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Daily Forex Strategy Briefing

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Yen Rises on Fears US Subprime Crisis Is Spreading

Fri, Aug 10 2007, 01:40 GMT
by Hans Nilsson

CMS Forex

• In NY trading Thursday, the dollar was higher against key currencies but lower against the yen on fears the US subprime mortgage crisis is spreading to Europe. BNP Paribas SA, France’s biggest bank, halted withdrawals from funds linked to US subprime mortgages, and NIBC Holding NV, a Dutch investment bank, said it lost at least $189 million on US subprime mortgage investments this year. To assuage a credit crunch, the European Central Bank allocated an unprecedented €94.841 billion ($130.2 billion), the US Federal Reserve lent $24 billion through its open market operations, and the Bank of Canada promised to provide liquidity to support financial markets. On fears the US subprime mortgage trouble is spreading, the Canadian dollar declined the most in almost 2 weeks, the Australian and New Zealand dollars fell, and the Swiss franc rose against the euro.

• The yen gained versus major currencies and rose the most since March versus the euro. The EUR/JPY failed to penetrate resistance at 165 after the two European banks above reported losses in US credit markets, prompting traders to reduce riskier investments funded by borrowing in yen. The pair is testing support around the162 area. If this support is significantly broken, the head-and-shoulder top will indicate a drop to 156.

Financial and Economic News and Comments

US & Canada

• US initial jobless claims rose 7,000 to 316,000 on a seasonally-adjusted basis in the week ended August 4, the Labor Department said. The increase was more than expected. Claims for the July 28 week were revised to 309,000 from 307,000. The 4-week average rose 1,750 last week to 307,750, after 4 straight declines.

• The Bank of Canada said in today’s BOC statement it will “provide liquidity to support the stability of the Canadian financial system and the continued functioning of financial markets. These activities are part of the Bank’s normal operational duties relating to the stability and efficient function of Canada's financial system. The Bank is closely monitoring developments, and will deal with issues as they arise.”

• The Federal Reserve lent $24 billion through its open market operations to get the federal funds interest rate back to its 5.25% target after it spiked higher. The Fed injected cash through 2 operations: A 14 day “repo,” an operation that adds reserves to the banking system and alleviates upward pressure on interest rates, and an additional $12 billion through an overnight repo.

Europe

• The European Central Bank allocated an unprecedented €94.841 billion ($130.2 billion) in emergency funds to European banks this morning to calm fears the US subprime crisis is spreading to Europe.

• The ECB said interest rates support economic growth and financing conditions are favorable, suggesting possible interest-rate increases. The ECB said in the ECB Bulletin: “The existence of upside risks to price stability at medium to longer-term horizons is confirmed by the strength of the underlying rate of monetary expansion. Strong vigilance is therefore of the essence to ensure that risks to price stability over the medium term do not materialize….Given the current positive economic environment in the euro area, the ECB’s monetary policy is still on the accommodative side. Overall financing conditions remain favourable, money and credit growth vigorous, and liquidity ample. Therefore, looking ahead, acting in a firm and timely manner to ensure price stability in the medium term remains warranted.”

• The UK’s trade deficit in June unexpectedly narrowed to £6.3 billion ($12.8 billion), the smallest since October 2005, compared with a revised £6.4 billion in May, the Office for National Statistics said. A £6.5 billion trade gap was expected. The numbers support the Bank of England’s view that exporters are being supported by global strong growth, allowing BOE policy makers to consider another interest-rate increase to curb inflation.

• Swiss consumer confidence unexpectedly dropped in July for the first time in 2 years. An index based on a quarterly survey fell to 15 in July from 20 in April, the State Secretariat for Economic Affairs said. The decline indicates household spending may ease in the second half of the year.

Asia-Pacific

• Australia’s employment rose for a ninth consecutive month in July, increasing speculation the Reserve Bank of Australia will raise interest rates again after hiking its benchmark rate to an 11-year high of 6.5% yesterday. Employment rose 21,800 in July from June, the Bureau of Statistics said. The unemployment rate was unchanged at 4.3%, close to a 33-year low.

• The Bank of Korea unexpectedly raised its key interest rate to a 6-year high of 5% to curb lending that may fuel asset-price bubbles.

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Published on  Fri, Aug 10 2007, 01:40 GMT