EURO
The euro appreciated vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.4760 level and was supported around the $1.4645 level. Technically, today’s intraday high was just above the 76.4% retracement of the move from $1.4845 to $1.4480. Many factors contributed to the common currency’s continued ascent today. First, gold rocketed higher, trading as high as US$ 1,043.78 in the spot market and adding more than US$ 24.00 on the day. The U.S. dollar remains on the back end of some commodities trades. Second, Reserve Bank of Australia raised interest rates, part of that central bank’s exit strategy. RBA Governor Stevens reported the rate hike may be the central bank’s first foray in multiple tightenings. Australia and China maintain a close commodities-trading relationship and this represented the first move towards higher official rates by a major central bank, also to the detriment of the dollar as it widens the greenback’s negative interest rate differential. Third, U.S. equities added to recent gains with the Dow poised to post another triple digit gain. Improving equities markets have been working against the U.S. dollar as the euro remains highly correlated with positive gains. Fourth, there is a lingering story in the press that oil exporting countries in the Middle East are planning to diversify their reserves further and price some oil transactions away from U.S. dollars, leading to less global demand for the greenback. Arab countries have denied the story but it received a lot of chatter on dealing desks. Persian members of OPEC are said to be in talks with Russia, China, Japan, and France to replace the greenback with a basket of currencies to trade oil. One conclusion that traders took away from this weekend’s Group of Seven summit is that there is a definitely a bias that the Chinese yuan will need to appreciate to help support the global economy. World Bank President Zoellick reported “Bretton Woods is being overhalued before our eyes.” Some economists are suggesting this weekend’s meetings will represent a watershed event for the U.S. dollar with references to the 1985 Plaza Accord. Data to be released in the U.S. tomorrow include MBA mortgage applications and ABC consumer confidence. Federal Reserve Bank of New York President Dudley reported the risk of slowing inflation is “problematic” for the economy and added rates should remain low for a while to ensure a “robust recovery.” In eurozone news, European Central Bank member Ordonzez reported the eurozone economy is stabilizing and said interest rates are at an “appropriate” level but added further economic recovery will “not be without difficulty.” Ordonez also reported eurozone inflation prices are likely to start rising by the end of the year on a year-over-year basis. ECB member Weber was equally cautious in his remarks, noting “We're only seeing green shoots...downside risks remain.” European Central Bank member Liikanen reported it will be “challenging” to design exit strategies while ECB member Sramko said he does “not see big problems in exchange rates now” or with “the development of inflation.” ECB’s Provopoulos added it is “too soon” to start withdrawing stimuli, remarks that were seconded by ECB’s Quaden. The ECB is expected to keep interest rates unchanged on Thursday. Euro bids are cited around the US$ 1.4445 level.
JPY / CNY
The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥88.60 level and was capped around the ¥89.55 level. The pair continues to inch lower as sentiment in the U.S. dollar continues to erode across the board. Finance minister Fujii called on Bank of Japan to carefully consider the Japanese economy before determining whether or not it should conclude its purchases of corporate debt in December. Fujii characterized the domestic economy as “unstable” and added the central bank should “appropriately monitor” the situation. International Monetary Fund Deputy Director Kato reported the yen’s strength reflects economic fundamentals. Fujii also verbally intervened again against the rising yen, reporting “it’s undesirable for individual nations to take a weak-currency policy. Currency devaluation policies back in the 1930s had an adverse impact on the global economy and politics.” Fujii also warned the government “will take action” if currencies “show excessive moves in a biased direction.” On the fiscal front, the government reported it will reallocate about US$ 28 billion from the previous administration’s extra budget for the current fiscal year. The Nikkei 225 stock index climbed 0.18% to close at ¥9,691.80. U.S. dollar offers are cited around the ¥94.75 level. The euro moved lower vis-à-vis the yen as the single currency tested bids around the ¥130.55 level and was capped around the ¥131.55 level. The British pound moved lower vis-à-vis the yen as sterling tested bids around the ¥140.95 level while the Swiss franc moved lower vis-à-vis the yen and tested bids around the ¥86.35 level. In Chinese news, the U.S. dollar gained ground vis-à-vis the Chinese yuan as the greenback closed at CNY 6.8245 in the over-the-counter market, up from CNY 6.8243. Chinese financial markets will be closed from 1 October through 8 October for the National Day’s holiday. Data released in Japan last week saw the September purchasing manager’s index rise to 54.3. People’s Bank of China this week announced it will continue its loose monetary policy. European Central Bank member this weekend Weber reported many Asian countries have an “excessively loose” monetary policy. Weber reported “Many Asian countries still have a strong link to the dollar and, therefore, correspondingly low interest rates at the moment. Through purchases of foreign exchange, monetary policy is more expansive than the actual economic situation allows (and) I expect that we will see further steps to make exchange rates more flexible.” Chinese officials who convened in Istanbul this weekend reported they will seek greater domestic economic growth, a move that could allow the yuan to appreciate as there would be less reliance on an export-led recovery.
STERLING
The British pound depreciated vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.5875 level and was capped around the $1.6045 level. Cable was dented by a reported that August manufacturing output was off 1.9% m/m and 11.3% y/y, worse than July’s revised +1.9% m/m climb and 10.2% y/y move lower. Industrial production was off 2.5% m/m and 11.2% y/y. Other data released overnight saw Halifax house prices improve again in September, up 1.6% m/m and off 7.4% y/y. Bank of England’s Monetary Policy Committee is expected to keep interest rates unchanged on Thursday. On the political front, the opposition Tory party reported it plans to implement a one-year pay free for most public sector workers from 2011 if it wins the general election due in mid-2010. Cable bids are cited around the US$ 1.5720 level. The euro moved higher vis-à-vis the British pound as the single currency tested offers around the ₤0.9275 level and was supported around the ₤0.9175 level.
