U.S. Forex Market Commentary

EURO

The euro gained ground vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.4245 level and was supported around the $1.4085 level. As expected, the Federal Open Market Committee kept interest rates unchanged after its second day of deliberations. The FOMC reported “ Information received since the Federal Open Market Committee met in June suggests that economic activity is leveling out. Conditions in financial markets have improved further in recent weeks. Household spending has continued to show signs of stabilizing but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing but are making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability. The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time. In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve is in the process of buying $300 billion of Treasury securities. To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.” Notably, the Fed indicated it will have exhausted its Treasury purchasing activities by the end of October and there is no confirmation from the Fed that it will extend its facility for purchasing mortgage-backed securities and agency securities. Data released in the U.S. today saw the June trade balance print at –US$ 27.0 billion, worse than the prior reading of –US$ 26.0 billion. Adjusted for oil, imports fell to their lowest level in more than five years. In eurozone news, EMU-16 June industrial production was off 0.6% m/m 17% y/y. Also, the German Ifo business sentiment indicator improved in the third quarter. Euro bids are cited around the US$ 1.3900 figure.

JPY / CNY

The yen depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥96.75 level and was supported around the ¥95.10 level. Bank of Japan Governor Shirakawa reported a “built-in mechanism” is required to end the central bank’s unconventional monetary policy and ensure smooth functioning of markets. He specifically reported “It would be important to have an appropriate built-in exit mechanism which reduces the incentive to use the (unconventional fund provision) facility as market functioning recovers," so that market players don't become reliant on those steps and hurt the market's functioning.” The central bank, like other central banks, continues to discuss an exit strategy from its significant amount of monetary stimuli. Data released in Japan overnight saw the July domestic corporate goods price index off 8.5% y/y, a record decline that evidences the increase in wholesale deflation. The Nikkei 225 stock index lost 0.50% to close at ¥10,435.00. 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 ¥137.25 level and was supported around the ¥134.05 level. The British pound moved higher vis-à-vis the yen as sterling tested offers around the ¥159.75 level while the Swiss franc moved higher vis-à-vis the yen and tested offers around the ¥89.65 level. In Chinese news, the U.S. dollar lost ground vis-à-vis the Chinese yuan as the greenback closed at CNY 6.8321 in the over-the-counter market, down from CNY 6.8355.

STERLING

The British pound gained ground vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.6560 level and was supported around the $1.6390 level. Bank of England’s quarterly inflation report was released today and it was more dovish than expected. Many economists now expect the central bank will not ease monetary policy before the first quarter of 2010. BoE Governor King reported the economy is likely to return to positive economic growth in the coming quarters and added the recession has been deeper than expected. Data released in the U.K. today saw unemployment climb to its highest level for fourteen years in the three months to June, rising by 220,000 to 2.43 million with the ILO measure of unemployment higher at 7.8%. King also reported banks are doing as much as they can to increase lending, contrary to current government perceptions. Cable bids are cited around the US$ 1.6215 level. The euro moved higher vis-à-vis the British pound as the single currency tested offers around the ₤0.8615 level and was supported around the ₤0.8570 level.