Forex Trading Commentary: Euro Falls To 11-Month Low Against US Dollar

Euro

The euro depreciated vis-à-vis the U.S. dollar Monday as the single currency tested bids around the US$ 1.4165 level and was capped around the $1.4425 level.  The common currency reached its lowest level since October 2007 as traders reacted to the U.S. government’s nationalization of U.S. government-sponsored enterprises Fannie Mae and Freddie Mac, two entities that own or guarantee about half of the U.S.’s US$ 12 trillion in outstanding home mortgage debt.  The common currency initially moved sharply higher on the news when Australasian dealing commenced but its intraday gains quickly evaporated.  In the move, the U.S. Treasury is potentially investing up to US$ 100 billion in each entity in an attempt to stabilize the U.S. home financing market.

Early reaction from U.S. equities markets was positive as traders speculated the announcement could be the catalyst the housing markets need to reverse course and address the ongoing residential credit crunch that began in 2007.  San Francisco Fed President Yellen said the U.S. economy faces more mortgage defaults, tighter credit conditions, and more downward activity on employment and business activity.  The Federal Reserve is not expected to change interest rates when the Federal Open Market Committee convenes on 16 September.

In eurozone news, European Central Bank member Stark acknowledged “most declines” in oil and commodities prices and warned global growth looks to be weaker.  Data released in the eurozone saw Sentix EMU-15 sentiment decline to a new five-year low.  Euro bids are cited around the US$ 1.3840 level.

Japanese Yen

The yen depreciated vis-à-vis the U.S. dollar Monday as the greenback tested offers around the ¥109.05 level and was supported around the ¥108.15 level. Technically, Monday’s intraday low was right around the 76.4% retracement of the move from ¥103.75 to ¥110.65. The pair failed to sustain many of its intraday gains scored after the U.S. government’s bailouts of Fannie Mae and Freddie Mac were announced. The dollar had rocketed sharply higher on the news on the premise that the short yen carry trade would be back in vogue as traders would sell yen to seek yield in other markets where risk had been mitigated by the U.S. government’s moves.

Bank of Japan Governor Shirakawa “hopes these measures will promote the stability of the global financial system” while finance minister Ibuki sees a “positive impact on the world economy…because the dollar is a key international currency.” Data released in Japan overnight saw August bank lending up 2.0% while August service sector sentiment weakened to a seven-year low. Also, August corporate failures were off 10.0% m/m. The Nikkei 225 stock index climbed 3.38% to close at ¥12,624.46. Dollar bids are cited around the ¥103.20 level.

The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥157.00 figure and was supported around the ¥153.60 level. The British pound gained ground vis-à-vis the yen as sterling tested offers around the ¥195.65 level while the Swiss franc moved lower vis-à-vis the yen and tested bids around the ¥95.90 level.

The Chinese yuan depreciated vis-à-vis the U.S. dollar as the greenback closed at CNY 6.8433 in the over-the-counter market, up from CNY 6.8422. People’s Bank of China Governor Zhou said the U.S. government’s takeover of Fannie Mae and Freddie Mac is a “positive” development.

British Pound

The British pound depreciated vis-à-vis the U.S. dollar as cable tested bids around the US$ 1.7565 level and was capped around the $1.7975 level. Sterling moved higher in Australasian dealing after the U.S. government’s bailouts of Fannie Mae and Freddie Mac were announced but relinquished its intraday gains. Data released in the U.K. saw August factory gate prices decline at their fastest rate since 1986 with output prices off 0.6% m/m and up 9.7% y/y. These data suggest wholesale price inflation could be moderating in what would be a welcome development for Bank of England Monetary Policy Committee members who must reconcile a slowing economy against heightened inflation. Cable bids are cited around the $1.7420 level. The euro moved lower vis-à-vis the British pound as the single currency tested bids around the ₤0.8020 level and was capped around the ₤0.8080 level.

Swiss Franc

The Swiss franc depreciated vis-à-vis the U.S. dollar Monday as the greenback tested offers around the CHF 1.1315 level and was supported around the CHF 1.1130 level. The pair reached its lowest level since 2 January 2008. The pair erased intraday gains after the U.S. nationalization of Fannie Mae and Freddie Mac was announced. Data released in Switzerland saw August unemployment tick up to 2.4% from 2.3% in July. Swiss National Bank expects the Swiss economy will expand 1.5% to 2.0% in 2008. U.S. dollar offers are cited around the CHF 1.1390 level.

The euro and British pound moved higher vis-à-vis the Swiss franc as the crosses tested bids around the CHF 1.5995 and CHF 1.9845 levels, respectively.

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