By GCI Forex Research
Fundamental Outlook at 0800 GMT (EDT + 0400)
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The euro appreciated vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.3145 level and was supported around the $1.3085 level. The common currency was poised to register its third consecutive lower weekly close. Ratings agency Fitch downgraded Portugal’s credit rating by one notch to A+, the fifth highest level, and confirmed Portugal’s outlook is negative. Fitch reported “The downgrade reflects an even slower reduction in the current account deficit and a much more difficult financing environment for the Portuguese government and banks than incorporated into Fitch’s previous rating and the negative outlook assigned on 24 March 2010, as well as a deteriorating near-term economic outlook.” Traders remain extremely concerned about the sovereign debt crisis involving peripheral eurozone countries like Portugal, Spain, Ireland, Greece, and others. Excess liquidity in the eurozone banking system remains elevated into year-end, reflecting banks’ nervousness concerning market stresses and a decreased willingness to lend. Irish finance minister Lenihan this week said a default on senior debt would “destroy” Ireland and is not an option. ECB member Kranjec noted “I see no danger for existence of the euro,” adding the European Union has shown a lot of “flexibility” in tackling its members’ financial problems. The German media this week reported Germany has proposed the creation of a new independent institution to bolster eurozone members that are financially-troubled. The German proposal would include the creation of a European Stability and Growth Investment Fund that would enhance the operations of the European Central Bank. The new Fund would provide liquidity against collateral in the form of gold reserves or equity in state-owned companies. In U.S. news, economic data released yesterday saw November durable goods come in at -1.3%, up from the revised prior reading of -3.1%, while the ex-transportation component was up 2.4%. November personal income and November personal spending were up 0.3% and 0.4%, respectively, while the November PCE deflator was up 1.0% y/y. Additionally, core PCE was up 0.1% and 0.8% y/y, below expectations. Weekly initial jobless claims were up 420,000 and continuing jobless claims were up 4.064 million. Moreover, November new home sales were up 5.5% to an annualized 290,000 units and the final University of Michigan consumer sentiment indicator improved to 74.5. Euro bids are cited around the US$ 1.2995 level.
¥/ CNY
The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥82.85 level and was capped around the ¥83.15 level. Technically, the pair was poised to close the week right around the 38.2% retracement of the ¥80.25 – 84.50 range. Some media outlets reported Japan will likely increase its reserves for conducting intervention in the exchange rates market. Cabinet Office official Wada reported “The BoJ has pretty much done everything it can do. It’ll probably be hard for the Bank of Japan to find more effective policy tools. So, it will be the government’s turn to make more of an effort with policy steps…It’s strange that private banks can’t lend. They are pouring money into government bonds even though they have sufficient funds to extend loans. Their money should go into companies rather than government bonds.” The Kan government today approved a record ¥92.41 trillion draft budget for the fiscal year that begins 1 April 2011. Japan plans to issue new bonds valued at ¥44.3 trillion, a move that means new debt will likely eclipse tax revenue for the second consecutive year. Notably, Japan’s public debt is estimated to be approximately 200% of gross domestic product, the highest level among its industrialized peers. Finance minister Noda reported “We were able to draft the budget…while walking a fine line to achieve both improvement of fiscal health and economic growth.” Noda also said the government fulfilled an obligation to limit new bond issuance to this year’s ¥44.3 trillion level. Bank of Japan released its Monthly Report of Recent Economic and Financial Developments this week in which it reiterated “Japan’s economy still shows signs of a moderate recovery, but the recovery seems to be pausing,” an assessment that is very similar to its assessments in November and October. Notably, however, the central bank upgraded its assessment of the impact from its “highly accommodative” monetary policy and reported capital spending is improving. On a negative note, the central bank lowered its assessment of production. The central bank also reported that it has made ¥25 trillion in asset purchases and loans as part of its ¥30 trillion stimulus program designed to enhance economic growth and overcome deflation. As expected, Bank of Japan’s Policy Board kept monetary policy unchanged this week, leaving the overnight unsecured call rate target between 0% and 0.1% and maintaining the size of its credit programs. BoJ Governor Shirakawa reported “Volatile long-term rates can affect the economy, prices, and financial conditions by influencing borrowing costs for households and companies.” The BoJ noted “The bank will steadily purchase various financial assets and provide longer-term funds” so that “the effects of comprehensive monetary easing spread.” Data released in Japan this week saw the November merchandise balance total decline to +¥162.8 billion from the prior total of ¥821.3 billion. The Nikkei 225 stock index lost 0.65% to close at ¥10,279.19. U.S. dollar offers are cited around the ¥84.60 level. The euro moved lower vis-à-vis the yen as the single currency tested bids around the ¥108.55 level and was capped around the ¥109.05 level. The British pound moved lower vis-à-vis the yen as sterling tested bids around the ¥127.80 level while the Swiss franc moved lower vis-à-vis the yen and tested bids around the ¥86.00 figure. In Chinese news, the U.S. dollar depreciated vis-à-vis the Chinese yuan today as the greenback closed at CNY 6.6264 in the over-the-counter market, down from CNY 6.6450. For the second time in one month, China failed to solicit enough demand for a bill sale as banks have less cash on account of higher reserve requirements. People’s Bank of China today reiterated China needs to return to a “prudent monetary policy” to control its money supply and reduce price inflation. The current cash squeeze being faced by banks renders it unlikely PBoC will hike interest rates by the end of the year. Notably, Chinese financial institutions have lent CNY 17 trillion over the past two years. Chinese money-market rates escalated to their highest level in more than two years this week as a result of lenders having to provision more capital as reserves. People’s Bank of China Governor Zhou last week reported global economic turbulence is limiting the central bank’s ability to raise interest rates to counter inflation. Notably, China’s inflation rate reached a 28-month high in November and PBoC has pledged it will transition to a “prudent” monetary policy stance in 2011. China is said to be targeting 8% GDP growth and 4% inflation growth in 2011 along with 16% M2 money supply growth.
£
The British pound appreciated vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.5475 level and was supported around the US$ 1.5415 level. Cable was poised to register its lowest weekly close since early September. Bank of England Monetary Policy Committee member Fisher this week warned mortgage interest rates could reach 5%. Data to be released early Monday include the December Hometrack housing survey. Data released in the U.K. this week saw November BBA loans for house purchases moderate while the October index of services were off 0.4% y/y. Other data released in the U.K. this week saw Q3 total business investment up 3.1% q/q and 8.9% y/y while Q3 gross domestic product was downwardly revised to +0.7% q/q and +2.7% y/y. Also, the Q3 current account deficit widened to -£9.6 billion. Minutes from Bank of England’s December Monetary Policy Committee meeting were released this week in which there was a three-way voting split again. MPC member Posen again voted to increase the BoE’s £200 billion asset purchase program by £50 billion while MPC member Sentance voted to increase interest rates for a seventh month. The other MPC members voted for no change in policy but “stood ready to change the stance of policy should the balance of risks shift materially.” BoE also reported that spare economic capacity is “substantial.” Cable bids are cited around the US$ 1.5265 level. The euro depreciated vis-à-vis the British pound as the single currency tested bids around the £0.8475 level and was capped around the £0.8510 level.
CHF
The Swiss franc depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 0.9635 level and was supported around the CHF 0.9555 level. The pair was poised to register its second consecutive lower weekly close. Swiss National Bank reported it is “ready to take the measures necessary” to counter deflation, adding to speculation it may conduct a fresh round of franc-selling intervention. SNB today reported “Concerns about stability in the euro area have led to renewed financial market tensions. Should these tension be exacerbated and put a strain on economic developments in the euro area, this would also have a detrimental effect on the Swiss economy. If a deflation risk emerges, the SNB would take the measures necessary to ensure price stability.” Earlier this week, the euro reached an all-time low vis-à-vis the Swiss franc. The November UBS consumption indicator and December KOF Swiss leading indicator will be released next week. There was market chatter this week that Swiss National Bank Chairman Hildebrand said the euro could fall to CHF 0.50 but the SNB later denied this comment. Data released in Switzerland this week saw the November trade balance surplus narrow to CHF 1.93 billion from the revised prior reading of CHF 2.05 billion. Also, the November M3 money supply indicator climbed 6.4% y/y. Swiss National Bank member Jordan this weekend reported “There may be situations where interest rates have to be kept at a low level to ensure price stability, and where higher rates could threaten the economy.” SNB Chairman Hildebrand reported he remains concerned over the eurozone sovereign debt crisis, adding it could lead to “devastating” consequences if the euro depreciates sharply and the franc soars. The KOF Institute last week raised its Swiss GDP growth forecast slightly for 2011 and reported Swiss National Bank is likely to raise interest rates around the middle of 2011. Swiss National Bank’s quarterly interest rate announcement was announced last week in which policymakers maintained the central bank’s three-month Swiss franc Libor target rate at 0.25%. SNB’s 2011 inflation forecast was raised to 0.4% from 0.3% and its 2012 inflation forecast was reduced to 1% from the prior reading of 1.2%. SNB expects the Swiss economy to grow about 2.5% in 2010 and around 1.5% in 2011. The Swiss government last week raised its GDP growth forecast for 2011 to 1.5% from the 1.2% projection it noted in September. U.S. dollar offers are cited around the CHF 0.9780 level. The euro appreciated vis-à-vis the Swiss franc as the single currency tested offers around the CHF 1.2655 level while the British pound moved higher vis-à-vis the Swiss franc and tested offers around the CHF 1.4885 level.
Forex Daily Market Commentary provided by GCI Financial Ltd.
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