By GCI Forex Research
Fundamental Outlook at 1400 GMT (EDT + 0400)
The euro depreciated vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.2670 level and was capped around the $1.2765 level. Today’s intraday high was right around the 23.6% retracement of the $1.3335 – 1.2580 range. Liquidity was reduced on account of the Bank holiday in the U.K. and market holidays elsewhere. The media reported the European Central Bank will likely extend its emergency aid program for the banking system into 2011. There is increasing speculation the U.S. economy is heading toward a double dip recession that could dim Europe’s economic recovery. Data released in the eurozone today saw the EMU-16 August business climate indicator tick lower to 0.61 from the revised print of 0.63 while August consumer confidence improved to -11 from from the prior reading of -12. August industrial confidence was unchanged at -4 and August services confidence ticked higher to +7. Data to be released in the eurozone tomorrow include the EMU-16 flash August estimate and the EMU-16 July unemployment rate. In U.S. news, data released today saw July personal income up 0.2% while July personal spending came in at +0.4%, more-than-expected and up from the prior reading of 0.0%. Also, the July PCE deflator was up 1.5% y/y and July core PCE was up 0.1% m/m and 1.4% y/y. Finally, the Dallas Fed’s August manufacturing activity index improved to -13.5. Data to be released in the U.S. tomorrow include the August Chicago PMI survey, August consumer confidence, and June CaseShiller home prices data. Minutes from the Federal Open Market Committee’s 10 August meeting will also be released tomorrow and closely scrutinized given the Fed’s decision to reinvest maturing mortgage-backed securities proceeds into the U.S. Treasury market. Dealers are still talking about Fed Chairman Bernanke’s comments on Friday regarding how the Fed could ease policy further if required including shifting the composition of its bond reinvestment strategy. Euro offers are cited around the US$ 1.3240 level.
The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥84.55 level and was capped around the ¥85.90 level. The pair briefly traded above the ¥85.80 level, representing the 23.6% retracement of the ¥92.85 – 83.60 range. As expected by many Bank of Japan-watchers, the central bank held an emergency Policy Board meeting and expanded its bank lending program – the first time it has added new monetary stimulus since March. BoJ is increasing the amount of funds in the facility by ¥10 trillion to a total of ¥30 trillion. BoJ Governor Shirakawa indicated the central bank is poised to take more action if required and cited “downside risks” to Japan’s ongoing economic recovery. Shirakawa left the Fed’s Jackson Hole symposium early to attend the meeting in Tokyo amid increasing pressure from the government to enact more monetary easing. More traders, however, are speculating the change in policy will not have a major impact on the economy or on the yen. Vice finance minister Ikeda welcomed the central bank’s “swift response.” There is no indication that Japanese monetary authorities are any closer to conducting unilateral yen-selling intervention than they were last week. Consumer prices have been on the decline for seventeen months, household spending remains weak, and gross domestic product growth is decelerating. Former BoJ Policy Board member Nakahara said the central bank’s easing today is “too little and too late” and argued they are “meaningless and can’t stop the yen’s advance.” Nakahara added “Lowering the policy rate to zero is a must to stem the yen’s gains. The BoJ should also boost outright purchases of bonds by another ¥500 billion. Increased bond purchases would enable the government to generate funds for more public works spending. As a whole, Japan can’t live without spending by companies and the government.” Prime Minister Kan reported he will consider a supplementary budget if necessary. Data to be released in Japan overnight include July industrial production and July retail trade. The Nikkei 225 stock index climbed 1.76% to close at ¥9,149.26. U.S. dollar bids are cited around the ¥84.60 level. The euro moved lower vis-à-vis the yen as the single currency tested bids around the ¥107.25 level and was capped around the ¥109.55 level. The British pound moved lower vis-à-vis the yen as sterling tested bids around the ¥130.95 level while the Swiss franc moved lower vis-à-vis the yen and tested bids around the ¥82.15 level. In Chinese news, the U.S. dollar appreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.8033 in the over-the-counter market, up from CNY 6.7980. Data to be released in China Wednesday include August PMI manufacturing numbers followed by August PMI services data on Friday. The yen fell significantly after a rumour circulated that People’s Bank of Governor Zhou may have defected on account of a possible US$ 430 billion loss on U.S. Treasury bond holdings. The rumours likely represent a power struggle within the Communist Party. PBoC adviser Xia Bin called for a floating interest rate mechanism for bank deposits and noted economic growth is expected to slow this year.
The British pound depreciated vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.5455 level and was capped around the US$ 1.5575 level. Data released in the U.K. last night saw the August Hometrack housing survey off 0.3% m/m and up 1.5% y/y. Data to be released in the U.K. tonight include the GfK August consumer confidence survey and it is expected to print around -24. Net consumer credit and mortgage lending data will be released tomorrow. Bank of England Chief Economist Bean spoke at Jackson Hole and said “The deleveraging process is incomplete, the recovery remains fragile, and a considerable margin of spare capacity is yet to be worked off, while further policy action may yet be necessary to keep the recovery on track.” Cable bids are cited around the US$ 1.5385 level. The euro depreciated vis-à-vis the British pound as the single currency tested bids around the £0.8160 level and was capped around the £0.8215 level.
The Swiss franc appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.0235 level and was capped around the CHF 1.0310 level. Swiss National Bank member Jordan said the central bank is closely monitoring the Swiss franc “very closely” and said Switzerland’s monetary policy situation remains “very complex.” Jordan also cited a “small” short-term risk of deflation. Some traders believe SNB may be forced to resume its franc-selling intervention to stop the euro’s sharp decline on the cross. The July UBS consumption indicator will be released tomorrow followed by August PMI on Wednesday, Q2 GDP and July retail sales on Thursday, and August consumer price inflation on Friday. U.S. dollar offers are cited around the CHF 1.0980 level. The euro depreciated vis-à-vis the Swiss franc as the single currency tested bids around the CHF 1.2980 level while the British pound moved lower vis-à-vis the Swiss franc and tested bids around the CHF 1.5840 level.
Forex Daily Market Commentary provided by GCI Financial Ltd.
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