Fundamental Outlook at 1400 GMT (EST + 0400)
€
The euro appreciated vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.4735 level and was supported around the $1.4435 level. Technically, today’s intraday high was right around the 76.4% retracement of the move from $1.4310 to $1.6040. Group of Seven finance ministers and central bank governors released a statement this weekend that pledged “heightened close cooperation” to safeguard the international financial system. Group of Seven officials convene in Washington, D.C. on 10 October. The U.S. government announced a plan late last week to initiate a US$ 700 billion asset purchase plan to transfer toxic assets off of banks’ balance sheets. The plan could be similar to the Resolution Trust Corporation vehicle the U.S. government enacted at least fifteen years ago. The Federal Reserve gave tentative permission this weekend for Goldman Sachs and Morgan Stanley to transition from investment banks to commercial banks, a move that would open them up to more stringent regulatory scrutiny. The United Arab Emirates’ central bank established an emergency bank lending facility worth 50 billion UAE dirhams for banks operating in the UAE while Reserve Bank of Australia injected A$ 2.025 billion in liquidity. Interbank funding rates eased today with three-month dollar rates at 3.15% today, down from 5% last week. Two-year dollar swap spreads were around 118 bps today compared with 155 bps last week, an indication of decreasing risk aversion. In eurozone news, the European Central Bank allotted US$ 40 billion in overnight funds at 3.25%. Euro bids are cited around the US$ 1.3840 level.
¥/ CNY
The yen appreciated sharply vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥105.90 level and was capped around the ¥107.15 level. Technically, today’s intraday high was right around the 23.6% retracement of the move from ¥95.70 to ¥110.65. As expected, former foreign secretary Taro Aso became the new head of the Liberal Democratic Party and will likely be voted the next Prime Minister by parliament on Wednesday. Aso is likely to call a snap election after being elected. Minutes from Bank of Japan’s August Policy Board meeting were released in which policymakers expressed concern that the U.S.’ economic stagnation could become prolonged. Data released in Japan overnight saw the July all-industries index up +0.8% m/m while the Q2 output gap was downwardly revised to -0.4%, the first negative print in seven quarters and evidence of decreasing demand. Finance minister Ibuki said he “welcomed” the U.S. government’s plan to manage bad debts on banks’ balance sheets and said he doesn’t see the need for Japan to do the same thing. BoJ will offer its first ever U.S. dollar funding on Wednesday, providing US$ 30 billion in one-month funds. The Nikkei 225 stock index gained 1.42% to close at ¥12,090.59. U.S. dollar bids are cited around the ¥102.45 level. The euro gained ground vis-à-vis the yen as the single currency tested offers around the ¥156.60 level and was supported around the ¥153.80 level. The British pound and Swiss franc came off vis-à-vis the yen as the crosses tested bids around the ¥194.25 and ¥96.30 levels, respectively. The Chinese yuan appreciated vis-à-vis the U.S. dollar today as the greenback closed at CNY 6.8300 in the over-the counter market, down from CNY 6.8350.
£
The British pound appreciated vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.8545 level and was supported around the $1.8260 level. Stops were reached above the $1.8480 level, representing the 38.2% retracement of the move from $2.0155 to $1.7440. Bank of England lent US$ 26 billion today at an average rate of 2.056% in an attempt to provide U.S. dollar liquidity. Data released in the U.K. today saw Rightmove September house prices off 3.3% y/y. BoE Deputy Governor Gieve reported “While we must remain vigilant for any signs of inflation expectations drifting upwards, the news on that front is encouraging. On the other side the risk we must be careful not to underestimate is the deflationary consequences of the credit crisis.” Cable bids are cited around the $1.7605 level. The euro moved higher vis-à-vis the British pound as the single currency tested offers around the £0.7970 level and was supported around the £0.7885 level.
CHF
The Swiss franc appreciated sharply vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.0735 level and was capped around the CHF 1.1050 level. Technically, today’s intraday low was right around the 38.2% retracement of the move from CHF 1.2465 to CHF 0.9645. Traders moved into the Swiss franc on safe-haven buying. Swiss National Bank allotted US$ 10 billion at an average rate of 2.72%. U.S. dollar offers are cited around the CHF 1.1430 level. The euro and British pound weakened vis-à-vis the Swiss franc as the crosses tested bids around the CHF 1.5880 and CHF 1.9945 levels, respectively.