By GCI Forex Research
Fundamental Outlook at 1500 GMT (EDT + 0500)
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The euro depreciated vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.3580 level and was capped around the $1.3635 level. Escalating sovereign credit concerns continue to weigh heavily on the common currency. Dealers sold the euro again today on reports that eurozone finance ministers are not yet ready to provide specific details about what form or fashion a Greek “bailout” might take. Greek finance minister Papaconstantinou today said “My guess is that what will stop markets attacking Greece at the moment is a further, more explicit message that makes operational what has been decided last Thursday.” Eurogroup Chaiman Juncker today reconfirmed the European Union is prepared to assist Greece. European finance ministers meet again tomorrow and many dealers believe reported German opposition to a bailout may keep the focus on fiscal austerity measures Greece can take rather than focus on an explicit package of bilateral or multilateral financial aid. Greece’s budget deficit is estimated to have been above 12.5% last year, far above the 3% limit imposed by the Maastricht Treaty. Greece is expected to release a report in mid-March about the steps it is taking to address its fiscal problems. European Central Bank member Orphanides today said it is “unthinkable” that a eurozone sovereign may default. In addition to Greece, dealers are closely monitoring the fiscal situations in Portugal, Spain, and Ireland. A German Parliament source today reported the European Union can provide aid to Greece as permitted in an emergency clause of some European Union treaties. Aside from the eurozone credit crisis, there are growing sovereign concerns involving Dubai where some borrowers are said to be facing difficult times. Five-year credit default swaps rose today to 651 basis points from 627 on Friday. A Middle Eastern sovereign credit default would likely not have as large a consequence on the markets as a European default. In U.S. news, data to be released tomorrow include the NAHB housing market index, December TICS flows, and the Empire State manufacturing index. Liquidity was light during the North American session on account of market holidays in the U.S. and Canada. Fed officials including Atlanta and Minneapolis Fed Presidents are scheculed to speak. Euro bids are cited around the US$ 1.3530 level.
¥/ CNY
The yen depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥90.40 level and was supported around the ¥89.60 level. Traders are awaiting Bank of Japan Policy Board’s monetary policy decision this week with most expecting no change in policy despite an apparent intensification of deflationary pressures. The central bank is likely to keep its bank lending program and intact along with its monthly purchases of Japanese government bonds. Despite a recent 4.6% annualized increase in Q4 gross domestic product, some prices declined more than they have in more than 50 years and others dealers believe this decrease will result in additional easing measures from the central bank this week. The GDP deflator tumbled 3% – the largest drop since at least 1955 – and the domestic demand deflator was off 2.9%. Standard & Poors last month warned it may downgrade Japan’s ‘AA’ credit rating if it does not take steps to manage its deficit. Prime Minister Hatoyama was on the tape today saying he cannot be optimistic about the economy. The Nikkei 225 stock index lost 0.78% to close at ¥10,013.30. 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 ¥122.25 level and was capped around the ¥122.90 level. The British pound moved lower vis-à-vis the yen as sterling tested bids around the ¥140.70 level while the Swiss franc moved lower vis-à-vis the yen and tested bids around the ¥83.35 level. In Chinese news, the U.S. dollar remained steady vis-à-vis the Chinese yuan as the greenback closed at CNY 6.8333 in the over-the-counter market. Chinese financial markets were closed for the Chinese New Year holiday. Last week, People’s Bank of China reconfirmed it will “gradually guide monetary conditions back to normal levels from the counter-crisis mode” but then the central bank lifted reserve requirements by 0.5%, effective 25 February. The central bank is clearly trying to contain inflationary pressures and avert asset bubbles. Some China-watchers believe the central bank could allow the yuan to appreciate some 5% in the coming months.
₤
The British pound moved lower vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.5610 level and was capped around the $1.5720 level. Dealers will pay very close attention to tomorrow’s U.K. inflation data. Consumer price inflation reached 2.9% and there is some speculation it could top 3% for January when data are released tomorrow. Bank of England Governor King last week prepared the market for a temporary spike in inflation, noting it should be back at target in two years’ time. Yields on ten-year U.K. gilts are actually higher than Spanish and Italian ten-year debt, suggesting dealers are unhappy about the U.K. debt level or its prospects for inflation. Chancellor of the Exchequer Darling today said the government aims to reduce its deficit by half over the next four years. Cable bids are cited around the US$ 1.5340 level. The euro moved lower vis-à-vis the British pound as the single currency tested bids around the ₤0.8670 level and was capped around the ₤0.8700 figure.
CHF
The Swiss franc depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.0805 level and was supported around the CHF 1.0750 level. Data released in Switzerland today saw January producer price inflation climb 0.3% m/m and decline 1.3% y/y. Swiss financial markets will likely be closed for most of the week for Carnival holidays. Swiss National Bank is said to have intervened again by buying euro and selling Swiss franc over EBS last week for at least the second time this month. 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 1.4650 level while the British pound depreciated vis-à-vis the Swiss franc and tested bids around the CHF 1.6845 level.
Forex Daily Market Commentary provided by GCI Financial Ltd.
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