By GCI Fx 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$ 1.3620 level and was capped around the $1.3685 level. There are ongoing themes that are driving trading flows now. First, Greece’s fiscal problems continue to plague the common currency. Greece continues to assert that it will not require financial assistance to manage its mountain of maturing debts. If a bailout is required, the most likely candidates include Germany, the European Union, and the International Monetary Fund. Second, there is a concern that sovereign credit risks could intensify and spread to other highly indebted eurozone countries including Portugal, Italy, and Spain. The prospect of a widerning problem has kept the single currency on the defensive for weeks. Third, there is a general sense that the Federal Reserve will be more proactive about unwinding emergency credit measures than the European Central Bank. This perception has also kept the euro on the defensive. Fourth, economic data continue to be mixed. Economists note that there really is not an evident trend in the U.S. labour market yet. Data released in the U.S. today saw weekly initial jobless claims decline 6,000 to 462,000 while continuing jobless claims came in at 4.588 million, up from 4.521 million. Some private sector forecasts suggest there could be jobs growth this month as high as 300,000. The general sense is that the unemployment rate will gradually decrease, possibly falling below 9% later this year. Other data released in the U.S. today saw the January trade balance print at –US$ 37.3 billion, down from an upwardly revised US$ -39.9 billion in December. Most economists expect the mammoth U.S. trade deficit to continue widening. Tomorrow’s U.S. data will include February retail sales, mid-March University of Michigan consumer sentiment, and January business inventories. Many important data including industrial production, TICS flows, and housing numbers will be released early next week. In eurozone news, European Central Bank member Mersch said that if a European Monetary Fund is created to help address fiscal problems in the eurozone, the entity will not receive financial asssitance from the ECB. Germany’s Kiel Institute reduced its eurozone growth forecast to +0.7% for 2010 and +1.8% for 2011. Data released in the eurozone today saw the Q4 current account surplus print at €4.8 billion compared with a €32.2 billion deficit one year ago. Euro bids are cited around the US$ 1.3335 level.
¥/ CNY
The yen depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥90.70 level and was supported around the ¥90.20 level. Many traders are concluding an additional quantitative easing measure by Bank of Japan next week seems like a foregone conclusion. Central bankers are known to be concerned that deflationary pressures are likely to remain in Japan through at least fiscal year 2012 and the Japanese government continues to pressure the BoJ into loosening policy further. Deputy finance minister Noda today said the BoJ and government “share the view that the economy is in a mild deflationary state.” Data released in Japan overnight saw Q4 gross domestic product rise at an annual 3.8% rate, notably less than the preliminary 4.6% figure reported last month. Also, the GDP deflation tumbled a record 3.8%, underscoring the seriousness of deflation in the Japanese economy. Demand across Asia is improving, however, and this may allow Japanese companies to increase capital expenditures. Capital spending was up 0.9% q/q in Q4 but approximately one-third of factory capacity is idle now in Japan. Japan’s fiscal situation remains critical and the government’s ability to increase fiscal spending through supplementary budgets to counter deflationary pressures is limited. Dealers continue to cite strong repatriation flows during the Australasian sessions. The Nikkei 225 stock index gained 0.96% to close at ¥10,664.95. U.S. dollar offers are cited around the ¥94.75 level. The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥123.85 level and was supported around the ¥123.00 figure. The British pound moved higher vis-à-vis the yen as sterling tested offers around the ¥136.45 level while the Swiss franc moved higher vis-à-vis the yen and tested offers around the ¥84.80 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 6.8260. Data released in China overnight saw inflation increase a significant 2.7% y/y and this has led to speculation that People’s Bank of China could hike rates or tighten policy further as early as tomorrow. The M2 money supply measure has increase more than 25% over the previous twelve months and this will invariably lead to inflationary pressures. It was also reported that Chinese banks provided CNY 700 billion in new loans last month.
₤
The British pound appreciated vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.5065 level and was supported around the $1.4945 level. A Bank of England quarterly inflation survey was released today in which U.K. inflation expectations climbed to their highest level since November 2008. This increase in expectations has added to speculation that interest rates could rise. Consumers now expect inflation to be 2.5% higher one year from now, up from the previous reading of 2.4%. The other big factor in the U.K. now remains the general election. Concerns that Tory leader Cameron could win the election but fail to form a majority government are weighing heavily on sterling. BoE member Posen said the U.K. economy has successfully avoided deflation and added the economy would have been considerably worse absent quantitative easing policies. Cable bids are cited around the US$ 1.4455 level. The euro moved lower vis-à-vis the British pound as the single currency tested bids around the US$ 0.9060 level and was capped around the $0.9120 level.
CHF
The Swiss franc appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.0690 level and was capped around the CHF 1.0725 level. As expected, Swiss National Bank kept its three-month Swiss franc Libor target rate unchanged at 0.2% today. SNB reported ‘The Swiss National Bank is maintaining its expansionary monetary policy. It will act decisively to prevent an excessive appreciation of the Swiss franc against the euro.” SNB is forecasting the Swiss economy will expand about 1.5% this year. U.S. dollar offers are cited around the CHF 1.1045 level. The euro moved higher vis-à-vis the Swiss franc as the single currency tested offers around the CHF 1.4630 level while the British pound moved higher and tested offers around the CHF 1.6120 level.
Forex Daily Market Commentary provided by GCI Financial Ltd.
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