By GCI Forex Research
Fundamental Outlook at 1400 GMT (EDT + 0400)
€
The euro depreciated sharply vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.2110 level and was capped around the $1.2310 level. Today’s intraday low represented a new four-year low and the common currency moved lower as eurozone unemployment reached its highest level in April since June 1998, at 10.1%. These data are the latest indication the eurozone sovereign debt crisis is having a profound impact on the labour market. The continued depreciation of the euro means more traders are viewing the common currency as a funding currency for carry trades. Dealers also dumped the common currency on escalating concerns Europe’s credit woes would lead to larger-than-expected losses at regional banks. Yesterday, the ECB warned that eurozone banks could face as much as €195 billion in additional loan losses over the next eighteen months on account of the financial crisis. The ECB also reported it increased its purchases of eurozone government bonds. ECB member Nowotny said the ECB’s bond purchase program will continue until there is financial stability in the eurozone, adding there “is no quantitative goal.” Yesterday, ECB member Weber said monetary policy has been expanded to include new measures “that I continue to see in a critical way due to the stability risks.” Weber also yesterday called for “heightened alertness.” There are also reported tensions between Germany and France with the former possibly complaining the latter is not doing enough to bail out their eurozone member partners. The ECB reported banks deposited €305 billion with it overnight. Other data released today saw EMU-16 May PMI manufacturing tick lower to 55.8 while German provisional May unemployment was lower by 45,000 and the unemployment rate came in at 7.7%. Also, May PMI manufacturing improved to 58.4 and German April retail sales were up 1.0% m/m and off 3.1% y/y. French data released today saw April producer prices up 1.0% m/m and 4.0% y/y with May PMI manufacturing lower at 55.8. In U.S. news, data released today saw May ISM manufacturing decrease to 59.7 while the ISM prices paid index fell to 77.5. Also, April construction spending improved 2.7% m/m. Chicago Fed President Evans yesterday reported that targeted asset purchases are more effective at addressing financial crises than straight injections of cash. Some Fed-watchers are expressing concern that the Fed may be too dovish in calculating that the full rate of employment is now between 5% and 5.3%. If the Fed waits until the unemployment rate gets that low before making material adjustments to short-term interest rates, it could risk fueling inflation. Euro offers are cited around the US$ 1.2620 level.
¥/ CNY
The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥90.55 level and was capped around the ¥91.25 level. Risk aversion returned to the market after the long holiday weekend in some trading centers as traders deliberated a slowdown in Chinese economy activity and a worsening fiscal situation in Europe. Bank of Tokyo is now forecasting the euro may weaken to US$ 1.16 by the fourth quarter and some policymakers are concerned that additional euro weakness could lead to too much appreciation of the yen. Prime Minister Hatoyama’s popularity has reached a new low, less than two months before parliamentary elections. The Social Democratic Party left Hatoyama’s coalition government this weekend in opposition to Japanese approval to relocate a U.S. base within Okinawa. Bank of Japan Governor Shirakawa yesterday reported “…the greatest challenge Japan’s economy is facing now is the decline in the potential growth rate as well as the shrinking of the population and sluggish productivity growth underlying this.” Speaking about the global increase in fiscal spending, Shirakawa added “Fiscal policies are not a cornucopia. Policymakers should work to appropriately conduct policies so as to maintain sufficient market confidence. In this regard, current events seem to have served as a ‘wakeup call’ to many countries.” Regarding inflation, Shirakawa added “Concerning inflation-targeting, there are expectations that expanding the central bank’s balance sheets would help Japan escape deflation and cause inflation rates to rise. But the central banks of Japan, the U.S., and Europe have expanded balance sheets only to see drops in inflation rates. Expanding central bank balance sheets does not immediately cause prices to rise.” Regarding economic growth, Shirakawa noted “Japan’s economy is making firm progress toward sustainable growth. We need to be mindful of upside and downside risks.” Data to be released in Japan overnight include the May monetary base. The Nikkei 225 stock index lost 0.58% today to close at ¥9,711.83. U.S. dollar offers are cited around the ¥96.85 level. The euro moved lower vis-à-vis the yen as the single currency tested bids around the ¥109.75 level and was capped around the ¥112.30 level. The British pound moved higher vis-à-vis the yen as sterling tested offers around the ¥133.10 level while the Swiss franc moved lower vis-à-vis the yen and tested bids around the ¥77.45 level. In Chinese news, the U.S. dollar appreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.8306 in the over-the-counter market, up from CNY 6.8278. Dealers expressed concern about a sharper-than-expected decline in May PMI manufacturing that saw the May level decline to 53.9 while the HSBC manufacturing PMI measure weakened to 52.7 from the revised prior reading of 52.7. Honda Motors reported its automobile production in China will remain halted until at least 3 June on account of a strike. People’s Bank of China lifted yields on one-year bills for the first time in four months as inflation is picking up and the central bank is attempting to absorb excess cash from the money market. A PBoC adviser warned China’s property problems are more severe than the U.S.’s real estate problems. Spreads on Chinese property company bonds are widening away from U.S. Treasuries.
£
The British pound appreciated vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.4615 level and was supported around the $1.4435 level. Sterling partially moved higher on account of its current retention of its AAA credit rating. In contrast, Spain’s credit rating was downgraded last week and the U.K. media today reported France could lose its vaulted rating as well. Data released in the U.K. today saw May PMI manufacturing remain unchanged at 58.0, beating expectations. Cable bids are cited around the US$ 1.4220 level. The euro depreciated vis-à-vis the British pound as the single currency tested bids around the £0.8320 level and was capped around the £0.8475 level.
CHF
The Swiss franc depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.1730 level and was supported around the CHF 1.1525 level. Data released in Switzerland today saw Q1 gross domestic product climb 0.4% q/q and 2.2% y/y while May PMI defied expectations and rallied to 66.4, up from the prior reading of 65.9. April retail sales data will be released tomorrow. Swiss National Bank member Leuthard on Friday said Switzerland is interested in a “stable euro,” adding the central bank’s euro reserves have risen to 52%. SNB has undertaken significant franc-selling intervention this year to address the depreciation of the common currency. U.S. dollar bids are cited around the US$ 1.1420 level. The euro lost ground vis-à-vis the Swiss franc as the single currency tested bids around the CHF 1.4155 level while the British pound gained ground vis-à-vis the Swiss franc and tested offers around the CHF 1.7050 level.
Forex Daily Market Commentary provided by GCI Financial Ltd.
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