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U.S. Forex Market Commentary

Thu, Nov 20 2008, 22:12 GMT
by GCI Financial Team

GCI

EURO

The euro moved higher vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.2585 level and was supported around the $1.2470 level.  The common currency gained ground on a variety of factors. First, weekly U.S. initial jobless claims surged to their highest level in nearly sixteen years, up 27,000 to 542,000 while continuing jobless claims were at 4.012 million, the highest level since December 1982.  These data suggest November non-farm payrolls could be off by another 200,000 or so and adds to the view that unemployment could reach at least 7.0% to 7.5% in 2009. Second, U.S. equity markets collapsed further as the Dow reached a fresh multi-year low around 7,774, reducing demand for U.S. shares.  Third, Detroit automakers left Washington, D.C. empty-handed and apparently will not be receiving any bailout money at this time.  Fourth, minutes from the Federal Open Market Committee meeting in October were released yesterday and indicated some policymakers wanted to enact additional monetary easing at that time while others preferred to wait for and see how the economy develops.  Many economists believe the FOMC will be forced to reduce borrowing costs to near zero per cent to counter the ongoing credit crisis.  The fed funds futures market is fully discounting a 50bps monetary easing by the FOMC on 16 December.  The minutes read “While some expected an improving financial situation to contribute to a recovery in growth in mid-2009, others judged that the period of economic weakness could persist for some time.”  Notably, the Fed reduced its GDP forecast for 2008 to 0% - 0.3% and some FOMC members believe the economy may contract by 1.0% next year with an unemployment rate reached 8.0%.  Fifth, Federal Reserve Vice Chairman Kohn spoke very aggressively about deflation yesterday saying “Some people have argued that we should save our ammunition, that interest rate cuts aren't effective. I think that if we were to see this (deflation) possibility, that we should be very aggressive with our monetary policy, as aggressive as we can be.”  Sixth, October consumer confidence fell 0.8%, underscoring the weak state of final private demand.  Seventh, Fed Governor Kroszner spoke and said small business credit access continues to shrink.  In eurozone news, Germany’s Bundesbank warned the German economy – already in a technical recession – could see additional monetary contraction in Q4.  ECB member Bini Smaghi reiterated “there may be more (rate) cuts” while ECB member Nowotny said falling inflation expectations “obviously gives room for further measures.”  Data released in Germany today saw October producer price inflation unchanged m/m and up 7.8% y/y.  Euro bids are cited around the US$ 1.2135 level.

JPY / CNY

The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥94.30 level and was capped around the ¥96.05 levels.  Technically, the pair reached its lowest level since 28 October as traders expressed escalating concerns that the global economic recession may be deeper and more prolonged than previously thought, requiring much more monetary easing. Bank of Japan’s Policy Board convenes tonight and tomorrow and is expected to keep its overnight call rate unchanged at 0.30%.  Many traders, however, expect the central bank may enact additional measures to enhance liquidity provision to distressed money markets.  Data released in Japan overnight saw exports decline 7.7% y/y with a trade deficit of ¥63.9 billion.  Notably, Japanese exports to Asia declined for the first time since February 2002 and exports to the U.S. fell 19.0%, the fourteenth consecutive month of declines.  Credit default swaps measured by the five-year iTraxx CJ index on 50 Japanese investment-grade companies escalated to 330 bps today, matching last month’s record high.  This is evidence of the massive problems facing Japan’s bond market.  The Nikkei 225 stock index lost 6.89% to close at ¥7,703.04.  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 ¥117.80 level and was capped around the ¥120.45 level.  The British pound moved lower vis-à-vis the yen as sterling tested bids around the ¥139.15 level while the Swiss franc lost ground vis-à-vis the yen and tested bids around the ¥77.30 level.  The Chinese yuan depreciated vis-à-vis the U.S. dollar as the greenback closed at CNY 6.8345 in the over-the-counter market, up from CNY 6.8285.  Some economists are predicting China’s economy could experience deflation next year and this will lead to increased speculation about an easier monetary policy from People’s Bank of China.  Data released in China today saw urban registered unemployment print at 4.0% at the end of October.

STERLING

The British pound depreciated sharply vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.4745 level and was capped around the $1.4995 level.  Bank of England Chief Economist Dean revealed the Monetary Policy Committee will reduce interest rates further if required to ensure inflation meets its 2% medium-term target.  Commenting on exchange rates, he reported “Sterling has fallen by around 15 percent in the past year and that should help to support exports.” Data released in the U.K. today saw October retail sales off 0.1% m/m and up 1.9% y/y, the weakest annual increase since February 2006.  These data are a concern, particularly ahead of the holiday shopping period.  Also, the October public sector net borrowing requirement reached ₤1.382 billion, the first October deficit for the measure since 1994.  Additionally, October CML gross mortgage lending rose to ₤18.7 billion.  Cable bids are cited around the US$ 1.4315 level.  The euro moved higher vis-à-vis the British pound as the single currency tested offers around the ₤0.8495 level and was supported around the ₤0.8335 level.

SWISS

The Swiss franc depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.2225 level and was supported around the CHF 1.2100 figure.  Swiss National Bank surprised the markets today by reducing interest rates by 100bps, its third reduction in rapid succession.  SNB lowered its target band for three-month Swiss franc LIBOR to 0.50% - 1.50% from the previous 1.50% - 2.50% range and is now targeting 1.0%.  Officials reported “International economic conditions have worsened appreciably, bringing a higher risk of a marked slowdown in economic activity in Switzerland next year.”  Notably, today’s action came just weeks before the scheduled December quarterly review.  Data released in Switzerland today saw October exports decline 8.1% while the trade surplus rose to CHF 1.84 billion.”  U.S. dollar offers are cited around the CHF 1.2450 level.  The euro moved higher vis-à-vis the Swiss franc as the single currency tested offers around the CHF 1.5350 level while the British pound came off vis-à-vis the Swiss franc and tested bids around the CHF 1.7960 level.

Published on  Thu, Nov 20 2008, 22:14 GMT