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$ 1.3075 level and was capped around the $1.3235 level. As expected, the Federal Open Market Committee kept its federal funds target rate unchanged at 0.25% and the Federal Reserve Bank of New York reported it will keep the Fed’s balance sheet at US$ 2.054 trillion. The FOMC reported “Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Bank lending has continued to contract. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be more modest in the near term than had been anticipated. Measures of underlying inflation have trended lower in recent quarters and, with substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The Committee will continue to roll over the Federal Reserve’s holdings of Treasury securities as they mature. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.” Kansas City Fed President Hoenig dissented, arguing “he believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted and limits the Committee’s ability to adjust policy when needed.” On the balance, the FOMC’s statement was relatively bearish and a downward trajectory is expected to continue in market rates. Data released in the U.S. today saw July NFIB small business optimism decline to 88.1 from the prior reading of 89.0. Also, Q2 non-farm productivity was off 0.9%, down from +3.9% in Q1, and Q2 unit labour costs were up +0.2%, up from -3.7% in Q1. Finally, June wholesale inventories came in at +0.1%, down from +0.5%. In eurozone news, German headline consumer prices were up 0.3% m/m and 1.2% y/y with the harmonized components up 0.3% m/m and 1.2% y/y. Also, the July wholesale price index was off 0.3% m/m and up 5.3% y/y. Other data released today saw French June manufacturing production off 1.3% m/m and up 5.0% y/y while June industrial production was off 1.7% m/m and up 5.7% y/y. European Central Bank member Stark reported monetary policy remains “very accommodative” and said inflation pressures remain contained in the medium-term. Euro offers are cited around the US$ 1.3505 level.
¥/ CNY
The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥85.65 level and was capped around the ¥86.20 level. As expected, Bank of Japan’s Policy Board kept its monetary policy unchanged today with the unsecured overnight call rate target unchanged at 0.10%. Bank of Japan Governor Shirakawa reported “We are well aware that the yen’s strength is a downside risk for corporate sentiment. On the other hand, we have to assess the currency’s effect on the economy in a well-balanced manner.” Many dealers believe the central bank will not ease policy further unless the yen’s advances become disruptive and push the economy back toward a recession. Similarly, a change in policy by the Fed could place more upward pressure on the yen and require a policy response. Traders are still focused on this ¥85 handle as a possible area where Japanese monetary authorities may conduct yen-selling intervention. Finance minister Noda verbally intervened today, saying the yen’s movements have been “one-sided” and “excessive.” The government today also maintained its assessment of the economy as unchanged. Japanese legislators are reportedly urging BoJ officials to discuss their policies in an open debate, possibly increasing the chances of a more expansionary policy. Data released in Japan overnight saw Q2 housing loans climb 3.6% y/y while July machine tool orders were up 144.8% y/y. Data to be released tonight include June machine orders and the July domestic corporate goods price index. The Nikkei 225 stock index lost 0.22% to close at ¥9,551.05. 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 bids around the ¥112.25 level and was capped around the ¥113.75 level. The British pound moved lower vis-à-vis the yen as sterling tested bids around the ¥135.00 figure while the Swiss franc moved lower vis-à-vis the yen and tested bids around the ¥81.00 figure. In Chinese news, the U.S. dollar appreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.7721 in the over-the-counter market, up from CNY 6.7684. Data released in China overnight saw the July trade balance expand to US$ 28.73 billion from the prior reading of US$ 20.02 billion. Data to be released tonight include July producer prices, consumer prices, retail sales, and industrial production. The yuan depreciated the most in five weeks after the People’s Bank of China established a lower reference rate. Central Huijin Investment plans to start selling CNY 190 billion in bonds this month.
£
The British pound depreciated vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.5710 level and was capped around the US$ 1.5905 level. Data released in the U.K. today saw the July RICS house price balance decline 8%, down from the revised prior release of +8. Also, the June total trade balance narrowed to -£3.260 billion from the prior reading of -£3.818 billion. Also, June DCLG house price growth narrowed to +9.9% from +10.6%. July Nationwide consumer confidence data will be released overnight. Unemployment and earnings data will be released in the U.K. tomorrow along with the Bank of England Quarterly Inflation Report. The central bank is expected to trim its economic growth forecast tomorrow. 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 £0.8300 figure and was capped around the £0.8360 level.
CHF
The Swiss franc depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.0615 level and was supported around the CHF 1.0480 level. Data released in Switzerland today saw the July SECO consumer confidence measure climb to +16 from the prior reading of +14. July producer and import prices data will be released 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 1.3830 level while the British pound moved lower vis-à-vis the Swiss franc and tested bids around the CHF 1.6580 level.
Forex Daily Market Commentary provided by GCI Financial Ltd.
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