Fundamental Outlook at 1400 GMT (EDT + 0400)

By GCI Fx Research

The euro came off vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.4000 figure and was capped around the $1.4150 level.  Three main factors contributed to the sell-off in the common currency.  First, EMU-16 May M3 money supply growth registered a twelve-year low with growth in loans to the private sector slowing to +1.8% from +2.4% in April.  Overall credit growth decelerated to +4.0% from +4.4% in April.  These data suggest that the fiscal and monetary stimuli being created in the eurozone are not reaching companies and consumers with banks apparently hording a lot of the liquidity.  Second, EMU-16 consumer prices were off year-over-year in June, the first negative reading since at least January 1997.  Eurozone CPI was off 0.1% y/y but this decline was less than expected and was anticipated by the European Central Bank on account of base year effects. Furthermore, the ECB is forecasting consumer price inflation costs will begin to rise again by the end of the year.  Nonetheless, today’s data suggest the ECB will not necessarily be in any hurry to lift borrowing costs further.  Third, Germany’s labour market continued to weaken this month with the number of jobless now around 3.410 million and the unemployment rate at 8.3%.  Some economists believe the number of unemployed workers may eclipse the politically-sensitive 4.0 million barrier by the end of 2009.  In U.S. news, many economic data were released. First, June consumer confidence printed at 49.3, down from a revised 54.8 in June and worse than expected.  Second, the June Chicago Purchasing Managers’ index improved to 39.9 from 34.9 in May with improvements in the production, inventories, employment, and prices paid sub-indices.  Third, the S&P/ CaseShiller home price incex fell to 139.18 in April from a revised 139.97 in March with composite home prices off 18.12% y/y from a revised -18.72% y/y in March.  The big news in the U.S. this week will be the June non-farm payrolls data that will be released on Thursday.   Euro bids are cited around the US$ 1.3435 level.

¥/ CNY

The yen depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥96.50 level and was supported around the ¥95.30 level.  Prime Minister Aso reported Bank of Japan’s monetary policy is not as effective during a recession where there are deflationary pressures evident.  Finance minister Yosano said one cannot assume bond yields will remain this low, especially when drafting the budget for the next fiscal year.  Yosano added the budget ceiling for the next fiscal year will be a record ¥52.7 trillion and said the impact of fiscal and monetary stimuli on the Japanese economy are not fully known.  Additionally, Yosano said the government is significantly concerned about unemployment.  It was reported overnight that the May unemployment rate ticked up to 5.2% from 5.0% in April while May household spending were up +0.3% m/m and off 1.3% y/y. Moreover, May overall housing starts were down a drastic 30.8% y/y and total May construction orders were off a staggering 41.9% y/y to ¥454.8 billion.  The Nikkei 225 stock index climbed 1.79% to close at ¥9,958.44.  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 ¥134.35 level and was capped the ¥135.95 level.  The British pound moved higher vis-à-vis the yen as sterling tested bids around the ¥158.20 level while the Swiss franc moved lower vis-à-vis the yen and tested bids around the ¥88.10 level. In Chinese news, the U.S. dollar moved lower vis-à-vis the Chinese yuan as the greenback closed at CNY 6.8295 in the over-the-counter market, down from CNY 6.8325.

The British pound depreciated vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.6420 level and was capped around the $1.6745 level.  Bank of England Deputy Governor Tucker today indicated banks need to “radically  simplify their structures and provide more information about what funds they would use in an emergency.”  The U.K. Treasury today reported the BoE and the Financial Services Authority will obtain new powers to help prevent future crises.  There has been widespread media reports over the past couple of days indicating the U.K. Treasury will not change the central bank’s mandate to keep inflation under control  but will give the FSA new powers to control banks’ balance sheets.  Data released in the U.K. today saw the Q1 current account deficit narrow to -₤8.5 billion from -₤8.8 billion in Q4.  Also, Q1 gross domestic product was off 2.4% q/q and 4.9% y/y, the largest decline in 50 years, while Q1 total business investment was off 7.6% q/q and 9.7% y/y.  Additionally, Nationwide reported June house prices were up 0.9% m/m and off 9.3% y/y.  Cable bids are cited around the US$ 1.6125 level.  The euro moved higher vis-à-vis the British pound as the single currency tested offers around the ₤0.8535 level and was supported around the ₤0.8435 level.


The Swiss franc depreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.0775 level and was capped around the CHF 1.0890 level.  Technically, today’s intraday low was right around the 61.8% retracement of the move from CHF 1.0630 to CHF 1.1020.  Data released in Switzerland today saw the UBS May consumption indicator decline to 0.77 from 0.91 in April.  U.S. dollar offers are cited around the CHF 1.1165 level.  The euro weakened vis-à-vis the Swiss franc as the single currency tested bids around the CHF 1.5230 level while the British pound moved lower vis-à-vis the Swiss franc and tested bids around the CHF 1.7855 level.

Daily Market Commentary provided by GCI Financial Ltd.

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