By GCI Forex Research
Fundamental Outlook at 1500 GMT (EDT + 0500)
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The euro appreciated vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.3710 level and was supported around the $1.3620 level. Dealers lifted the common currency during the North American session but the pair remains on a downward trajectory, having traded on Friday at its lowest level since May 2009. PIMCO’s El-Erian today reported the global bond giant prefers German government bonds over U.S. Treasuries. This statement highlights the drastic reassessment of sovereign risk the markets are currently undertaking. Eurozone debt remains highly volatile and Greek 10-year paper is currently trading more than 400 bps wider than German 10-year paper. The debt situations in Portugal, Spain, and Ireland are also causing the euro some weakness. Dealers are currently focusing on the likelihood the International Monetary Fund will need to bail out Greece and perhaps some other European countries if they cannot manage their debt crises themselves. Group of Seven officials finance ministers and central bankers convened in Canada this weekend and indicated they would continue their fiscal stimuli to prop the slumping global economy. Some central banks, however, are unwinding their stimulus programs at the same time. Many G7-watchers were unimpressed with the meeting as it failed to provide any significant new details about the level of international support Greece and other aggrieved countries can expect if bailouts are required. Spain today announced it will reduce net debt issuance by 34% in 2010 in a bid to remove public debt. Deutsche Bank today revised its forecast for official European Central Bank interest rates hikes and now sees the main refinancing rate at 1.5% by the end of the year, down from the previous forecast of 2.0%. ECB’s Nowotny said every eurozone country needs to respect the bloc’s fiscal rules and said new financial regulations must not harm economic growth. Data released in the eurozone today saw the Bank of France January business sentiment index print at 104, up from 102 in December. Also, EMU-16 Sentix investor confidence fell to -8.2 in January from -3.7 in December, the first decline in seven months. European Union officials will are convening this week to discuss a long-term economic strategy. In U.S. news, traders are still evaluating Friday’s mixed January non-farm payrolls report and assessing U.S. economic data for clues as to when the U.S. labour market may improve. St. Louis Fed President Bullard said the U.S. economic recovery is “on track” and reported “Maybe you get in the second half of 2010 or something like that, if things are going pretty weell, maybe then you’d sell a little bit (of assets from the Fed’s balance sheet) at that point and you’d try to see how the market reacts.” Former Fed Chairman Greenspan said he anticipates unemployment will remain in the 9% – 10% range in 2010. Data to be released in the U.S. tomorrow include December wholesale inventories. Euro bids are cited around the US$ 1.3530 level.
¥/ CNY
The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥89.15 level and was capped around the ¥89.55 level. Traders continue to sell Japanese government bonds in the cash and futures markets as the markets continue to reduce exposure to sovereign risk. The benchmark 10-year JGB is now yielding around 1.355%. BoJ Deputy Governor Yamaguchi warned economic growth “may stall” temporarily and said “growth may be in a pretty severe state through this summer, so we can’t really expect a rapid expansion.” The central bank continues to expect tepid economic growth with deflationary pressures at the consumer price inflation level through the fiscal year ending March 2012. Data released in Japan overnight saw bank lending off 1.5% y/y in January, highlighting the broad lack of capital in Japan at this time. The Nikkei 225 stock index lost 1.05% to close at ¥9,951.82. U.S. dollar offers are cited around the ¥94.75 level. The euro moved lower vis-à-vis the yen as the single currency tested bids around the ¥121.55 level and was capped around the ¥122.75 level. The British pound moved lower vis-à-vis the yen as sterling tested bids around the ¥138.60 level while the Swiss franc moved lower vis-à-vis the yen and tested bids around the ¥82.85 level. In Chinese news, the U.S. dollar appreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.8266 in the over-the-counter market, up from CNY 6.8265. The Chinese government reiterated it aims to keep inflation around 3% this year. It appears likely People’s Bank of China will raise interest rates this year to control inflation and counter growing asset bubbles. Group of Seven policymakers this weekend issued a discussion paper that calls for more currency flexibility, hardly the approach that many traders wanted officials to take with China.
₤
The British pound moved lower vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.5533 level and was capped around the $1.5625 level. Chancellor of the Exchequer Darling reported he fully supports Bank of England’s asset purchase pause that was announced on Thursday, adding the U.K. gilt market responded well. BoE has recently announced the weaker pound has benefited the U.K. economy. The central bank will publish its quarterly inflation report and new economic forecasts on Wednesday. In November, the central bank estimated 2010 economic growth of 2.2%, rallying to 4.1% in 2011. Most BoE-watchers believe the central bank will reduce its growth forecast this week and will likely see inflation around 2% in two years. Cable bids are cited around the US$ 1.5340 level. The euro moved higher vis-à-vis the British pound as the single currency tested offers around the ₤0.8795 level and was supported around the ₤0.8730 level.
CHF
The Swiss franc appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.0700 figure and was capped around the CHF 1.0770 level. Data released in Switzerland today saw December real retail sales up 4.7% while the January unemployment rate rose to 4.5% from 4.4%. Some dealers are still talking about Friday’s reported intervention by Swiss National Bank in which the central bank is rumoued to have bid on the EUR/CHF cross some 280 pips above the current market price. U.S. dollar offers are cited around the CHF 1.0810 level. The euro moved lower vis-à-vis the Swiss franc as the single currency tested bids around the CHF 1.4645 level while the British pound came off vis-à-vis the Swiss franc and tested bids around the CHF 1.6680 level.
Forex Daily Market Commentary provided by GCI Financial Ltd.
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