EURO
The euro came off vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.3890 level and was capped around the $1.4135 level. Several factors led to the common currency’s decline. First, Swiss National Bank is said to have intervened in significant size to counter the Swiss franc’s rise by buying euro and selling francs. This followed a reported intervention last week and recent jawboning from SNB officials who spoke out against the franc’s appreciation. The rumoured expiry of a double-no-touch option around the CHF 1.5250 level today or tomorrow also saw added to volatility. The common currency, however, was unable to sustain the intervention-fueled gains in European dealing and came off during the North American session. Second, the Federal Reserve voted to keep monetary policy unchanged and indicated the recession is receding, leading some to unwind their short U.S. dollar trades on narrowing yield differentials between the U.S. and eurozone. The Fed reported “Information received since the Federal Open Market Committee met in April suggests that the pace of economic contraction is slowing. Conditions in financial markets have generally improved in recent months. Household spending has shown further signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Businesses are cutting back on fixed investment and staffing but appear to be making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability. The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time. In these circumstances, the Federal Reserve will employ all available 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. As previously announced, 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 up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.” U.S. Treasuries sold off significantly on the announcement. The real Fed fireworks will come tomorrow when Fed Chairman Bernanke testifies on his involvement in Bank of America’s purchase of Merrill Lynch. Third, U.S. economic data were a mixed bag today. MBA mortgage applications were up 6.6% from the previous reading of -15.8% while May durable goods orders were up +1.8%, above expectations, with the ex-transportation component up a better-than-expected +1.1%. These data were tempered by May new home sales data that printed at an annualized rate of 342,000, below expectations. In eurozone news, the European Central Bank injected a record amount of liquidity into the money markets today to the tune of €442 billion in unlimited, one-year funds at 1%. The European Commission reported government budget deficits in the European Union are declining “markedly.” Data released in the eurozone saw April current account deficit decline for the fifth consecutive month. Euro bids are cited around the US$ 1.3435 level.
JPY / CNY
The yen depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥96.05 level and was supported around the ¥95.00 figure. Data released in Japan overnight saw the May corporate service price index print at 92.4, down 0.3% m/m and 3.0% y/y. The OECD reported Bank of Japan should extend its unconventional policy easing measures including corporate debt purchases and increased purchases of Japanese government bonds well into 2010. Policy Board official Nakamura noted the central bank may need to lengthen its commercial paper and commercial bond purchases programs when they roll off in September. The Nikkei 225 stock index climbed 0.31% to close at ¥9,544.08. U.S. dollar offers are cited around the ¥104.15 level. The euro weakened vis-à-vis the yen as the single currency tested bids around the ¥132.950 level and was capped the ¥134.95 level. The British pound moved higher vis-à-vis the yen as sterling tested offers around the ¥158.25 level while the Swiss franc moved higher vis-à-vis the yen and tested bids around the ¥86.85 level. In Chinese news, the U.S. dollar came off vis-à-vis the Chinese yuan as the greenback closed at CNY 6.8312 in the over-the-counter market, down from CNY 6.8338.
