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$ 1.3275 level and was supported around the $1.3160 level. Technically, today’s intraday high was right around the 61.8% retracement of the $1.2650 – 1.4280 range. The dollar was weak across the board including the majors and the Antipodean dollar bloc. Data released in the U.S. today saw the October CaseShiller home price index decline more than expected at -0.99% m/m and -0.80% y/y. These data evidence a U.S. housing market that likely began the fourth quarter on a weak note despite strong indications the Federal Reserve would be easing monetary policy drastically. Other data released to be released today include December consumer confidence and the December Richmond Fed manufacturing index. European Central Bank member Mersch called for tougher penalties against eurozone countries that exceed fiscal deficit limits, incuding near-automatic sanctions. The European Central Bank last week increased its intervention in the eurozone government bond market with purchases under the ECB’s asset-buying program escalating to €1.1 billion from €603 million the previous week. ECB member Stark this weekend reported “Helping governments cannot and should not be a goal of these (bond-buying) operations.” German December consumer price inflation data will be released tomorrow. French Q3 gross domestic product data were released today and narrowed to +0.3% m/m and +1.7% y/y. Estonia will be joining the eurozone as of the New Year and this will increase the size of the bloc to seventeen members. In U.S. news, traders continue to speculate on whether the Federal Reserve will be forced to ease monetary policy further in 2011. The U.S. dollar’s recent pullback is coinciding with a move higher in riskier assets including crude oil and gold. It was reported today that more than 50% of the credit provided through the Federal Reserve’s emergency Term Auction Facility went to foreign banks during the financial crisis. Notably, the Dow Jones Industrial Average has risen approximately 14% since Fed Chairman Bernanke hinted at the end of August that the Fed could expand policy further, a move it made in early November by announcing it could purchase as much as US$ 600 billion in additional U.S. Treasury securities by the middle of 2011. New voting members of the Federal Open Market Committee will be casting rate-setting votes in 2011 and many Fed-watchers believe the new voting members as a whole may provide the Fed with a more hawkish bent. 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 ¥81.80 level and was capped around the ¥82.85 level. Technically, today’s intraday low was right around the 61.8% retracement of the ¥80.25 – 84.50 range. Finance Minister Noda verbally intervened against the yen’s strength again, vowing to take “bold action when moves are excessive.” Noda added the yen’s appreciation has been “one-sided” while Economy Minister Kaieda added “abrupt yen moves must be avoided.” Japanese policymakers clearly remain preoccupied with preventing the yen’s advances from eroding exporters’ margins too much, especially after positive Japanese economic data were released overnight. On 22 December, the government released an economic growth forecast that predicts economic growth will fall to +1.5% in the fiscal year beginning 1 April, down from the estimated +3.1% rate of growth in the current fiscal year. Many data were released in Japan overnight. First, the November jobless rate remained steady at 5.1%. Second, November overall household spending remained steady at -0.4%, defying expectations of an improvement. Third, December Tokyo-area consumer price inflation was off 0.2% y/y at the headline level and off 0.5% y/y at the ex-food, energy level. Fourth, November national consumer price inflation was up 0.1% y/y at the headline level and off 0.5% y/y at the ex-fresh food level, evidencing a minor uptick from October’s rate. In October, Bank of Japan’s Policy Board forecast that core prices would rise 0.1% in the fiscal year beginning 1 April and 0.6% the following fiscal year. Fifth, November industrial production improved significantly and was up 1.0% m/m and 5.8% y/y. Sixth, November retail trade was up 1.9% m/m and 1.3% y/y. Seventh, November labour cash earnings were off 0.2% y/y. Minutes from Bank of Japan Policy Board’s 4-5 November meeting were released earlier this week and one voting member “was of the view that the effects of the measure taken (by the Federal Reserve to ease policy in early November) were highly uncertain and growth in the U.S. economy was still likely to remain low for some time.” BoJ officials also noted they needed to continue monitoring the impact of the yen’s gains on exporters with one member speculating gross domestic product growth could contract this quarter. Officials warned the yen “might exert downward pressure on Japan’s economy by negatively affecting business and household sentiment. A few members expressed the opinion that careful attention should be paid to the economy’s vulnerability to downside risks, particularly when the pace of economic improvement remained slow.” The Nikkei 225 stock index lost 0.61% to close at ¥10,292.63. 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 ¥108.20 level and was capped around the ¥109.50 level. The British pound moved lower vis-à-vis the yen as sterling tested bids around the ¥126.55 level while the Swiss franc moved higher vis-à-vis the yen and tested offers around the ¥87.15 level. In Chinese news, the U.S. dollar depreciated vis-à-vis the Chinese yuan today as the greenback closed at CNY 6.6250 in the over-the-counter market, down from CNY 6.6313. People’s Bank of China raised the yield on one-year bills for the first time in seven weeks. PBoC official Wu Nianlu reported it would be optimal if the yuan was convertible by 2016. People’s Bank of China raised its one-year lending and deposit rates by 25bps on Saturday, its second rate hike since mid-October. The benchmark lending rate increased to 5.81% and the benchmark deposit rate increased to 2.75%. Many economists believe PBoC will front-load additional rate hikes and other monetary tightening policies in the coming months. Notably, China has raised banks’ reserve requirements six times in 2010 and reduced loan growth from record levels. These actions evidence a central bank and government that remain very concerned about elevated rates of inflation. Data released in China overnight saw the November leading index tick higher to 101.58. Data released in China earlier this week saw November industrial profits move lower to +49.4% y/y. 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$ 1.5510 level and was supported around the US$ 1.5410 level. Technically, today’s intraday high was right around the 38.2% retracement of the $1.4230 – 1.6300 range. The pair last week reached its weakest level since September. Data released in the U.K. earlier this week saw the December Hometrack housing survey off 0.4% m/m and off 1.6% y/y. Q3 Bank of England housing equity withdrawal data will be released tomorrow followed by December Nationwide house prices on Friday. Bank of England Monetary Policy Committee member Fisher last week warned mortgage interest rates could reach 5%. Cable bids are cited around the US$ 1.5265 level. The euro appreciated vis-à-vis the British pound as the single currency tested offers around the £0.8590 level and was supported around the £0.8530 level.
CHF
The Swiss franc appreciated sharply vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 0.9435 level and was capped around the CHF 0.9605 level. The pair has now lost about twenty big figures from its 2010 high and fell to an all-time low today as the franc continues to sharply escalate. Data released in Switzerland today saw the November UBS consumption indicator decline to 1.630 from the revised prior reading of 1.708, still indicating an expansion in consumer spending activity. The December KOF Swiss leading indicator will be released tomorrow. There is intense focus on the Swiss franc by traders now. Swiss National Bank Chairman Hildebrand has labeled the franc’s record rally a “burden” and options traders are said to more bullish on the franc over the next quarter than any other currency other than the yen. SNB incurred approximately CHF 22 billion of intervention-related losses in the first nine months of 2010 on account of its inability to halt the franc’s appreciation and there is a broadening perspective the SNB may not be able to reverse the franc’s ongoing gains. SNB last week 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.” The SNB’s 2012 inflation forecast was reduced to 1% from 1.2% on 16 December, just a few months after SNB Vice Chairman Jordan reported intervention is no longer necessary because the deflation threat was almost gone. Last week, the euro reached an all-time low vis-à-vis the Swiss franc. U.S. dollar offers are cited around the CHF 0.9780 level. The euro depreciated vis-à-vis the Swiss franc as the single currency tested bids around the CHF 1.2485 level while the British pound moved lower vis-à-vis the Swiss franc and tested bids around the CHF 1.4550 level.
Forex Daily Market Commentary provided by GCI Financial Ltd.
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