GCI Forex Research Daily Market Commentary

Fundamental Outlook at 1400 GMT (EST + 0400)

€

The euro extended recent losses vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.4465 level and was capped around the $1.4615 level.  The common currency reached its lowest level since early February as traders reacted to a further pullback in oil prices.  NYMEX crude oil futures for October delivery traded as low as the $105 handle after hurricane Gustav weakened.  Data released in the U.S. today saw July construction spending off 0.6% while the August ISM manufacturing index ticked lower to 49.9 from 50.0 in July.  Kansas City Federal Reserve President Hoenig hawkishly said “The current stance of policy, while understandably calibrated for responding to the immediate financial crisis, will make it difficult to achieve our mandate for price stability over the longer term.” In eurozone news, most traders expect the European Central Bank will keep interest rates unchanged when it convenes on Thursday.  Even though economic growth is slowing in the eurozone, inflation pressures remain high and economic data released today confirm this.  EMU-15 July producer prices were up 1.1% m/m and 9.0% y/y while core producer prices were up 0.5% m/m and 4.3% y/y.  Many ECB officials have been quite hawkish lately and this is further evidence that rates are unlikely to decline anytime soon.  Comments from ECB President Trichet will be closely scrutinized on Thursday after the ECB’s interest rate decision is announced.  Luxembourg’s Juncker verbally intervened saying “the euro is still overvalued.”  Euro bids are cited around the US$ 1.4315 level.

¥/ CNY

The yen depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥109.15 level and was supported around the ¥107.75 level.  Technically, today’s intraday high was right around the 50% retracement of the move from ¥110.65 to ¥107.60.  Bank of Japan Governor Shirakawa reported “For a central bank, we are very much interested in long-term interest rates. Japan's long-term interest rate is around 1.5 percent now. That's because market players do not expect inflation. If they think only inflation can solve Japan's debt problems, rates will rise.” Traders are also carefully monitoring the political vacuum in Japan created after yesterday’s resignation of Prime Minister Fukuda.  Most Japan-watchers expect LDP’s Taro Aso will succeed Fukuda in an interim government before next year’s general election.  Data released in Japan overnight saw the August monetary base off 0.2% y/y.  The Nikkei 225 stock index lost 1.75% to close at ¥12,609.47.  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 ¥156.95 level and was capped around the ¥158.45 level. The British pound and Swiss franc came off vis-à-vis the yen as the crosses tested bids around the ¥192.60 and ¥97.60 levels, respectively.  The Chinese yuan depreciated vis-à-vis the U.S. dollar as the greenback closed at CNY 6.8397 in the over-the-counter market, up from CNY 6.8256.

£

The British pound fell sharply vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.7780 level and was capped around the $1.8010 level.  Cable reached its lowest level since April 2006 as economic sentiment weakened and traders upped their bets that Bank of England’s Monetary Policy Committee will move rates lower this year. The MPC meets on Thursday and is not expected to alter monetary policy at this time.  Chancellor of the Exchequer Darling today said he is optimistic the U.K. economy will move past its economic difficulties, one day after he was quoted as being pessimistic in the U.K. media.  The U.K. government announced a plan to waive house tax purchases for one year for properties that are less than £175,000.  Cable bids are cited around the $1.7420 level.  The euro moved higher vis-à-vis the British pound as the single currency tested offers around the £0.8160 level and was supported around the £0.8105 level.

CHF

The Swiss franc depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.1130 level and was supported around the CHF 1.1010 level.  The pair reached its strongest level since 10 January 20087.  Data released in Switzerland today saw GDP expand 0.4% q/q in Q2 and 2.3% y/y.  Also, August consumer price inflation fell 0.3% m/m and were up 2.9% y/y.  U.S. dollar offers are cited around the CHF 1.1390 level.  The euro and British pound moved lower vis-à-vis the Swiss franc as the crosses tested bids around the CHF 1.6060 and CHF 1.9680 levels, respectively.