Forex Commentary: Euro Up Against US Dollar As Risk Appetite Returns

Euro

The euro moved sharply higher vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.2895 level and was supported around the $1.2565 level.  Risk appetite returned to the market as traders mulled Obama’s appointment of Geithner and the tripartite Federal Reserve/ U.S. Treasury/ FDIC bailout of troubled U.S. banking giant Citigroup (NYSE:C).  Government officials will provide Citigroup with US$ 20 billion of fresh balance sheet capitalization and will absorb up to US$ 306 billion of the bank’s troubled assets.  The Bush administration warned that Citigroup’s bailout may not be the final one and Citigroup’s shares were up more than 50% mid-way through the trading session.  Data released in the U.S. today saw October existing home sales off 3.1% in October to a 4.98 million annualized rate.  Also, the Chicago Fed’s National Activity Index printed at -2.09 for the three months to October, a slight improvement from the -2.16 rate in the three months to September.  Traders are closely monitoring reports that Obama is considering up to US$ 500 billion in tax cuts and federal spending over the next two years to support the economy and financial markets.

In eurozone news, EMU-15 industrial orders were off 3.9% m/m and 1.1% y/y in September.  German business confidence receded to a fifteen-year low in November with the main Ifo business climate index lower at 85.8.  Most traders expect the European Central Bank will cut rates by 50bps in December with some more dovish dealers eyeing a 75bps move.  ECB member Bini Smaghi was quoted as saying “…now that the euro has returned to levels that are more favourable for exporters, it doesn’t seem to me to be something to complain about. Intervention to safeguard the financial system does not run contrary to the Stability Pact if the measures are temporary and put in place to safeguard financial stability.

I believe this crisis will lead many countries to increase their convergence efforts to enter the euro. But we shouldn’t delude ourselves. The euro is like an umbrella, it protects in cases of external crisis but it is not the solution to every problem.”  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 ¥96.75 level and was supported around the ¥94.90 level.  The yen was given across the board as risk appetite returned to the markets following Obama’s nomination of New York Federal Reserve Bank President Geithner to head the U.S. Treasury Department and the government’s massive bailout of U.S. banking giant Citigroup.  Some traders, however, remain skeptical that normal market functioning will return to the market anytime soon. There has not been any indication that Japanese monetary authorities are close to conducting yen-selling intervention.  Bank of Japan’s monthly economic report will be released overnight.  The Nikkei 225 stock index will reopen overnight.  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 ¥124.70 level and was supported around the ¥119.50 level. The British pound and Swiss franc gained ground vis-à-vis the yen as the crosses tested offers around the ¥146.80 and ¥80.80 levels, respectively.

The Chinese yuan appreciated vis-à-vis the U.S. dollar as the greenback closed at CNY 6.8284 in the over-the-counter market, down from CNY 6.8311.  People’s Bank of China Deputy Governor Yi Gang said interest rates are at a “relatively appropriate” level but may be adjusted further.  The Chinese media reported the National Development and Regulatory Commission is drafting plans to inject at least CNY 300 billion into the local stock market.

British Pound

The British pound appreciated sharply vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.5175 level and was supported around the $1.4840 level.  Chancellor of the Exchequer Darling gave his Pre-Budget report and indicated the government will reduce the VAT sales tax to 15% from 17.5% effective 1 December through the end of 2009 and said the government will accelerate ₤3 billion in capital spending and will sharply increase borrowing to support the economy.  The government is also estimating inflation will decline sharply to reach 0.5% by the end of 2009.  The total spending amounts to ₤20 billion on tax cuts.  The government is expected to finance the tax cut by raising taxes in a few years.  Cable bids are cited around the US$ 1.4315 level. 

The euro moved higher vis-à-vis the British pound as the single currency tested offers around the ₤0.8535 level and was supported around the ₤0.8425 level.

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