By GCI Forex Research
Fundamental Outlook at 1400 GMT (EDT + 0400)
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The euro appreciated vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.2670 level and was supported around the $1.2455 level. Dealers continued to cover shorts ahead of the weekend, fearful that the European Central Bank could intervene by buying euro for dollars. Market rumours circulated yesterday that the ECB was on the bid for euro to prevent further depreciation. The common currency has appreciated more than 330 pips over the past three trading days, underscoring how technically oversold the pair has been for weeks. The common currency’s recent sell-off may moderate until there is a market perception that the eurozone credit crisis has intensified. A stabilization in global financial markets may unwind elevated volatilities in the market but a stabilization would not necessarily improve the crisis of confidence in the eurozone or remedy its massive fiscal imbalances. ECB President Trichet reported “Let us be clear: it is not the euro that is in danger, but the fiscal policy of some countries that has to be, and is being, addressed.” ECB member Nowotny said the euro’s exchange rate “is clearly within the historical range and gives no reason for special concern.” ECB member Stark said the “euro is secure and will remain so.” Data released in the eurozone today saw the March current account improve to €1.7 billion while May EMU-16 PMI services improved to 56.0, EMU-16 PMI manufacturing fell to 55.9, and May composite PMI moved lower to 56.2. German Q1 GDP was up 0.2% q/q and 1.7% y/y and the May Ifo business climate index ticked lower to 101.5. Also, the Ifo current assessment fell to 99.4 and the May Ifo expectations index fell to 103.7. Finally, French May PMI services improved to 61.9 and PMI manufacturing fell to 56.2. In U.S. news, the U.S. Senate passed a financial services overhaul bill overnight that maintains the Fed’s oversight over 5,000 banks but reduces the influence of regional Federal Reserve directors. The bill also creates a new customer protection agency, imposes restrictions on banks’ proprietary trading, and creates a new group of regulators to monitor economic threats. Outgoing Fed Vice Chairman Kohn today reported the Fed “will be able to raise interest rates when it is appropriate for macroeconomic stability. Exit tools are very important.” Euro bids are cited around the US$ 1.2140 level.
¥/ CNY
The yen depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥90.45 level and was supported around the ¥89.00 figure. As expected, Bank of Japan’s Policy Board kept its main overnight unsecured call rate target unchanged at 0.10%. The central bank also outlined plans to stimulate corporate loans and increase growth. BoJ Governor Shirakawa reported it will “take time” for the European Central Bank’s efforts to improve the markets, and noted the European crisis has had a “limited” impact on Japan so far. Finance minister Kan verbally intervened against the yen, saying he wants to prevent the yen’s gains from becoming “excessive.” BoJ injected ¥1 trillion on same-day funds into the banking system today to expand liquidity, the third such operation since 7 May. Notably, the central bank upgraded its assessment of the economy, noting it is “starting to recover moderately.” The Hatoyama government is likely to continue pressuring the central bank to ease policy further. Data released in Japan overnight saw the March leading index tick lower to 102.7 and the March coincident index improved to 101.5. The Nikkei 225 stock index lost 2.45% to close at ¥9,784.54. U.S. dollar offers are cited around the ¥96.85 level. The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥114.40 level and was supported around the ¥111.00 figure. The British pound moved higher vis-à-vis the yen as sterling tested offers around the ¥130.80 level while the Swiss franc moved higher vis-à-vis the yen and tested offers around the ¥78.80 level. In Chinese news, the U.S. dollar appreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.8278 in the over-the-counter market, up from CNY 6.8277. Market talk suggests the U.S. and China will deemphasize a revaluation of the yuan when officials meet soon. Many dealers believe PBoC may delay its yuan revaluation and further interest rate increases on account of the global market turmoil. Former PBoC adviser said the yuan’s revaluation should be “gradual.”
£
The British pound appreciated vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.4495 level and was supported around the $1.4315 level. Yesterday, Bank of England Monetary Policy Committee member Posen reported eurozone problems will reduce the U.K.’s consumer price inflation despite “upside risks to inflation.” MPC member Tucker warned the sharp monetary easing may lead to exuberance. Data released in the U.K. today saw Q1 total business investment grow 0.6% q/q and decline 11.0% y/y. Also, the April public sector net cash requirement came in at £8.8 billion and April public sector net borrowing came in at £10.0 billion. Also, April mortgage approvals growth decelerated to 47,000 from the revised prior reading of 51,000. Cable bids are cited around the US$ 1.4110 level. The euro appreciated vis-à-vis the British pound as the single currency tested offers around the £0.8770 level and was supported around the £0.8650 level.
CHF
The Swiss franc appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.1450 level and was capped around the CHF 1.1580 level. Data released in Switzerland today saw the April M3 money supply expand 5.4% y/y. Swiss National Bank Vice Chairman Jordan this week reported the central bank is “decisively” averting an appreciation of the franc, leading to speculation the SNB’s actions prompted today’s massive short covering in the euro. It was reported today that the Swiss National Bank’s foreign currency holdings rose to CHF 153.6 billion in April from CHF 125.1 billion in March, the latest evidence of SNB intervention. U.S. dollar bids are cited around the US$ 1.1110 level. The euro gained ground vis-à-vis the Swiss franc as the single currency tested offers around the CHF 1.4585 level while the British pound gained ground vis-à-vis the Swiss franc and tested offers around the CHF 1.6660 level.
Forex Daily Market Commentary provided by GCI Financial Ltd.
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