U.S. Forex Market Commentary Wed, Sep 16 2009

STERLING

The euro extended recent gains vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.4730 level and was supported around the $1.4645 level. Federal Reserve Chairman Bernanke yesterday reported the U.S. recession “appears to be over” and this gave a bid to some global asset markets. Many data were released in the U.S. today. First, the August consumer price index was up 0.4% m/m, exceeding expectations and stronger than the previous 0.0% reading, while the ex-food and energy component was up 0.1%, matching July’s print and expectations. August CPI was off 1.5% y/y, up from the prior reading of -2.1% y/y, and the core ex-food and energy rate came at +1.4%, down from the prior reading of +1.5%. Other data released today saw the Q2 current account balance print at –US$ 98.8 billion, an improvement from the previous reading of –US$ 101.5 billion but worse than expectations. Moreover, July total net TIC flows printed at –US$ 97.5 billion, down from the revised –US$ 56.8 billion June total. Net long-term TIC flows were also lower at US$ 15.3 billion, down from a revised US$ 90.2 billion in June. Data revealed that both China and Japan continue to be net purchasers of U.S. assets while Russia appears to be selling U.S. assets. Both China and Russia have been vocal proponents of replacing the U.S. dollar as the main international reserve currency. Other data released today saw August capacity utilization improve to 69.6% with industrial production falling to +0.8% from a revised +1.0%, still above expectations. Finally, the September NAHB housing market index matched expectations with a reading of +19, up from +18 in August. The U.S. Treasury reported it will reduce some borrowing on behalf of the Federal Reserve to keep government debt under a legal limit. In other Fed news, the Fed has tightened its review of commercial real estate. Bernanke is expected to testify before Congress about regulatory change on 1 October. The Federal Open Market Committee’s interest rate decision is expected next Wednesday. In eurozone news, the German retail sector reported it believes most of the worst of the recession is still ahead of us. Data released in the eurozone today saw EMU-16 August consumer price inflation off 0.2% y/y, unrevised from the provisional estimate, and was up 0.3% m/m. 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 ¥90.15 level and was capped around the ¥91.35 level. Incoming finance minister Fujii talked about recent movements in exchange rates, reporting they “are not fluctuating rapidly now.” There is definitely less concern in the market now over actual intervention than there was when the Liberal Democratic Party was in charge. Fujii also said it is important to respect the central bank’s independence and said the central bank should not finance spending. Most traders believe BoJ will not change interest rates when its policy decision is announced overnight. There is a possibility the central bank could make an announcement about the renewal or non-renewal of some emergency programs that are currently expected to expire by year’s end. The yen has recently benefited from its positive interest rate differential over the U.S. dollar and from the repatriation of overseas yen proceeds ahead of the fiscal half-year end at the end of the month. The new head of the banking and postal service ministry said he will seek to assist small companies get through the credit crunch by extending their loan payments for three years. Today’s U.S. TICS flows data revealed Japan was a net buyer of U.S. Treasuries last month. The Nikkei 225 stock index climbed 0.52% to close at ¥10,270.62. U.S. dollar offers are cited around the ¥94.75 level. The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥133.85 level and was supported around the ¥132.45 level. The British pound moved lower vis-à-vis the yen as sterling tested bids around the ¥148.60 level while the Swiss franc moved higher vis-à-vis the yen and tested offers around the ¥87.15 level. In Chinese news, the U.S. dollar lost ground vis-à-vis the Chinese yuan as the greenback closed at CNY 6.8187 in the over-the-counter market, down from CNY 6.8225. Today’s U.S. TICS investment flows data revealed China was a net buyer of U.S. government assets last month.