Forex Commentary: ECB’s Trichet Says Interest Rates May Be Cut Next Week

Euro

The euro moved lower vis-à-vis the U.S. dollar today (Wednesday) as the single currency tested bids around the US$ 1.2905 level and was capped around $1.3070 level.  Many U.S. economic data were released today ahead of tomorrow’s Thanksgiving holiday.  First, November personal income edged up 0.1% and the core personal consumption expenditures were unchanged in October and up 2.1% y/y.  Second, October durable goods orders decreased 0.6% with the ex-transportation component off 4.4%.  Third, weekly initial jobless claims were off 29,000 to 529,000 and continuing jobless claims fell to 3.96 million.  Fourth, October building permits were revised to -9.3%.  Fifth, the New York NAPM current business conditions index fell to 33.3 from 35.6 in October.

Most traders expect the Federal Open Market Committee will ease interest rates by 50bps on 16 December.  The Fed doesn’t have much scope to reduce official interest rates further and has taken to expanding the money supply aggressively over the past several weeks, a de facto monetary easing.

In eurozone news, European Central Bank President Trichet dovishly said the central bank may reduce interest rates next week, adding “We will have a lot of new information and we did not exclude to decrease rates again if the upside risk to prices alleviate.”  Trichet also hinted the ECB may reduce its economic forecasts next week and ECB Weber added there is room for the ECB to cut rates further.  Data released in Germany today saw provisional November price pressures ease markedly and this will give European Central Bank policymakers more breadth to reduce interest rates.  The European Commission approved a €200 billion fiscal spending plan across the European Union today.

Euro bids are cited around the US$ 1.2135 level.

Japanese Yen

The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥94.70 level and was capped around the ¥95.55 level.  Bank of Japan Governor Shirakawa talked about quantitative easing policies today saying “I understand this policy helped stabilize financial markets when there was strong anxiety about the financial system.  But when this policy was continued even after the financial system settled down, markets could not function properly.”  The government’s Fiscal System Council today recommended more fiscal stimuli from the government, reporting “Large-scale government spending in the face of extreme turmoil in the global economy and financial markets should be considered as an emergency measure.  We are urging the government not to lose sight of the importance of fiscal consolidation.  But for the moment, we cannot allow the economy to crash and fall into depression.”  The Nikkei 225 stock index shed 1.33% to close at ¥8,213.22.  U.S. dollar offers are cited around the ¥104.15 level.

The euro moved lower vis-à-vis the yen as the single currency tested bids around the ¥122.55 level and was capped around the ¥124.60 level. The British pound and Swiss franc came off vis-à-vis the yen as the crosses tested bids around the ¥144.50 and ¥79.30 levels, respectively. 

The Chinese yuan depreciated vis-à-vis the U.S. dollar today as the greenback closed at CNY 6.8282 in the over-the-counter market, up from CNY 6.8260.  People’s Bank of China cut interest rates for the first time since mid-September overnight, reducing its one-year borrowing rate to 5.58% and its one-year certificates of deposit rate to 2.52%.  The decrease was equivalent to a 108bps cut and the cut in the lending rate was the largest since October 1997.  Data released in China today saw the October consumer confidence index fall to 92.4 from 93.4 in September.

British Pound

The British pound depreciated vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.5230 level and was capped around the $1.5480 level.  Data released in the U.K. today saw third quarter gross domestic product growth confirmed at -0.5% q/q, taking the annualized growth rate to a mere +0.3%. the weakest since 1992.  These data reinforce economists’ view that the U.K. economy is sliding into a deep recession and increased the likelihood Bank of England’s Monetary Policy Committee will slash interest rates again next week.  Cable bids are cited around the US$ 1.4315 level. 

The euro moved lower vis-à-vis the British pound as the single currency tested bids around the ₤0.8415 level and was capped around the ₤0.8485 level.

Swiss Franc

The Swiss franc depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.1965 level and was supported around the CHF 1.1835 level.  Swiss National Bank board member Hildebrand reported “The current economic situation globally has definitely worsened in the last few weeks. Therefore the risks for Switzerland have greatly increased. We are without doubt in the middle of a very severe crisis. There is an impending material economic slowdown and next year we will have negative growth.  Switzerland is a small, very open economy and in such an environment will definitely be seriously.”  Many dealers expect Swiss National Bank will reduce borrowing costs again as early as mid-December.  U.S. dollar offers are cited around the CHF 1.2350 level.

The euro and British pound moved higher vis-à-vis as the crosses tested offers around the CHF 1.5500 and CHF 1.8390 levels, respectively.

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