EURO
The euro lost ground vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.4960 level and was capped around the $1.5140 level. The dollar rallied hard across higher-yielding currencies such as the euro, British pound, Canadian dollar, Swiss franc, Australian dollar, and New Zealand dollar following an announcement from Dubai corporate real estate giant Dubai World that it is seeking a six-month moratorium and possible restructuring on US$ 60 billion in debt. Credit default swaps on emerging market names widened substantially and investors moved sharply away from higher-yielding assets. Liquidity was reduced during the North American session for the U.S. Thanksgiving holiday and will normalize overnight. Moody’s Investors Service and Standard & Poors heavily downgraded the debt of Dubai entities. There is a fear that contagion could spill over to other markets and areas of the world and this could result in further U.S. dollar appreciation. In eurozone news, European Central Bank member Weber called for prudence in trying to jump-start the asset-backed debt securities market. Weber also noted Bundesbank wants Germany to reduce its budget deficit to 3% of GDP by 2012 as opposed to the government’s plan of 2013. The European Central Bank is not expected to change monetary policy when it convenes next Thursday. Data released in Germany today saw the November provisional consumer price index off 0.2% m/m and climb 0.3% y/y. Also, it was reported that EMU-16 October lending to businesses and households fell to a new record low, off 0.8% y/y. Euro bids are cited around the US$ 1.4720 level.
JPY / CNY
The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥86.30 level and was capped around the ¥87.50 level. The pair fell to its lowest level since July 1995 as traders doubted the resolve of Japanese and U.S. authorities to arrest the yen’s ascent. Minutes from Bank of Japan Policy Board’s meeting on 30 October were released overnight and they “expressed the view that, when judged necessary, the bank should employ appropriate measures--including reutilization of special funds-supplying operations to facilitate corporate financing--in a flexible and timely manner. All other members agreed with this view.” This statement suggests emergency lending facilities will be reinstated as necessary, mostly to counter deflationary pressures. Regarding deflation, the central bank added “Many members said that attention should continue to be paid to the risk that, in a situation where the substantial slack in the economy was likely to persist, prices might become weaker than expected if firms' and households' medium- to long-term inflation expectations declined.” Deflation prospects have worsened since the October meeting and many traders believe BoJ will resume commercial paper purchases and corporate bond purchases after the current planned expiry at the end of December. Finance minister Fujii reported the Chinese yuan remains too weak and reiterated he supports U.S. Treasury Secretary Geithner’s dollar-supportive comments. The big question on traders’ minds is if and when Japan will conduct unilateral intervention to support the yen and whether or not they have enough political capital to encourage the U.S. and European officials to sell the yen through actual intervention. Fujii added “We are currently monitoring (the yen's appreciation), and I think now is the time to be vigilant.” Most BoJ-watchers believe the central bank will keep interest rates unchanged through at least most of 2010. BoJ’s Policy Board recently predicted core consumer prices will decline 1.5% in the year ending March 2010, decline 0.8% in the fiscal year ending March 2011, and decline 0.4% in the fiscal year ending March 2012. The Nikkei 225 stock index lost 0.62% to close at ¥9,383.24. 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 ¥129.50 level and was capped around the ¥132.30 level. The British pound moved lower vis-à-vis the yen as sterling tested bids around the ¥142.50 level while the Swiss franc moved lower vis-à-vis the yen and tested bids around the ¥85.95 level. In Chinese news, the U.S. dollar depreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.8270 in the over-the-counter market, down from CNY 6.8290. People’s Bank of China Deputy Governor yesterday reported the yuan will become a “more attractive currency” and added the central bank will increase surveillance of hot money flows. Vice Foreign Minister Zhang Zhijun this week said China will “increase the flexibility of the yuan exchange rate while maintaining stability in the market,” adding the increase will be “incremental and balanced.” Zhang added China is moving toward a system “that is market-based and is a managed floating mechanism with respect to a basket of currencies.” Chinese Premier Wen Jiabao will meet European Central Bank President Trichet and Ecofin head Juncker on 29 November. China’s banking regulator informed Chinese lenders they must comply with capital requirements or risk sanctions. There is increasing speculation China will strengthen its strict capital requirements.
