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$ 1.1960 level and was capped around the $1.2215 level. The common currency dove below the psychologically-important US$ 1.2000 figure during the North American trading session and has not traded at these levels since March 2006. Technicans are now eyeing the 1.1640/ 1.1210 levels as key downside areas of possible support. One major catalyst for the weaker euro today was a worsening of the financial situation in Hungary where the government admitted it is in a “grave situation.” The situation in Hungary poses an interesting problem for European policymakers because Hungary is a member of the European Union but is not a member of the eurozone. The European Union cobbled together a bailout package for Greece along with the International Monetary Fund and the European Central Bank reduced their credit rating requirements for eligible collateral for repo purposes to make sure banks could post Greek bonds as collateral to receive cash. Many European banks – inside and outside of the eurozone – are likely sitting with Hungarian sovereign, corporate, and other debt on their books and a worsening of the crisis in Hungary could test Europe’s resolve once again. French Prime Minister Fillon today said good things would result if the common currency traded as low as parity. French government debt may be downgraded on account of its massive fiscal debt position and high debt-to-GDP level. There is ongoing talk that Germany wants to leave the common currency altogether, a strong rumour that would rock the financial markets if it ever materialized. Group of Twenty officials will convene in Busan, South Korea this weekend and their top priority will be deficit reduction. Finance officials may also agree on some semblance of a global bank tax. Data released in the eurozone today saw Q1 GDP up 0.2% q/q and 0.6% y/y. In U.S. news, data released today saw May non-farm payrolls up 431,000, about 100,000 below consensus and up from 290,000 last month. The number was quite bad because around 411,000 of the jobs that were counted included temporary census workers. Absent those, today’s number would have been quite weak. The unemployment rate moved lower to 9.7% from 9.9%. Average hourly earnings growth accelerated 0.3% m/m and 1.9% y/y and average weekly hours worked ticked higher to 34.2 from 34.1. Atlanta Fed President Lockhart reported job creation remains too weak. 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 ¥91.50 level and was capped around the ¥92.85 level. Traders reduced exposure to higher-yielding currencies and moved back into yen in a risk aversion trade. Hungary’s problems are the latest excuse to sell higher-yielders and get long lower-yielders like the yen. Nikkei reported Bank of Japan may spend as much as ¥2 trillion for a new lending program to stimulate economic growth. Finance minister Kan was named the new Prime Minister of Japan overnight following this week’s resignation of Hatoyama. Vice finance minister Minezaki will represent Japan in Busan, South Korea this weekend at the Group of Twenty meeting and may become the new finance minister. Kan may apply more pressure on the central bank to ease monetary policy further. The yield on the five-year Japanese government bond reached a multi-year low overnight below 0.395%. This reflects increasing deflationary pressures and a perception the central bank may be forced to buy more Japanese government bonds. BoJ currently purchases about ¥1.8 trillion in debt every month. The Nikkei 225 stock lost 0.13% to close at ¥9,901.19. The euro moved lower vis-à-vis the yen as the single currency tested bids around the ¥109.75 level and was capped around the ¥113.35 level. The British pound moved lower vis-à-vis the yen as sterling tested bids around the ¥132.45 level while the Swiss franc moved lower vis-à-vis the yen and tested bids around the ¥78.75 level. In Chinese news, the U.S. dollar appreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.8288 in the over-the-counter market, up from CNY 6.8283. People’s Bank of China Governor Zhou said “there are many factors” that may have contributed to the decline in May manufacturing and said the European crisis may not be attributable. China’s economy is expected to expand about 9% to 10% this year following a strong performance in the first quarter.
£
The British pound depreciated sharply vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.4455 level and was capped around the $1.4680 level. Data released in the U.K. today saw May Halifax house prices off 0.4% m/m. The BRC retail sales monitor will be released on Monday. Bank of England Monetary Policy Committee member Posen this week warned the eurozone financial crisis could spread to the U.K. and U.S. BoE Deputy Governor Bean warned against using inflation to reduce debt, adding “a bit of inflation” can turn into “a lot of inflation.” Bank of England Governor King this week said the system must seize the opportunity for reform and banks should not be permitted to be “too big to fail.” King reiterated support for the BoE’s policy framework, reporting “Despite its volatility, inflation remains low by historic standards, and on track to meet the target in the medium term. The framework has proved resilient to the stress of the financial crisis. It guided our monetary decisions going out into the crisis, and it will guide them coming out of it.” Cable bids are cited around the US$ 1.4220 level. The euro depreciated vis-à-vis the British pound as the single currency tested bids around the £0.8250 level and was capped around the £0.8335 level.
CHF
The Swiss franc depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.1625 level and was supported around the CHF 1.1420 level. Swiss National Bank President Hildebrand today said “There’s a consensus that the financial system needs to become more resilient. It’s absolutely decisive that the regulatory focus remains on capital, liquidity, and a diffusion of the too-big-to-fail problem.” There is increasing speculation again that Swiss National Bank may reduce its franc-selling intervention on account of the massive amount of market operations it has undertaken already this year. SNB member Leuthard verbally intervened against the strong franc this week.. U.S. dollar bids are cited around the US$ 1.1420 level. The euro lost ground vis-à-vis the Swiss franc as the single currency tested bids around the CHF 1.3865 level while the British pound lost ground vis-à-vis the Swiss franc and tested bids around the CHF 1.6725 level.
Forex Daily Market Commentary provided by GCI Financial Ltd.
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