EURO

The euro weakened vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.5315 level and was capped around the $1.5500 figure.  The common currency came within a few pips of establishing a new multi-month low dating to 8 May.  There were two major reasons for the extension of the euro’s recent losses.  First, traders were displeased with comments from European Central Bank President Trichet following the central bank’s decision to keep interest rates unchanged at 4.25%.  Trichet remained hawkish in his comments saying “It has confirmed that annual inflation rates are likely to remain well above levels consistent with price stability for a protracted period of time and that risks to price stability over the medium term remain on the upside.”

Trichet said recent inflation data have justified last month’s rate hike.  Dealers sold the euro on these comments because recent economic data have deteriorated and traders believe the ECB should be lowering rates to counter weaker economic growth. Trichet said the eurozone’s economic fundamentals remain “sound” but acknowledged GDP growth in Q3 will not be much above the pace seen in Q2.

Second, U.S. housing data surprised traders and may have signaled a possible bottom in the housing market there.  Data released in the eurozone today saw German industrial production rise 0.2% m/m and 4.1% y/y.  In U.S. news, weekly initial jobless claims rose 7,000 to 455,000, the highest level since March 2002, while continuing jobless claims rose 31,000 to 3.311 million, the highest level since December 2003.  Also, U.S. pending homes sales rose 5.3% in June, defying expectations of a decline.  Euro bids are cited around the US$ 1.5175 levels.

JPN/CNY

The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥109.10 level and was capped around the ¥109.75 level.  Technically, today’s intraday high was right around the 50% retracement of the move from ¥124.15 to ¥95.70.  As expected, the Japanese government downgraded its economic assessment in its August monthly report on account of weakening exports, industrial production, and employment.  The government also removed the word “recovery” from its assessment for the first time in 56 months and government policymakers have suggested the economy is already in a recession.  Data released in Japan overnight saw June machinery orders off 2.6% m/m, less-than-forecast and the first decline in three months.  The Nikkei 225 stock index lost 0.98% to close at ¥13,124.99.  Dollar bids are cited around the ¥106.40 level.

The euro moved lower vis-à-vis the yen as the single currency tested bids around the ¥167.75 level and was capped around the ¥169.45 level.

The British pound and Swiss franc came off vis-à-vis the yen as the crosses tested bids around the ¥212.55 and ¥103.00 levels, respectively.

The Chinese yuan weakened vis-à-vis the U.S. dollar as the greenback closed at CNY 6.8614 in the over-the-counter market, up from CNY 6.8482.  China announced the most significant change to its foreign exchange regulations since 1997 overnight. The government loosened capital controls by permitting domestic companies to hold foreign exchange income overseas and by allowing foreign companies to issue securities in China.

STERLING

The British pound weakened vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.9420 level and was capped around the $1.9535 level.  The pair reached its lowest level since 13 June.  As expected, Bank of England’s Monetary Policy Committee kept its headline repo rate unchanged at 5.00%.  BoE’s quarterly inflation report will be released next week and policymakers will likely have a difficult time reconciling elevated rates of inflation with slumping economic growth.   Data released in the U.K. today saw Halifax house prices off 1.7% m/m and 8.8% y/y.  Cable bids are cited around the $1.9140 level.

The euro moved lower vis-à-vis the British pound as the single currency tested bids around the ₤0.7880 level and was capped around the ₤0.7935 level.

SWISS

The Swiss franc came off vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.0635 level and was supported around the CHF 1.0525 level.  The pair reached its highest level since 26 February. Swiss National Bank’s three-month Swiss franc LIBOR target has remained unchanged at 2.75% since June.  U.S. dollar offers are cited around the CHF 1.0760 level.

The euro and British pound slumped vis-à-vis the Swiss franc as the crosses tested bids around the CHF 1.6275 and CHF 2.0560 levels, respectively.

Posted in Categories: Contributor, External Research, Forex.

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