bids around the ¥81.00 figure. 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, down from CNY 6.8280. Data released in China overnight saw April foreign direct investment up an actual 24.69% y/y, up from the prior reading of 12.08%. Yuan forwards registered their largest weekly gain this year on speculation China will revalue its currency in short order. The U.S. and China will hold their second U.S.-China Strategic and Economic Dialogue in Beijing on 24-25 May. People’s Bank of China member Li Daokui reported “conditions for China’s interest rate adjustment are basically mature now.”
£
The British pound depreciated vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.4495 level and was capped around the $1.4640 level. Bank of England Governor King was on the tape as saying the U.S. faces some of the same fiscal dangers as Greece. Traders are increasing their positions that would benefit if Bank of England keeps interest rates lower for a longer period of time. Yields on two-year and 10-year gilts fell to their lowest level this year. Traders continue to express doubts that the new coalition government will be able to adequately reduce the U.K.’s mammoth fiscal deficit. The new government has suddenly found an ally in Bank of England Governor King who has publicly supported their decision to reduce spending by as much as £6 billion. Cable bids are cited around the US$ 1.4335 level. The euro depreciated vis-à-vis the British pound as the single currency tested bids around the £0.8500 figure and was capped around the £0.8620 level.
Forex Daily Market Commentary provided by GCI Financial Ltd.
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