Daily Forex Market Commentary

EURO

The euro weakened vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.5470 level and was capped around the $1.5635 level. Technically, today’s intraday low was right around the 50% retracement of the move from $1.5300 to $1.5650. The common currency came sold off after the German Ifo business climate index fell to 101.3 in June from 103.5 in May, worse-than-expected, while the expectations sub-index was also weak. The main headline print of 101.3 was the weakest level since December 2005. Additionally, the EMU-15 services sector PMI fell to 49.5 from 50.6 while the EMU-15 manufacturing sector PMI fell to 49.1. These data were reported a little more than a week before the European Central Bank is expected to lift its main refinancing rate by 25bps to 4.25%. Most traders believe the ECB will only lift rates once but a one-off hike may not be enough. It was also reported that consumer input price inflation surged to 67.4 from 64.4, its highest level since October 2000, while output price inflation jumped to 55.6 from 54.8. ECB member Stark hawkishly said it is essential “we seriously examine the current level of the key interest rate.” In U.S. news, traders are closely monitoring Friday’s downgrades of two U.S. bond insurance companies and Citigroup’s announcement that it is slashing 10% of its investment banking staff. The Federal Open Market Committee convenes tomorrow and Wednesday and is expected to keep rates unchanged and signal that inflation is more of a threat than a slowdown in economic growth. Euro bids are cited around the $1.5230 level.

JPN/CNY

The yen depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥108.05 level and was supported around the ¥107.10 level. The government reported sentiment among large Japanese companies weakened in Q2 for the third consecutive quarter with the business sentiment diffusion index for large companies falling to -15.2. The print was much worse than expected and suggests next week’s Bank of Japan Tankan corporate sentiment survey could come in on the weak side. Prime Minister Fukuda said Group of Eight policymakers “should consider ways to resolve the problem of inflation” and cited oil and food prices as problem areas. G8 policymakers will convene in Japan between 7-9 July. Other data released today saw May supermarket sales off 1.1%, the second consecutive monthly decline. The Nikkei 225 stock index lost 0.61% to close at ¥13,857.47. Dollar bids are cited around the ¥103.00/ 101.35 levels. The euro weakened vis-à-vis the yen as the single currency tested bids around the ¥166.85 level and was capped around the ¥167.80 level. The British pound and Swiss franc came off vis-à-vis the yen as the crosses tested bids around the ¥211.05 and ¥102.95 levels, respectively. The Chinese yuan appreciated vis-à-vis the U.S. dollar as the greenback closed at CNY 6.8750 in the over-the-counter market.

STERLING

The British pound depreciated vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.9590 level and was capped around the $1.9755 level. Technically, today’s intraday high was right around the 38.2% retracement of the move from $2.0395 to $1.9360. Data released in the U.K. overnight say Rightmove house prices fall 1.2% m/m in June. Bank of England Monetary Policy Committee member Sentance hawkishly reported “We will need to ensure that the rise in inflation injected by rising oil and commodity prices does not become broad-based. That requires that wage and price increases more generally do not pick up in response to a temporary episode of rising headline inflation. The Monetary Policy Committee cannot influence wage and price increases directly. But we can influence the economic climate in which they take place.” Cable bids are cited around the US$ 1.9360/ 1.9100 levels. The euro moved higher vis-à-vis the British pound as the single currency tested offers around the ₤0.7920 level and was supported around the ₤0.7890 level.

SWISS

The Swiss franc depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.0485 level and was supported around the CHF 1.0330 level. The Swiss government raised its inflation expectations for 2008 and 2009 and reduced its 2009 GDP growth forecast. SECO sees the economy expanding 1.9% in 2008 and 1.3% in 2009 and sees inflation growth around 2.5% this year. Swiss National Bank kept its target rate for three-month Swiss franc Libor unchanged at 2.75% last week. SNB sees 2008 inflation growth around 2.7%. U.S. dollar bids are cited around the CHF 1.0250 level. The euro and British pound gained ground vis-à-vis the Swiss franc as the crosses tested offers around the CHF 1.6230 and CHF 2.0540 levels, respectively.

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