Daily Forex Commentary: ECB’s Trichet Open To Further Rate Cuts

Euro

The euro moved higher vis-à-vis the U.S. dollar today (Monday) as the single currency tested offers around the US$ 1.2950 level and was supported around the $1.2715 level.  The common currency moved higher as the incoming Obama administration signaled plans to increase public works spending and the U.S. Congress continued work on a bailout for Detroit automakers.  European Central Bank policymakers went on the interest rate offensive today, making it abundantly clear the ECB has additional room to ease monetary policy.  ECB President Trichet said the ECB “has ample monetary policy ammunition” while ECB’s Quaden reported the “financial crisis has accelerated the downward (growth) revisions.”  ECB member Nowotny added “I favor a steady-hand policy. Having said that, one should always retain the flexibility to react to new developments. There’s certainly room for maneuvre if the future economic development is significantly weaker.” Similarly, ECB’s Gonzalez-Paramo added policymakers have not excluded reducing interest rates further.  ECB’s Tumpel-Gugerell said central banks’ impact on counterparty credit risk and uncertainty are limited and added “the measures taken by the governments and shareholders are, therefore of paramount importance, and should address these problems over time.” 

The European Union will hold a summit in Brussels on 11 - 12 December to review fiscal stimulus proposals that are calling for a €200 billion spending plan.  Data released in German today saw October industry output fall 2.1% while EMU-15 December Sentix investment sentiment worsened for a sixth straight month to -42.3. 

 In U.S. news, Boston Federal Reserve President Rosengren said additional Fed monetary policy actions are limited and added “Increasingly, many observers and commentators are suggesting that fiscal stimulus will be an important element of economic recovery.”  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 ¥93.90 level and was supported around the ¥92.55 level.  Traders reduced long yen exposure as risk appetites returned following an ambition plan by U.S. President-elect Obama to enact the largest public spending program since the 1950s.  Also, there is increasing speculation the U.S. government will bail-out the beleaguered Detroit automakers.  Japan’s Toyota Motor Corp reported it is considering a sharp decrease in capital spending.  Data released in Japan overnight saw November bank lending climb 3.2% y/y while the October current account surplus was off 56.5% y/y. The increase in bank lending was attributable to the severe problems in the commercial paper market as the outstanding balance of commercial paper declined 9.9% y/y in November.  Also, the November M3 money supply was up +0.6% y/y while the November service sector sentiment index printed at 21.0 and November corporate bankruptcies were up 11.5% y/y.  U.S. dollar offers are cited around the ¥104.15 level.  

The euro gained ground vis-à-vis the yen as the single currency tested offers around the ¥120.95 level and was supported around the ¥117.90 level.  The British pound and Swiss franc moved higher vis-à-vis the yen as the crosses tested offers around the ¥140.75 and ¥77.50 levels, respectively. 

 The Chinese yuan appreciated vis-à-vis the U.S. dollar as the greenback closed at CNY 6.8800 in the over-the-counter market, down from CNY 6.8812.  China’s “central economic work conference” is convening to discuss options as to how to maintain economic growth of 8% per year. China Investment Corp President Gao Xiqing was quoted as saying “Everyone is saying, ‘Oh, look, the dollar is getting stronger!’ I say, that’s really temporary. It’s simply because a lot of people need to cash in, they need U.S. dollars in order to pay back their creditors. But after a short while, the dollar may be going down again. I’d like to bet on that!”

British Pound

The British pound appreciated vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.5045 level and was supported around the $1.4675 level.  Sterling powered higher as traders increased exposure to risk following announcements of U.S. fiscal spending plans.  Prime Minister Brown is meeting French President Sarkozy and European Commission President Barroso to discuss the European Union economy.  Data released in the U.K. today saw November output prices fall 0.7% m/m and climb +5.1% y/y.  Similarly, input prices fell 3.3% and the annual rate of input price inflation was reduced to +7.5%, the lowest since September 2007.  These data are the latest evidence that deflationary pressures are evident in the U.K. economy.  Most traders expect Bank of England will reduce interest rates further in January.  Cable offers are cited around the US$ 1.4865 level.  

The euro moved lower vis-à-vis the British pound as the single currency tested bids around the ₤0.8725 level and was supported around the ₤0.8580 level. 

Swiss Franc

The Swiss franc appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.2020 level and was capped around the CHF 1.2210 level.  Traders repriced risk today and sold U.S. dollars and Japanese yen for higher-yielding currencies.  Most traders expect Swiss National Bank will announce additional monetary easing measures on Thursday.  U.S. dollar offers are cited around the CHF 1.2210 level. 

The euro moved higher vis-à-vis the Swiss franc as the single currency tested offers around the CHF 1.5615 level while the British pound came off vis-à-vis the Swiss franc and tested bids around the CHF 1.7835 level.

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