EURO
The euro weakened vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.4725 level and was capped around the $1.4845 level. As expected, the Federal Open Market Committee voted to keep interest rates unchanged. The FOMC’s statement read “Information received since the Federal Open Market Committee met in August suggests that economic activity has picked up following its severe downturn. Conditions in financial markets have improved further, and activity in the housing sector has increased. Household spending seems to be stabilizing, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability. With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time. In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability. 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 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 will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt. The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010. As previously announced, the Federal Reserve’s purchases of $300 billion of Treasury securities will be completed by the end of October 2009. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.” Dealers were left with the impression that the Fed extended some of its asset purchase programs through the end of the year for an extra three months. The greenback was immediately given after the FOMC’s interest rate decision but then finished higher on the day. Despite the Fed’s extension of its asset purchase program, today’s statement generally represented the Fed’s most optimistic statement since the financial crisis began in earnest in Q3 2007. Nonetheless, the Fed remains far removed from implementing its exit strategy. Data to be released in the U.S. tomorrow include weekly initial jobless claims and continuing jobless claims. Dealers are also talking about a report that the Federal Deposit Insurance Corp. is going broke. Traders are paying close attention to a report that Bank of England has summoned the City’s leading economists for a meeting at the central bank next Tuesday. In eurozone news, the European Union today proposed new regulatory bodies to supervise banks and monitor systemic risks to the financial system. Data released in the eurozone today saw EMU-16 July industrial new orders up 2.6% m/m and off 24.3% y/y. Also, the EMU-16 September manufacturing PMI survey improved to 49 from 48.2 in August while the EMU-16 September services PMI survey rallied to 50.6 from 49.9. Traders will pay close attention to this weekend’s Group of Twenty summit in Pittsburgh. Euro bids are cited around the US$ 1.3900 figure.
JPY / CNY
The yen depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥91.55 level and was supported around the ¥90.50 level. Japanese financial markets will reopen overnight after being closed since the weekend. Traders are trying to determine exactly what the Federal Open Market Committee’s interest rate decision means for the yen. The Fed’s statement was more dovish than expected and a sense that official U.S. interest rates and interbank interest rates may be lower for a longer period of time could support the yen. Data released in Japan overnight saw the August trade surplus print at a stronger-than-expected ¥185.7 billion. Before the holiday, Bank of Japan upgraded its assessment of the economy but also noted it remains very cautious about the general economic outlook. Asian Development Bank yesterday lifted its growth forecast for some developing Asian countries today and this added to risk appetite among traders. The yen continues to enjoy a positive interest rate differential over the U.S. dollar with the latter now acting as a funding currency given its record low levels. Three-month US$ Libor was fixed today at 0.28500 with three-month yen Libor fixed at 0.34750. Bank of Japan Governor Yamaguchi last week reported that maintaining emergency credit programs for “a long time…may hurt an autonomous recovery of market functions and invite the distortion of the allocation of resources.” He added, however, that a “positive mechanism has started to take hold in the Japanese economy.” The central bank voted to keep monetary policy unchanged last week and upgraded its assessment of the economy. New finance minister Fujii last week verbally intervened saying exchange rates “should be determined by the state of a nation’s economy.” His comments suggest the new Democratic Party of Japan government may not be inclined to sell the yen through actual intervention. The Nikkei 225 stock index on last Friday lost 0.70% to close at ¥10,370.54. 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 ¥134.10 level and was capped around the ¥135.20 level. The British pound moved higher vis-à-vis the yen as sterling tested offers around the ¥150.35 level while the Swiss franc moved lower vis-à-vis the yen and tested bids around the ¥88.60 level. In Chinese news, the U.S. dollar gained ground vis-à-vis the Chinese yuan as the greenback closed at CNY 6.8256 in the over-the-counter market, up from CNY 6.8190. People’s Bank of China Deputy Governor Hu yesterday reported G20 nations should consider establishing an international wealth fund to invest a portion of members’ current account surpluses. There is continued speculation among dealers that Chinese monetary authorities may allow the yuan to appreciate further vis-à-vis the U.S. dollar.
