By GCI Fx Research
€
The euro appreciated vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.3770 level and was supported around the $1.3655 level. As expected, the Federal Open Market Committee kept its benchmark federal funds target rate unchanged at 0.25%. The FOMC reported “Information received since the Federal Open Market Committee met in January suggests that economic activity has continued to strengthen and that the labor market is stabilizing. Household spending is expanding at a moderate rate but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly. However, investment in nonresidential structures is declining, housing starts have been flat at a depressed level, and employers remain reluctant to add to payrolls. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve has been purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt; those purchases are nearing completion, and the remaining transactions will be executed by the end of this month. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability. In light of improved functioning of financial markets, the Federal Reserve has been closing the special liquidity facilities that it created to support markets during the crisis. The only remaining such program, the Term Asset-Backed Securities Loan Facility, is scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities and on March 31 for loans backed by all other types of collateral.” Kansas City Fed President Hoenig dissented with the decision, arguing “that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to the buildup of financial imbalances and increase risks to longer-run macroeconomic and financial stability.” Data released in the U.S. today saw February housing starts off 5.9% to an annualized 575,000 units while February building permits were off 1.6% m/m to an annualized 612,000. Also, the February import price index was off 0.3% m/m and up 11.2% y/y. Data to be released in the U.S. tomorrow include February producer price inflation data. In eurozone news, Standard & Poor’s affirmed Greece’s BBB+ credit rating and removed the country from “creditwatch negative.” Eurozone finance ministers last night reiterated their plan to “take coordinated action” but did not provide much additional information other than to suggest any assistance would take the form of bilateral loans rather than loan guarantees. Data released in the eurozone today saw the EMU-16 consumer price index expand 0.3% while the core consumer price index expanded 0.4% m/m, up from -0.1% in January; consumer prices were also up 0.9% y/y. Also, the EMU-16 March ZEW economic sentiment survey fell to 37.9 from the prior reading of 40.2. The German March ZEW survey’s economic sentiment and current situation indices improved to 44.5 and -51.9, respectively. European Central Bank member Stark called on more regulation for credit default swaps and called on countries to improve their fiscal finances. Euro bids are cited around the US$ 1.3335 level.
¥/ CNY
The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥90.00 figure and was capped around the ¥90.75 level. Traders await Bank of Japan Policy Board’s interest rate decision tonight with strong expectations of additional monetary easing. The central bank may expand a ¥10 trillion fund that provides funding to banks when policymakers convene on 16-17 March and this is important because an unlimited uncollateralized loan facility expires on 31 March. Some BoJ-watchers believe the facility could expand by at least ¥5 trillion. The central bank remains under significant pressure to do more to combat the deflation problem further. Finance minister Kan today reported “Fiscal policy focusing on stimulating demand will have some impact against deflation. The central bank can make an inflationary impact with monetary policy…I want to overcome deflation as soon as possible in cooperation with monetary policies.” National Strategies Minister Sengoku called on the central bank to enact policies that will be positive for “production activity, capital investment, and consumer spending.” Former MoF mouthpiece “Mr Yan” Sakakibara reported deflation is a “structural problem” that monetary policy cannot remedy. Data released in Japan overnight saw February machine tool orders climb 217.4% y/y and dealers await the release of January tertiary index data. The Nikkei 225 stock index lost 0.28% to close at ¥10,721.71. 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 ¥124.60 level and was supported around the ¥123.20 level. The British pound moved higher vis-à-vis the yen as sterling tested offers around the ¥137.45 level while the Swiss franc moved higher vis-à-vis the yen and tested offers around the ¥85.80 level. In Chinese news, the U.S. dollar depreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.8260 in the over-the-counter market, down from CNY 6.8262. People’s Bank of China reported inflation expectations are rising in a quarterly survey released today and this could render it difficult for the government to meet its 3% annual inflation target. Higher inflation expectations will likely propel interest rates higher.
₤
The British pound appreciated vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.5200 figure and was supported around the $1.4975 level. Data released in the U.K. today saw the DCLG January house price index expand 6.2% y/y, the highest increase since February 2008. Bank of England Monetary Policy Committee member Barker yesterday reported the U.K. economy could recede again, adding the economic recovery will continue to be “bumpy and fragile.” Cable continues to suffer from political uncertainty ahead of the upcoming mandatory General Election. Prime Minister Brown is expected to lose to Tory leader Cameron but Cameron may not be able to form a majority government if he wins, and this could lead to a weaker pound. Many data will be released in the U.K. including February jobless claims along with the BoE MPC meeting minutes. Cable bids are cited around the US$ 1.4455 level. The euro moved lower vis-à-vis the British pound as the single currency tested bids around the US$ 0.9045 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 1.0545 level and was capped around the CHF 1.0625 level. Notably, the franc rocketed to its highest level vis-à-vis the euro since October 2008 as the common currency plumbed the CHF 1.45 handle. Traders are speculating Swiss National Bank will be less inclined to intervene by selling francs as the Swiss economic recovery strengthens. SECO released economic forecasts today that are calling for economic growth of about 1.4% in 2010, up from the +0.7% forecast issued in December. Unemployment is expected to decline to 4.3% from 4.9% in 2010 and private spending is expected to ramp up. Data released in Switzerland yesterday saw February producer and import prices decline 0.3% m/m and fall 1.0% y/y. U.S. dollar offers are cited around the CHF 1.1045 level. The euro moved lower vis-à-vis the Swiss franc as the single currency tested bids around the CHF 1.4505 level while the British pound moved higher and tested offers around the CHF 1.6050 level.
Daily Market Commentary provided by GCI Financial Ltd.
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