EURO
The euro moved sharply higher vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.3700 figure and was supported around the $1.3365 level. Traders reduced long exposure to the U.S. dollar ahead of tomorrow’s Federal Open Market Committee meeting in which Fed policymakers are expected to reduce the federal funds target rate by at least 50bps to 0.50% with some dealers eyeing a 75bps cut to 0.25%. At the same time, some traders are speculating the European Central Bank will not cut interest rates in January. ECB member Ordonez said next month’s rate-setting meeting is “open” and could go either way. This followed comments from ECB members Stark and Weber last week that reinforced the fact that a rate cut next month is not a fait accompli. Data released in the U.S. today saw the December Empire State manufacturing index decline to -25.76 from -25.43 in November. Also, November industrial production was off 0.6% m/m and 5.5% y/y while manufacturing output was off 1.4%. November capacity utilization fell to 75.4% from 76.0% in October. TICS capital flows data saw foreigners purchase a net US$ 286.3 billion in U.S. securities in October, up from September’s inflows of US$ 142.6 billion and sufficient to cover the month’s US$ 57.2 billion trade deficit. In eurozone news, ECB President Trichet said policymakers should not “tear up” the rule book when initiating emergency economic rescue packages. Germany’s Bundesbank forecast German GDP will contract 0.8% in 2009 after expanding about 1.6% this year. 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 ¥90.25 level and was capped around the ¥91.35 level. As expected, Bank of Japan’s quarterly Tankan survey of corporate sentiment fell to its lowest level in several years. Some believe today’s Tankan data may result in a possible reduction in the BoJ’s overnight call rate from its current 0.30% level, possibly as early as this week. Also, BoJ may downgrade its economic assessment further. The headline big Japanese manufacturers’ sentiment index worsened to -24 from -3 in September, worse-than-expected and consistent with an economic recession. The swaps market is pricing in a about a 40% chance of a 25bps rate cut by the BoJ by March, up from 20% to 30% last week. The index for large Japanese non-manufacturers printed at -9, the sixth consecutive quarterly decline. On average, big manufacturers reported they expect the U.S. dollar will average ¥103.32 during the current fiscal year, lower than previous forecasts. BoJ Governor Shirakawa will testify in Parliament tomorrow and today suggested economic growth in 2009-2010 may be negative. The Nikkei 225 stock index climbed 5.21% to close at ¥8,664.66. U.S. dollar offers are cited around the ¥104.15 level. The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥124.15 level and was supported around the ¥121.60 level. The British pound moved higher vis-à-vis the yen as sterling tested offers around the ¥139.20 level while the Swiss franc moved higher vis-à-vis the yen and tested offers around the ¥78.30 level. In Chinese news, November industrial output was up 5.4% y/y, down from October’s 8.2% pace and the worst reading since early 1999.
STERLING
The British pound appreciated sharply vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.5375 level and was supported around the $1.4920 level. Data released in the U.K. today saw the YouGov public expectations index for the next twelve months reach a record low in December, falling to 0.8% from 0.9%. Longer-term inflation expectations for the next five-to-ten years fell to 2.8% from 3.0%. The U.K. Treasury is expected to announce the results of the review of its ₤250 billion credit guarantee scheme. Cable offers are cited around the US$ 1.5720 level. The euro moved higher vis-à-vis the British pound as the single currency tested offers around the ₤0.9020 level and was supported around the ₤0.8885 level.
