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U.S. Forex Market Commentary

Wed, Oct 8 2008, 23:54 GMT
by GCI Financial Team

GCI

EURO

The euro rallied higher vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.3755 level and was supported around the $1.3540 level.  Central banks enacted concerted interest rate cuts today to support their economies.  The Federal Open Market Committee voted unanimously to reduce its federal funds target rate by 50bps to 1.50%.  The FOMC reported “inflation expectations are diminishing” and said the “unprecedented joint action” was to “reduce strains in financial markets” and to counter “the intensification of financial market turmoil.”  Group of Seven officials will convene this weekend and some dealers believe more policy coordination will be required.  European Union officials will hold a summit next week to discuss the financial markets.  Data released in the U.S. today saw August pending home sales rise 7.4% m/m and 8.4% y/y.  The Fed injected US$ 20 billion in repo today and federal funds traded as low as 3.5% thereafter, still more than double the Fed’s current 1.5% target level.  In eurozone news, the German media reported Germany is likely to reduce its 2008 economic growth forecast to 0% to 0.5% on account of the ongoing crisis while three leading German think tanks reported the eurozone economy is likely to shrink for a second consecutive quarter in the July – September quarter.  The French government is establishing a governmental entity that can quickly assume stakes in French banks that encounter problems.  European Central Bank reduced its main refinancing target rate by 50bps to 3.75%.  ECB member Weber reported central banks are prepared to do anything that is needed to stop the financial crisis from spreading.  Data released in the eurozone today saw German industrial output climb 3.4% m/m and EMU-15 Q2 GDP growth was confirmed at -0.2% q/q.  Euro bids are cited around the US$ 1.3320 level.

JPY / CNY

The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥98.60 level and was capped around the ¥101.70 level.  The pair reached its lowest level since March as the global financial crisis spread further and major central banks enacted coordinated rate cuts.  Bank of Japan did not cut rates with other central banks but indicated it “strongly supported” the actions.  The central bank noted it is reviewing ways to improve its market operations to enhance stability in the financial markets. The BoJ cut its assessment of corporate capital spending and warned business sentiment “has become even more cautious.”  The central bank’s overall assessment of the economy and said “growth is sluggish.”  Data released in Japan overnight saw the September economy watchers survey decline for the sixth consecutive month to 28.0. The yen is gaining ground because traders are less likely to sell yen and invest the proceeds in overseas markets, especially given the current market volatility.  Current levels raise the possibility the Japanese government will intervene by selling yen in the market.  A Ministry of Finance official reported he “is not sure if foreign exchange issues will be discussed...(currency intervention) is usually conducted according to market conditions, so we don't necessarily decide on whether to do so because the G7 meeting is held.”  The Nikkei 225 stock index lost 9.38% to close at ¥9,203.32.  U.S. dollar offers are cited around the ¥104.15 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 ¥138.75 level. The British pound depreciated vis-à-vis the yen as sterling tested bids around the ¥171.50 level while the Swiss franc moved higher vis-à-vis the yen and tested offers around the ¥89.45 level.  The Chinese yuan depreciated marginally vis-à-vis the U.S. dollar today as the greenback closed at CNY 6.8171 in the over-the-counter market, up from CNY 6.8169.   People’s Bank of China reduced its one-year benchmark lending and deposit interest rates by 0.27%, effective tomorrow.

STERLING

The British pound depreciated vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.7260 level and was capped around the US$ 1.7655 level.  Bank of England reduced the official Bank Rate paid on commercial banks’ reserves to 4.5%, a decline of 50bps.  BoE’s Monetary Policy Committee reported “Conditions in international credit and money markets have deteriorated very markedly.  Many markets are closed.  In the United Kingdom, the supply of credit to households and businesses is clearly tightening further as banks seek to adjust their balance sheets.  The Committee noted that cuts in official interest rates could not be expected to resolve the current problems in financial markets and that a significant increase in the capital of the banking sector would be required.  The Committee therefore welcomed this morning’s announcement of a Government programme to recapitalise the major UK banks. Data released over the past month indicate that the outlook for economic activity in the United Kingdom has deteriorated substantially, reflecting a sharp monetary contraction.” Separately, the U.K. government reported it will invest up to ₤50 billion in a number of U.K. banks to recapitalize the industry.  Data released in the U.K. today saw September shop price inflation fall to 3.6% y/y. Also, Nationwide September consumer confidence fell to 50, the lowest level since May 2004.  Cable bids are cited around the $1.7045 level.  The euro moved sharply higher vis-à-vis the British pound as the single currency tested offers around the ₤0.7940 level and was supported around the ₤0.7715 level.

SWISS

The Swiss franc appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.1210 level and was capped around the CHF 1.1440 level.  Swiss National Bank reduced its three-month Swiss franc Libor target rate to 2.5% from 3.0%, a 50bps decline, and is now targeting the 2.0% to 3.0%.  SNB President Roth said the crisis is having “a very fast development in the real economy.”  He added “The machinery industry is reporting that orders are freezing up. We also see that the export industry has more and more difficulties.” SNB member Hildebrand reported the crisis is a “systemic problem and therefore needs coordinated government action.”  U.S. dollar offers are cited around the CHF 1.1800 figure.  The euro and British pound fell sharply vis-à-vis the Swiss franc as the crosses tested bids around the CHF 1.5370 and CHF 1.9400 levels, respectively.

Published on  Wed, Oct 8 2008, 23:55 GMT