By GCI Forex Research
Fundamental Outlook at 1400 GMT (EDT + 0400)
€
The euro depreciated vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.3235 level and was capped around the $1.3305 level. The common currency has gained about 6% from four-year lows in June amid slowing U.S. economic activity. Many banks are pushing back their forecasts for eventual European Central Bank monetary policy tightening with some eyeing late 2011 or early 2012 as to when policy could begin to be normalized. German 10-year bond yields are near a record low as most traders expect the ECB to remain on hold and the Federal Reserve to possibly signal it may resume asset purchases in some capacity. Three-month U.S. Libor fell to 0.404%, its lowest level since 6 May, while three-month Euro Libor was unchanged around 0.834%. ECB member Paramo called on Spanish lenders to strengthen bank capital and ECB member Orphanides said there is “no urgency” to begin raising rates. In contrast, ECB’s Quaden said the ECB “needs to be more attentive on inflation.” Data released in the eurozone today saw August Sentix investor confidence improve sharply to 8.5 from the prior reading of -1.3. Also, the German June trade balance improved to €14.1 billion and the June current account expanded to €12.9 billion. Other data saw French July Bank of France business sentiment steady at 101. In U.S. news, the Federal Open Market Committee will release its interest rate decision tomorrow and policymakers are expected to keep the federal funds rate target unchanged at 0.25%. The big question on traders’ minds is whether or not the Fed will signal a resumption of its credit expansion programs. Dealers are focused on the possibility the Fed will reinvest proceeds from maturing assets back into the market to keep a lid on market interest rates rather than keeping cash on its balance sheet. Recent U.S. economic activity has slowed or worsened and the Fed’s biggest task will be to reduce the U.S. unemployment rate. Data to be released in the U.S. tomorrow include Q2 non-farm productivity, Q2 unit labour costs, and June wholesale inventories. Euro offers are cited around the US$ 1.3505 level.
¥/ CNY
The yen depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥85.75 level and was supported around the ¥85.30 level. The pair continues to trade in the ¥85 handle, an area where many dealers believe Japanese monetary authorities will intervene to prevent the yen from surging further. Others, however believe Japanese authorities are pleased with improving domestic demand and an export-led recovery and will not feel forced to intervene around these levels. Former Bank of Japan Assistant Governor Hirano warned “If the pace of the yen’s rise is too fast, Japan may try to check it by showing its readiness to intervene.”
He added “Japan is unlikely to obtain other nations’ consent for launching a solo intervention.” Bank of Japan’s Policy Board convened overnight to discuss monetary policy and is not expected to alter policy when its decision is announced tonight. Government official Hiraoka said the central bank cannot counter deflation alone, reporting “Japan must fight an all-out battle to change deflationary sentiment by utilizing various measures, including fiscal and social welfare policies.” Some government officials are still calling for the Kan government to impose an inflation target on the central bank. Data released in Japan overnight saw the June current account total narrow to ¥1.047 trillion while the June trade balance nearly doubled to ¥769.0 billion. Also, July bank lending was off 1.7%. Data to be released overnight include the July economy watchers survey and July bankruptcies data. The Nikkei 225 stock index lost 0.72% to close at ¥9,572.49. U.S. dollar bids are cited around the ¥85.30 level. The euro moved lower vis-à-vis the yen as the single currency tested offers around the ¥113.25 level and was capped around the ¥113.90 level. The British pound moved higher vis-à-vis the yen as sterling tested offers around the ¥136.90 level while the Swiss franc moved higher vis-à-vis the yen and tested offers around the ¥82.50 level. In Chinese news, the U.S. dollar depreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.7684 in the over-the-counter market, down from CNY 6.7686. People’s Bank of China set the yuan’s reference rate at its strongest level since the currency peg was ended in July 2005. There is talk that a Chinese government commitment to energy reduction may reduce industrial output growth in the near term. Chinese exports data will be released overnight and could show exports growth decelerated to 35% last month. Former PBoC Deputy Governor Wu said China should not introduce additional stimulus measures.
£
The British pound appreciated vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.5995 level and was supported around the US$ 1.5930 level. Bank of England is expected to reduce its U.K. economic growth projections and increase its inflation forecast. The BoE Quarterly Inflation Report will be released on Wednesday and will likely trim the Bank’s May forecast of 3.4% economic growth for 2011 and 3.6% growth for 2012. There is talk the Bank could reduce its projections by up to a full percentage point. Data to be released in the U.K. overnight include the BRC July retail sales monitor and July RICS house price balance. Cable bids are cited around the US$ 1.5640 level. The euro depreciated vis-à-vis the British pound as the single currency tested bids around the £0.8295 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 1.0415 level and was supported around the CHF 1.0370 level. Data to be released in Switzerland tomorrow include July SECO consumer confidence followed by July producer and import prices on Friday. Data released in Switzerland last week saw the July unemployment rate tick lower to 3.6% from the prior level of 3.7%. S&P last week withdrew its short-term ratings of “AAA/A-1+” on Swiss National Bank on account of the lack of rated debt outstanding. U.S. dollar offers are cited around the CHF 1.0980 level. The euro depreciated vis-à-vis the Swiss franc as the single currency tested bids around the CHF 1.3760 level while the British pound moved higher vis-à-vis the Swiss franc and tested offers around the CHF 1.6620 level.
Forex Daily Market Commentary provided by GCI Financial Ltd.
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