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$ 1.2175 level and was capped around the $1.2370 level. The situation in Europe worsened dramatically overnight. First, yieds on German government 10-year bunds reached a record low, reflecting the safe haven play that many nervous investors and traders are seeking. Yields on French 10-year debt also reached a record low overnight. Second, the German government has now proposed a ban on the naked short-selling of all German equities, a broad expansion of the plan announced two weeks ago. In addition, Germany’s plan calls for a ban on the short-selling of certain types of eurozone bonds and certain types of credit default swaps. Other eurozone countries have not yet followed suit with similar banks and the common currency is suffering as a result of the perception of a lack of cohesion with regard to policymaking. Third, there is a sense that more European banks will fail. Yesterday, four regional Spanish savings banks announced a plan to combine forces to stave off concerns following the nationalization of one savings bank. The yield spread between Spanish 10-year bonds and German 10-year bunds widened fourteen basis points to 154 bps, the highest levels since 7 May. Fourth, there is talk the European Union will introduce a new up-front tax on banks to help stabilize the financial system. European Central Bank member Nowotny reiterated the ECB is “fiercely independent” and said it is not engaging in quantitative easing. Data released in the eurozone today saw EMU-16 March industrial new orders up 5.2% m/m and 19.8% y/y. In U.S. news, the March Case-Sehiller home price index was off a marginal 0.05% m/m and up 2.35% y/y. Other data to be released today include the May Richmond Fed manufacturing index and March house price index. St. Louis Fed President Bullard reported the trajectory of U.S. interest rates depends on the economic recovery into 2011. Euro offers are cited around the US$ 1.2620 level.
¥/ CNY
The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥89.25 level and was capped around the ¥90.30 level. Dealers added to long yen positions on escalating concerns about the European debt crisis and a worsening regional situation involving the two Koreas. North Korean leader Kim Jong-Il is said to have ordered his military on “combat footing” while South Korea is said to have restarted “psychological warfare” against the north. These measures are in response to the sinking of a South Korean submarine, allegedly by North Korea. Japan strategy minister Sengoku warned the European economy will not recover soon. Three-month Libor rates for yen loans grew to 0.2456% and three-month U.S. dollar Libor is now 0.50969%, the highest level since 16 July. Traders await the release of April Bank of Japan Policy Board meeting minutes overnight along with the April corporate service price index. The Nikkei 225 stock index lost 3.06% to close at ¥9,459.89. 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 ¥108.80 level and was capped around the ¥111.65 level. The British pound moved lower vis-à-vis the yen as sterling tested bids around the ¥127.65 level while the Swiss franc moved lower vis-à-vis the yen and tested bids around the ¥76.40 level. In Chinese news, the U.S. dollar appreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.8315 in the over-the-counter market, up from CNY 6.8287. Data released in China overnight saw the April leading index decline to 104.36. The State Administration of Foreign Exchange indicates China has not had large-scale “hot money” inflows ahead of the possible revaluation and appreciation of the yuan. People’s Bank of China sold one-year bills at an unchanged yield of 1.9264% in open-market operations today, the seventeenth consecutive time it has not changed yields. Some dealers believe PBoC will increase the yield on its bills to absorb excess liquidity in the money markets. Chinese yuan forwards came off their most in fifteen months on the European debt crisis today, bringing into question whether or not China will revalue the yuan with the global economy on a relatively weak footing. U.S. Treasury Secretary Geithner characterized U.S.-Chinese talks on the yuan as “encouraging.” Yesterday, People’s Bank of China adviser Li Daokui today said “Politically it is worthwhile, it makes sense, for the two sides – China and the U.S. – to see some progress in renminbi reform in the near future.”
£
The British pound depreciated vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.4255 level and was capped around the $1.4420 level. Data released in the U.K. today saw Q1 gross domestic product up 0.3% q/q and off 0.2% y/y. Bank of England Monetary Policy Committee member Posen said he cannot rule out deflationary pressures in the U.S. and U.K. economies. Chancellor of the Exchequer Osborne yesterday reported the new Cameron government hopes to decrease fiscal spending by at least £6 billion in what would be an abrupt shift from the policies of former Prime Minister Brown. Outgoing Bank of England Monetary Policy Committee member Barker reported more difficult times are ahead for the U.K. economy. Cable bids are cited around the US$ 1.4110 level. The euro depreciated vis-à-vis the British pound as the single currency tested bids around the £0.8510 level and was capped around the £0.8585 level.
CHF
The Swiss franc depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.1695 level and was supported around the CHF 1.1580 level. Data released in Switzerland today saw the April UBS consumption indicator improve to 1.763 from the revised print of 1.682 in March. There is a growing sense among traders that Swiss National Bank may be unable to keep up with market speculation and may be forced at some point to abandon its franc-selling intervention operations on account of the major global bearish sentiment that overhangs the common currency. U.S. dollar bids are cited around the US$ 1.1110 level. The euro lost ground vis-à-vis the Swiss franc as the single currency tested bids around the CHF 1.4205 level while the British pound lost ground vis-à-vis the Swiss franc and tested bids around the CHF 1.6585 level.
Forex Daily Market Commentary provided by GCI Financial Ltd.
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