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$ 1.2010 level and was supported around the $1.1900 figure. The common currency failed to gain any sustainable traction today as dealers cited few compelling reasons to be long euro with the European sovereign debt crisis overhanging the pair. Fitch’s warning today about U.K. debt reminded investors that large economies on the periphery of the eurozone face their own problems and traders will look for any similariaties between each troubled country and Greece, which experienced its own implosion. Three-month Euro Libor reached 0.65% today, its highest since early January and an indication of the stresses in European money markets. Another measure of market stress – the Euro Libor/ Overnight index swap spread – increased and is near the 2010 high. Three-month U.S. Dollar Libor remains elevated at 0.53688%. At the same time, the European Central Bank lent financial institutions more than €122 billion in seven day-funds at its main refinancing rate, up from last week’s total of €117.7 billion. These data suggest more banks are facing liquidity problems. The ECB will announce its policy decision on Thursday and these funding stresses may cause the ECB to issue a new six-month refinancing operation so that banks can borrow funds for longer terms. Furthermore, the ECB could expand its covered bond buying program to inject more liquidity into the market. Approximately €500 billion in one-year funds expires on 1 July and the ECB will have to address this maturity in the context of existing financial constraints. It was also reported that eurozone banks deposited a record €361.692 billion with the ECB overnight instead of lending them to other banks. Germany’s Finance Agency reported it will expand its operation and sell debt on behalf of the newly-created European Financial Stabilization Fund. Data released in Germany today saw the April trade balance slow to €13.4 billion while the current account balance slowed to €11.8 billion. Also, April industrial production expanded 0.9% m/m and 13.3% y/y. French data saw May Bank of France business sentiment tick lower to 101. In U.S. news, data released in the U.S. today saw May NFIB small business optimism improve to 92.2. Data to be released tomorrow include MBA mortgage applications and April wholesale inventories along with the Fed’s Beige Book. Fed Chairman Bernanke reiterated the U.S. unemployment rate is likely to stay “high for a while” and said the economic recovery remains “moderate paced.” Euro offers are cited around the US$ 1.2330 level.
¥/ CNY
The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥90.85 level and was capped around the ¥91.90 level. Traders were reluctant to take on too much risk and the yen remained bid as a result. Many data were released in Japan overnight. First, the April current account total fell to ¥1.242 trillion, down from the prior reading of ¥2.534 trillion, while the trade balance fell to ¥859.1 billion from the prior reading of ¥1.074 trillion. Second, May bank lending was off 2.0% y/y. Third, the April leading index fell to 101.7 and the coincident index improved to 101.6. Fourth, the May economy watchers’ survey fell to 47.7 at the current level and 48.7 at the outlook level. Data to be released during the Australasian session include April machine orders followed by Q1 gross domestic product on Thursday. New Economy minister Arai reported the “biggest theme of Japan’s economy policy is how to overcome deflation. For that purpose, cooperation with the BoJ is very important.” The central bank today warned its Japanese government bond holdings may reach its self-imposed limit “within a few years.” BoJ Governor Shirakawa noted the BoJ’s ability to increase purchases is “pretty limited.” New finance minister Noda verbally intervened today, saying he will “carefully monitor markets with the understanding that excessive and disorderly movements can have a negative impact on the stability of the economy.” New Prime Minister Kan yesterday said a weak yen is “generally said to be” positive for the Japanese economy. Former MoF official “Mr Yen” Sakakibara warned the euro may decline below ¥100 “within the next couple of months.” The Nikkei 225 stock index gained 0.18% to close at ¥9,537.94. The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥110.05 level and was supported around the ¥108.70 level. The British pound moved higher vis-à-vis the yen as sterling tested offers around the ¥133.35 level while the Swiss franc moved higher vis-à-vis the yen and tested offers around the ¥79.30 level. In Chinese news, the U.S. dollar depreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.8296 in the over-the-counter market, down from CNY 6.8324. Data released in China overnight saw the Q3 manpower survey increase to 27% from 17%. Data to be released this week include May money supply numbers, May new yuan loans, May trade, May retail sales, May industrial production, May PPI, and May CPI. People’s Bank of China warned Chinese economic growth will continue to be impacted by global problems and said final domestic private demand is still not “solid.” PBoC noted an “appropriately loose” monetary policy and a proactive fiscal policy will continue. The State Administration of Foreign Exchange warned China is considering controls on yuan forward transactions to slow investors from speculating when the central bank will end its peg to the U.S. dollar.
£
The British pound depreciated vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.4345 level and was capped around the $1.4530 level. Cable was knocked lower after ratings agency Fitch warned the U.K. is facing a “formidable” challenge with its escalating debts. Prime Minister Cameron warned that forthcoming fiscal realignments will hurt everyone. Bank of England’s Monetary Policy Committee is expected to keep rates unchanged on Thursday and to keep its asset purchase target unchanged at £200 billion. Data released in the U.K. today saw BRC May retail sales growth of 0.8% y/y. Data to be released tomorrow include April trade data. Cable bids are cited around the US$ 1.4220 level. The euro appreciated vis-à-vis the British pound as the single currency tested offers around the £0.8290 level and was capped around the £0.8230 level.
CHF
The Swiss franc appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.1550 level and was capped around the CHF 1.1640 level. Data released in Switzerland today saw the May unemployment rate remain unchanged at 4.0% while May consumer price inflation was off 0.1% m/m and up 1.1% y/y. There is speculation today the Swiss National Bank bought euro for francs in an intervention after the London close. Swiss National Bank President Hildebrand last week said “There’s a consensus that the financial system needs to become more resilient. It’s absolutely decisive that the regulatory focus remains on capital, liquidity, and a diffusion of the too-big-to-fail problem.” U.S. dollar bids are cited around the US$ 1.1420 level. The euro lost ground vis-à-vis the Swiss franc as the single currency tested bids around the CHF 1.3780 level while the British pound lost ground vis-à-vis the Swiss franc and tested bids around the CHF 1.6640 level.
Forex Daily Market Commentary provided by GCI Financial Ltd.
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