Daily Forex Commentary: Euro Gains As Emerging Markets Stabilize

Euro

The euro moved sharply higher vis-à-vis the U.S. dollar today (Thursday) as the single currency tested offers around the US$ 1.3295 level and was supported around the $1.2940 level.  The common currency recovered following a recovery in emerging market assets.  The European Union and International Monetary Fund bailed out Hungary to the tune of US$ 25.1 billion and the IMF also enacted a short-term financing facility for emerging market economies that have been well-managed but are facing funding difficulties.

The euro gained on this news because traders have recently been reducing exposure to currencies with higher yields and if emerging markets are stabilized, traders will be less inclined to sell euro for yen and Swiss francs.  The Federal Open Market Committee yesterday reduced the federal funds target rate by 50bps to 1.00% and cut the discount rate.  Fed policymakers reported “The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.”

Some dealers believe the fed funds target rate could move lower if other central banks reduce their rates.  The Fed enacted more reciprocal swap lines with other central banks including those in New Zealand, South Korea, Mexico, and Brazil.  Data to be released in the U.S. today include Q3 GDP and GDP price indices along with weekly jobless data.

In eurozone news, some traders believe the European Central Bank will cut rates by 25bps next week while others see a 50bps easing. Data released in Germany overnight saw the September ILP unemployment. Euro bids are cited around the US$ 1.2135 level.

Japanese Yen

The yen depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥99.10 level and was supported around the ¥97.20 level.  There is growing speculation Bank of Japan’s Policy Board will announce the first cut in interest rates in some seven years at the end of the week.  This would signify solidarity between Japanese central bankers and their Group of Seven counterparts in handling the ongoing credit market dislocations.  The Fed’s decision to reduce the overnight rate to 1.00% renders it increasingly likely BoJ will take its overnight call rate lower to 0.25%.  Data to be released in Japan tonight include Tokyo and nationwide CPI, household spending, and employment data.  The Nikkei 225 stock index climbed 9.96% to close at ¥9,029.76.  U.S. dollar offers are cited around the ¥104.15 level.  The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥131.00 figure and was supported around the ¥125.80 level.

The British pound and Swiss franc moved higher vis-à-vis the yen as the crosses tested offers around the ¥165.00 and ¥88.00 figures, respectively. In Chinese news, a government think-tank reported 2008 GDP is expected up 9.8% y/y with CPI up around 6.3%.

British Pound

The British pound rallied vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.6670 level and was supported around the $1.6350 level.  The improvement in emerging market economies and recent stabilization in global equity markets has supported higher-yielding currencies such as sterling.
Prime Minister Brown met with business leaders today to discuss new policies to improve the financial markets.  Brown also continues to defend the lofty levels of government borrowing, reporting it is much needed to counter the negative impact of the global financial market crisis.  Bank of England’s Monetary Policy Committee is expected to reduce its main repo rate by up to 50bps next week.

Data released in the U.K. today saw Nationwide October house prices off 1.4% m/m and 14.6% y/y while pay settlements were steady a 3.8% between July and September.  Data to be released in the U.K. tomorrow include the October GfK consumer confidence number.

Cable bids are cited around the US$ 1.6400 figure.  The euro moved higher vis-à-vis the British pound as the single currency tested offers around the 0.8010 level and was supported around the ₤0.7890 level.

Swiss Franc

The Swiss franc appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.1195 level and was capped around the CHF 1.1335 level.  Swiss National Bank has been actively trying to get three-month franc LIBOR back within its target band.  Many traders believe Swiss National Bank will reduce interest rates in December.  The October KOF leading indicator will be released tomorrow.   U.S. dollar offers are cited around the CHF 1.1805 level. 

The euro and British pound climbed higher vis-à-vis the U.S. dollar as the greenback tested offers around the CHF 1.4900 and CHF 1.8760 levels, respectively.

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