U.S. Forex Market Commentary Tue, Sep 22 2009

EURO

The euro moved higher vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.4820 level and was supported around the $1.4670 level. Demand for risk grew today and the greenback was a casualty of the revival in risk appetite. Some traders got short U.S. dollars ahead of the Federal Open Market Committee’s interest rate decision tomorrow and Group of Twenty meeting later in the week in Pittsburgh. Speculation that the FOMC may decide to pare back or not renew some of its asset purchase programs contributed to a weaker greenback. A decision by the Fed to accelerate the end of its quantitative easing programs further could have a rough impact on the Treasury and mortgage-backed securities markets. On the other hand, an indication that the Fed plans to extend its emergency funding programs could have a negative impact on the U.S. dollar. U.S. economic data have been stronger recently and this probably works against the Fed extending some programs. Data released in the U.S. today saw September Richmond Fed manufacturing index remain steady at +14, unchanged from August’s +14 level. Also, the July housing price index was up 0.3% m/m and off 4.2% y/y. U.S. Treasuries appreciated after the sale of a record US$ 43 billion in two-year notes. In eurozone news, European Central Bank member Weber talked about exchange rates today, indicating they are “not out of line with stronger data coming from the eurozone compared to some other regions.” ECB member Sramko reported “There are still question marks over euro-zone growth despite upward revisions,” adding the ECB is “ready to take necessary steps” if economic growth stumbles after governments’ stimuli are phased out. This week’s G20 meeting could be a watershed event for the U.S. dollar. There have been strong international calls to replace the U.S. dollar as the main international reserve currency. Some announcements are expected on attempts to limit bankers’ pay. Euro bids are cited around the US$ 1.3900 figure.

JPY/ CNY

The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥90.95 level and was capped around the ¥92.10 level. Liquidity remained reduced during Australasian dealing on account of the ongoing Japanese market holiday. Asian Development Bank lifted its growth forecast for some developing Asian countries today and this added to risk appetite among traders. The yen continues to enjoy a positive interest rate differential over the U.S. dollar with the latter now acting as a funding currency given its record low levels. Three-month US$ Libor was fixed today at 0.28563 with three-month yen Libor fixed at 0.34875. Bank of Japan Governor Yamaguchi last week reported that maintaining emergency credit programs for “a long time…may hurt an autonomous recovery of market functions and invite the distortion of the allocation of resources.” He added, however, that a “positive mechanism has started to take hold in the Japanese economy.” The central bank voted to keep monetary policy unchanged last week and upgraded its assessment of the economy. New finance minister Fujii last week verbally intervened saying exchange rates “should be determined by the state of a nation’s economy.” His comments suggest the new Democratic Party of Japan government may not be inclined to sell the yen through actual intervention. The Nikkei 225 stock index on Friday lost 0.70% to close at ¥10,370.54. U.S. dollar offers are cited around the ¥94.75 level. The euro moved lower vis-à-vis the yen as the single currency tested bids around the ¥134.55 level and was capped around the ¥135.30 level. The British pound moved higher vis-à-vis the yen as sterling tested offers around the ¥149.40 level while the Swiss franc moved lower vis-à-vis the yen and tested bids around the ¥88.80 level. In Chinese news, the U.S. dollar lost ground vis-à-vis the Chinese yuan as the greenback closed at CNY 6.8190 in the over-the-counter market, down from CNY 6.8299. People’s Bank of China Deputy Governor Hu reported G20 nations should consider establishing an international wealth fund to invest a portion of members’ current account surpluses. There is continued speculation among dealers that Chinese monetary authorities may allow the yuan to appreciate further vis-à-vis the U.S. dollar.