Daily Forex Commentary: UK Economy Contracts More Than Expected

Euro

The euro moved higher vis-à-vis the U.S. dollar today (Wednesday) as the single currency tested offers around the US$ 1.3000 figure and was supported around the $1.2905 level.  Traders became less risk averse overnight as it appeared the U.S. House of Representatives would vote today on a US$ 15 billion bailout plan to aid the U.S. automakers industry.   Data released in the eurozone today saw October industrial output decline in France, Italy, and Greece and it is expected that November’s and December’s data will worsen substantially.  These data are likely to lead to downward revisions for Q4 gross domestic product growth.  French output was off 2.7% m/m and 7.2% y/y, the largest decline on record.  The German government reported it has no plan to reduce its growth forecasts despite increasing expectations for an extended economic pullback.  In mid-October, the government reduced its official 2009 GDP growth forecast to 0.2%.  German finance minister Steinbrueck said there will be no new announcements on 5 January regarding new stimulus measures.  The European Union announced it will release a new economic forecast on 19 January on account of the worsening economic outlook.

European Central Bank member Stark reported “The environment for conducting economic policies, in particular monetary policy and fiscal policies, has become extremely difficult. Only a few countries have the scope to take additional action. There is a clear risk that any additional stimulus program may erode, rather than restore, public confidence…Over and beyond the confidence-related effects, it is by no means clear that stimulus measure will be effective.”

In other German news, it was reported that November wholesale prices were off 3.3% m/m and 0.8% y/y.  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 ¥92.90 level and was supported around the ¥92.05 level. Yomiuri reported the Japanese government is likely to issue its most dire assessment of the Japanese economy in nearly seven years by downgrading its view and noting conditions are worsening.  Data released in Japan overnight saw annual wholesale inflation growth slow to 2.8% in November after peaking at 7.4% in August.  Bank of Japan will issue its quarterly tankan survey next Monday and is expect to confirm a sharp slide in confidence among large Japanese manufacturers.  BoJ Deputy Governor Nishimura reported “financial institutions are becoming less capable of lending.”

Other data released in Japan overnight saw October core private-sector machinery orders fall 4.4%, worse-than-expected.  Also, October machinery orders from foreign operators fell 37.2%. BoJ Governor Shirakawa spoke today and said “If moves in the foreign exchange market become too excessive, an intervention is one way” to control excess volatility.  The government has not overtly intervened in the foreign exchange markets since March 2004.  Shirakawa added “The economy is stagnant due to drops in exports and high commodities prices.”  Swap contracts on Japan’s benchmark overnight rate are pricing in a 20% to 30% chance of a 25bps interest rate cut in early 2009.  The Nikkei 225 stock index climbed 3.15% to close at ¥8,660.24.  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 ¥120.55 level and was supported around the ¥119.00 figure.  The British pound and Swiss franc gained ground vis-à-vis the yen as the crosses tested offers around the ¥137.75 and ¥77.25 levels, respectively.

The Chinese yuan appreciated vis-à-vis the U.S. dollar as the greenback closed at CNY 6.8633 in the over-the-counter market, down from CNY 6.8735.  Data released in China overnight saw exports decline for the first time in more than six years.  People’s Bank of China announced it will maintain “appropriately easier” monetary policy in 2009 to counter “substantial challenges.”  Other data released today saw November annual producer price inflation fall for the third consecutive month, printing at +2% and down from October’s 6.6% reading.  These data evidence potential deflationary pressures.

British Pound

The British pound appreciated vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.4865 level and was supported around the $1.4735 level.  NIESR released an estimate that indicates the U.K. economy contracted 1.0% in the three months to November.  Cable offers are cited around the US$ 1.4920 level.  The euro moved higher vis-à-vis the British pound as the single currency tested offers around the ₤0.8780 level and was supported around the ₤0.8725 level.

Swiss Franc

The Swiss franc appreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.2085 level and was supported around the CHF 1.1975 level.  Most traders expect Swiss National Bank will reduce interest rates tomorrow for the fourth time in two months, probably by about 50bps in a move that could take the central bank’s three-month Swiss franc LIBOR band to 0.00% - 1.00%.  Some dealers believe the SNB will also aim to weaken the Swiss franc over the next several months to counter slowing economic activity.  Data released in Switzerland today saw the December ZEW investor sentiment index rise 12.3 points to 76.2.  U.S. dollar offers are cited around the CHF 1.2140 level.

The euro and British pound came off vis-à-vis the Swiss franc as the crosses tested bids around the CHF 1.5565 and CHF 1.7740 levels, respectively.

Posted in Categories: Contributor, Eurozone, External Research, Forex, Japan, Switzerland, UK, USA.

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