Daily Forex Market Commentary

Euro

The euro moved higher vis-à-vis the U.S. dollar today (Thursday) as the single currency tested offers around the US$ 1.2540 level and was supported around the $1.2385 level.  U.S. equity prices suffered another major decline yesterday with the Dow off more than 400 points.  Traders dumped U.S. assets after the U.S. Treasury announced it no longer plans to purchase toxic mortgage assets, a US$700 billion plan that was the centerpiece of the U.S. government’s bailout plan just weeks ago.  Treasury Secretary Paulson reported the Treasury will now focus on direct investments in U.S. financial institutions.  Traders are wondering what other surprises may emerge at this week’s Group of Twenty meeting in Washington, D.C. Traders are deliberating the likelihood of additional monetary easing from both the European Central Bank and Federal Reserve before the end of the year and again in Q1 2009.

ECB President Trichet and other ECB members have made it abundantly clear that they have not prejudged monetary policy but that it is possible rates could come down in December.  Trichet yesterday said “An ambitious and effective reform of the financial system is necessary, but not sufficient to restore a stable global economic order.  At the Fed, policymakers continue to implement multiple liquidity provision facilities to support commercial banks, investment banks, primary dealers, and the commercial paper market.

The media is reporting that Germany’s “Wise Men” are gloomy on their 2009 economic outlook and foresee a likely recession.  The ECB’s monthly bulletin was released today and it highlighted the elevated levels of economic uncertainty.  Data released today saw Italian October harmonized consumer price inflation at 3.6% y/y while French October consumer prices fell 0.1% m/m.  Notably, German GDP fell 0.5% q/q and this means the eurozone’s largest economy entered a recession for the first time in five years.  U.S. September trade data will be released today.  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 ¥96.25 level and was supported around the ¥94.50 level.  Finance minister Nakagawa verbally intervened against the yen’s recent gains saying “Rapid foreign exchange rate swings would have a negative impact on the economy.”  Data released in Japan overnight saw revised September industrial orders up +1.1% m/m while October wholesale prices were up 4.8% y/y, down from September’s 6.8% climb.  Bank of Japan Policy Board member Nakamura said he does not see the need to cut rates again immediately and said Japan needs to monitor the impact of the most recent cut.  Dealers are wondering if the BoJ will be easing monetary policy further, particularly if other central banks continue to reduce borrowing costs to contend with the ongoing credit crisis.  The Nikkei 225 stock index lost 5.25% to close at ¥8,238.64.  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 ¥120.35 level and was supported around the ¥117.65 level.  The British pound moved higher vis-à-vis the yen as sterling tested offers around the ¥143.90 level while the Swiss franc gained ground vis-à-vis the yen and tested offers around the ¥80.95 level.  The Chinese yuan depreciated vis-à-vis the U.S. dollar as the greenback closed at CNY 6.8300 in the over-the-counter market, up from CNY 6.8295.  Data released in China overnight saw October factory output growth decelerate to +8.2%, a seven-year low.

British Pound

The British pound moved lower vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.4805 level and was capped around the $1.4990 level.  Cable moved sharply lower yesterday as traders reacted to a very dovish quarterly inflation report from Bank of England.  BoE Governor King reported the central bank “…is certainly prepared to cut that rate again if it is necessary.”  The Monetary Policy Committee last week slashed rates by a major 150bps and King noted the BoE will take rates to whatever level is necessary to meet its 2% inflation target.  Many traders expect the MPC will cut rates again next month.  Notably, the inflation report also contained the biggest-ever cut in inflation forecasts with policymakers now eyeing inflation “well below 2%” by 2010 if official rates follow current market projections.  Chancellor of the Exchequer Darling justified it is proper for the government to increase public borrowing now to help counter the economic recession.  MPC’s Sentance said it will take time for the BoE’s recent 150bps cut to work through to the real economy.  Cable bids are cited around the US$ 1.4315 level.

The euro moved higher vis-à-vis the British pound as the single currency tested offers around the ₤0.8385 level and was supported around the ₤0.8340 level.

Swiss Franc

The Swiss franc depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.1945 level and was supported around the CHF 1.1850 level.  The Swiss government yesterday agreed an economic stimulus package valued around CHF 890 million to counter the anticipated economic recession next year.  The government reported “Switzerland is still currently in a comparatively good economic and employment situation, but due to global economic developments, the prospects have become noticeably more gloomy since September.”  Data released in Switzerland today saw the November ZEW expectations index improve marginally to -88.5 while October producer and import prices rose 2.9% y/y and were off 0.6% m/m.  U.S. dollar offers are cited around the CHF 1.2120 level.

The euro and British pound gained ground vis-à-vis the Swiss franc as the crosses tested offers around the CHF 1.4895 and CHF 1.7810 levels, respectively.

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