Traders Pricing In 100% Chance That Fed Will Cut Rates To 0.5%

Euro

The euro moved lower vis-à-vis the U.S. dollar today (Friday) as the single currency tested bids around the US$ 1.2625 level and was capped around the $1.2800 figure.  Traders were shocked by U.S. economic data that confirmed November non-farm payrolls fell by a larger-than-expected 533,000, the most significant decline since December 1974 and the eleventh consecutive monthly decline. The November unemployment rate ticked higher to 6.7%, its highest level since October 1993, and many economists now believe the rate could reach at least 8% in the coming months.  Notably, the U.S. economy has lost more than 1.2 million jobs in the past three months alone, reflecting sharp downward revisions to September’s and October’s tallies.  Additionally, average hourly earnings climbed 0.4% m/m and 3.7% y/y to US$ 18.30 and service sector employment fell a staggering 370,000.   Today’s data render it all but certain that Federal Reserve policymakers will cut the overnight federal funds target rate by at least 50bps to 0.50% on 16 December.  Fed funds futures are fully pricing in a 50bps cut and a 76% implied probability of a 75bps cut to 0.25%. 

In eurozone news, Germany’s upper house of parliament approved a fiscal stimulus package valued at €31 billion over two years.  Data released in Germany today saw October manufacturing orders fall 6.1%. Germany’s Bundesbank reduced its 2009 inflation outlook forecast to 0.8% but said deflationary effects “are not likely.”  The Economic Cycle Research Institute’s Eurozone Future Inflation Gauge fell to a 33-month low in October.  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 ¥91.60 level and was capped around the ¥92.55 level.  Traders are awaiting for new Bank of Japan funding measures to be implements from next month to ease upward pressures on money market rates and commercial paper rates.  The BoJ will also accept a wider range of collateral from 9 December for its funding operations.  Prime Minister Aso said the central bank “should consider” increasing its outright purchase of Japanese government bonds.  It is clear Japan will have to revert to some quantitative easing measures to improve the money markets in the current near-zero per cent interest rate environment.  Data released in Japan overnight saw Japan’s trade balance print at -¥441.11 billion between 1 - 20 November while Japan’s foreign reserves totaled US$ 1.002861 trillion at the end of last month.  The Nikkei 225 stock index lost 0.08% to close at ¥7,917.51. 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 ¥115.85 level and was capped around the ¥118.20 level.  The British pound and Swiss franc came off vis-à-vis the yen as the crosses tested bids around the ¥133.25 and ¥75.05 levels, respectively.   

The Chinese yuan appreciated vis-à-vis the U.S. dollar as the greenback closed at CNY 6.8812 in the over-the-counter market, down from CNY 6.8817.  China and the U.S. are conducting economic talks and Treasury Secretary Paulson indicated China “agrees” the yuan should keep appreciating.

British Pound

The British pound depreciated vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.4520 level and was capped around the $1.4750 level.  The British media is reporting Bank of England is considering “radical plans” to inject cash directly into the U.K. economy as a measure to reverse the current economic recession.  Bank of England yesterday slashed interest rates to lower their lowest level since 1951 and the media report suggests quantitative easing methods are being discussed to reflate the economy.  Some U.K. banks are again refusing to pass on the latest interest rate cut to homeowners and to reduce the London Interbank Offered Rate. Cable offers are cited around the US$ 1.4865 level.

The euro moved lower vis-à-vis the British pound as the single currency tested bids around the ₤0.8630 level and was capped around the ₤0.8720 level.

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