By GCI Forex Research
Fundamental Outlook at 1400 GMT (EDT + 0400)
€
The euro depreciated sharply vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.2200 figure and was capped around the $1.2385 level. The common currency came off early in the North American session on a report that Spanish bank BBVA was unable to renew approximately US$ 1 billion in commercial paper funding this month. While the amount would only represent about 0.2% of the assets on BBVA’s balance sheet, it could portend short-term funding difficulties for other Spanish banks. Funding strains became evident in the Spanish banking market earlier this week and that precipitated the tie-up of some regional Spanish savings banks. Many traders believe it is only a matter of time before the single currency tests major technical support at US$ 1.2010 and there are said to be significant options-related orders and stops around the psychologically-important US$ 1.2000 figure. PIMCO chief Gross reported default may be an option for some highly-indebted countries. German Chancellor Merkel verbally intervened in favour of a strong euro. The amount of excess liquidity in the money markets reached a record high today as the European Central Bank continued to keep the system awash with euro. Money markets are now oversupplied by approximately €440 billion. ECB member Noyer called on central banks to limit market interventions and avert “moral hazard,” adding they should be “exceptional.” Data released in Germany today saw June GfK consumer confidence decline to +3.5 from +3.7 in May. Also, French April consumer spending was off 1.2% m/m and up 1.1% y/y and May business confidence ticked higher to 97. In U.S. news, data released today saw MBA mortgage applications climb 11.3% while April headline durable goods orders were up 2.9% and the ex-transportation component was off 1.0%. Additionally, April new home sales were up 14.8% m/m to an annualized rate of 504,000. GDP numbers and jobless claims data will be released tomorrow. Euro offers are cited around the US$ 1.2620 level.
¥/ CNY
The yen depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥90.65 level and was supported around the ¥90.00 figure. Bank of Japan Governor Shirakawa and Federal Reserve Chairman Bernanke reported the currency swap operations between the central banks “played a very important role in stabilizing global dollar funding markets during the crisis.” Bernanke said he does not want to make the facility permanent and Shirakawa said it is important for the markets to know the facility exists as needed. Minutes of the 30 April BoJ Policy Board meeting revealed the BoJ should “devise ways to avoid its excessive involvement in resource allocation among individual firms.” Bernanke and Shirakawa both indicated it would be best if their central banks worked to keep inflation right around the 2% level. Data released in Japan overnight saw the April corporate service price index decline 1.1% y/y while May small business confidence ticked lower to 46.7. Data to be released tonight include April foreign trade data. The Nikkei 225 stock index climbed 0.66% to close at ¥9,522.66. U.S. dollar offers are cited around the ¥96.85 level. The euro moved lower vis-à-vis the yen as the single currency tested bids around the ¥110.50 level and was capped around the ¥111.95 level. The British pound moved lower vis-à-vis the yen as sterling tested bids around the ¥129.05 level while the Swiss franc moved higher vis-à-vis the yen and tested offers around the ¥78.45 level. In Chinese news, the U.S. dollar depreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.8290 in the over-the-counter market, down from CNY 6.8315. Yuan forwards are pricing in virtually no appreciation in the yuan vis-à-vis the U.S. dollar over the next three months. This follows the conclusion of talks between the U.S. and Chinese governments that offered little indication that a revaluation of the yuan had been solidified. U.S. Treasury Secretary Geithner said revaluating the yuan is “absolutely” in China’s best interest. There is now renewed focus on opening China’s bond market to international investors to improve the yuan’s standing as a global reserve currency.
£
The British pound appreciated vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.4450 level and was supported around the $1.4330 level. Bank of England will expand its long-term funding mechanism next month and will incorporate a two-tier auction system that accepts a wider array of collateral to address stresses in the financial system. Data released in the U.K. today saw April BBA loans for house purchases improve. Bank of England Monetary Policy Committee member Posen this week said he cannot rule out deflationary pressures in the U.S. and U.K. economies. Chancellor of the Exchequer Osborne this week reported the new Cameron government hopes to decrease fiscal spending by at least £6 billion in what would be an abrupt shift from the policies of former Prime Minister Brown. Cable bids are cited around the US$ 1.4110 level. The euro depreciated vis-à-vis the British pound as the single currency tested bids around the £0.8530 level and was capped around the £0.8580 level.
CHF
The Swiss franc appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.1515 level and was capped around the CHF 1.1625 level. Data to be released in Switzerland tomorrow include Q1 employment numbers. There remains a sense among traders that Swiss National Bank may be unable to keep up with market speculation and may be forced at some point to abandon its franc-selling intervention operations on account of the major global bearish sentiment that overhangs the common currency. U.S. dollar bids are cited around the US$ 1.1110 level. The euro lost ground vis-à-vis the Swiss franc as the single currency tested bids around the CHF 1.4175 level while the British pound lost ground vis-à-vis the Swiss franc and tested bids around the CHF 1.6585 level.
Forex Daily Market Commentary provided by GCI Financial Ltd.
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