By GCI Forex Research
Fundamental Outlook at 1400 GMT (EDT + 0400)
€
The euro appreciated vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.2655 level and was supported around the $1.2480 level. The common currency reached its highest level since 21 May as dealers were less risk-averse on the heels of stronger global equity markets. Liquidity was normalized following the U.S. Independence Day holiday weekend. Yields on German and French government bonds are hovering near record lows and Austria successfully sold €1.32 billion in bonds today. Germany plans to auction as much as €5 billion in ten-year debt tomorrow. Most traders expect European Central Bank will keep monetary policy unchanged on Thursday. ECB President Trichet will speak after the ECB’s decision is announced and he is expected to discuss liquidity provisions by the ECB and the stress tests that will be conducted on eurozone banks. An anonymous ECB official today reported the central bank is pleased with the manner in which the euro has stabilized and suggested the ECB may continue with its extraordinary monetary policy measures until 2011. There is also talk that German ECB officials want to end the ECB’s asset purchase program this year. ECB official Noyer said economic growth needs to be “balanced and sustainable.” Data to be released in the eurozone tomorrow include EMU-16 Q1 gross domestic product, German May factory orders, and the French May trade balance. In U.S. news, data released today saw the June ISM non-manufacturing index decline more-than-expected to 53.8, lower than the May print of 55.4. Data to be released tomorrow include MBA mortgage applications. Richmond Fed President Lacker was quoted in the Japanese media as saying consumer spending is “moderately strong” while Dallas Fed President Fisher reported households are “cautious.” Economists are closely scrutinizing U.S. economic data to see if the recent moderation in economic growth worsens and the U.S. encounters a double dip recession. The U.S. economy is also experiencing disinflationary pressures. Euro offers are cited around the US$ 1.2720 level.
¥/ CNY
The yen depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥87.95 level and was supported around the ¥87.40 level. U.S. dollar sentiment eroded further and the pair stopped just short of testing key technical support around the ¥87.20 level. The yen reversed course and was given across the board as dealers cited better risk-taking that followed the release of stronger-than-expected Australian May trade surplus data. Data released in Japan overnight saw the May leading index fall to 98.7 while the May coincident index ticked lower to 101.2. Bank of Japan official Toyama yesterday said the Tokyo interbank offered rate is “substantially” deviating from appropriate levels. Tibor fell yesterday for a fourth consecutive day to 0.380%, its lowest level since July 2006. The yen will likely remain strong provided growth estimates for the U.S. and Europe remain muted, absent any intervention from the Japanese government. The Japanese media continues to report Bank of Japan may lift its 2010 economic growth forecast to around 2.5% from the current forecast of 1.8%. Dealers are paying close attention to Japanese politics where Prime Minister Kan’s Democratic Party of Japan party could lose its upper-house majority on 11 July. Kan and the DPJ are seeking to increase taxes. Data to be released in Japan this week include May machine orders and current account data on Wednesday. The Nikkei 225 stock index climbed 0.77% to close at ¥9,338.04. U.S. dollar bids are cited around the ¥86.29 level. The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥110.85 level and was supported around the ¥109.15 level. The British pound moved higher vis-à-vis the yen as sterling tested offers around the ¥133.65 level while the Swiss franc moved higher vis-à-vis the yen and tested offers around the ¥83.05 level. In Chinese news, the U.S. dollar appreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.7805 in the over-the-counter market, up from CNY 6.7758. The State Administration of Foreign Exchange noted a depreciation in the U.S. dollar will not cause “real” losses from foreign reserve investments. Agricultural Bank plans to raise as much as US$ 20.1 billion by selling equity in Shanghai and Hong Kong. Dealers are reporting People’s Bank of China has purchased significant amount of Japanese government bonds, approximately US$ 6 billion between January and April. The big news in China yesterday was a slide in the HSBC June services index to 55.6 from 56.4 and these data follow recent weaker data in the manufacturing sector. Some economists are scaling back their Chinese GDP growth forecasts for the fourth quarter to an annualized 8%. Notably, the Chinese economy expanded 11.9% y/y in the first three quarters of 2010. Premier Wen this weekend reported the Chinese government will remain flexible on account of “very complicated” economic situations in China and abroad.
£
The British pound appreciated vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.5225 level and was supported around the US$ 1.5080 level. Bank of England is expected to keep its headline Bank rate target unchanged this week at 0.50% and keep its asset purchase program unchanged at £200 billion. BCC today reported the BoE is unlikely to change its Bank Rate before May 2011. It was announced yesterday that economic forecaster Martin Weale will join the BoE Monetary Policy Committee as an external member. Traders will pay very close attention to Thursday’s MPC vote to see if there are additional calls for higher rates. Traders await the release of the BRC June shop price index. Cable bids are cited around the US$ 1.4620 level. The euro appreciated vis-à-vis the British pound as the single currency tested offers around the £0.8325 level and was supported around the £0.8265 level.
CHF
The Swiss franc appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.0560 level and was capped around the CHF 1.0665 level. Data released in Switzerland today saw June consumer price inflation off 0.4% m/m and up 0.5% y/y, a moderation of price pressures. The June unemployment rate will be released on Thursday and is expected to come in around 3.7%. Swiss National Bank’s foreign currency holdings declined last month to CHF 225.8 billion from CHF 232.1 billion in May as SNB officials stopped selling francs for euro or U.S. dollars. Swiss National Bank President Hildebrand yesterday said he is “closely monitoring” the franc, adding its fluctuation has “clearly increased.” U.S. dollar offers are cited around the CHF 1.0980 level. The euro appreciated vis-à-vis the Swiss franc as the single currency tested offers around the CHF 1.3410 level while the British pound moved lower vis-à-vis the Swiss franc and tested bids around the CHF 1.6035 level.
Forex Daily Market Commentary provided by GCI Financial Ltd.
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