U.S. Forex Market Commentary

EURO

The euro strengthened 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 $1.4555 level. The common currency rocketed to a new lifetime high following negative remarks about the U.S. dollar from a Chinese official. Notably, French President Sarkozy said currency “disarray” could lead to an “economic war.” Many traders are wondering if unilateral or multilateral intervention may be implemented to smooth out some of the move in the U.S. dollar. The Bush administration seems to have a hands-off policy regarding the greenback and does not seem to want to stray far beyond its “strong dollar” mantra. Data released in the U.S. today saw Q3 productivity print at 4.9%, much stronger than the 3.3% rise that was expected and the largest gain in four years. Also, Q3 unit labour costs fell 0.2%, the first decline since Q3 2006 and unit labour costs have risen 4.3% over the past year, down from 5.1% y/y in Q2. The pullback in unit labour costs will please Federal Reserve officials. Traders are generally unsure if the FOMC will ease monetary policy further in December or if they will remain on hold. The Fed’s decision will largely be data-dependent and if a further erosion is seen in the U.S. housing sector, the Fed may be forced to reduce borrowing costs further. Richmond Fed President Lacker reported the Fed “did the right thing” by cutting rates in response to the recent credit market turmoil. Other data released in the U.S. today saw September wholesale inventories up 0.8% with wholesale sales up 1.3%. In eurozone news, German September industrial output was up 0.3% m/m and Germany’s Five Wise Men reported 2008 GDP should slow to 1.9% from an expected 2.6% gain this year. Most traders do not expect the European Central Bank will change interest rates tomorrow. Euro bids are cited around the US$ 1.4560 level.

JPY / CNY

The yen appreciated sharply vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥112.75 level and was capped around the ¥114.80 level. Today’s intraday low represents the pair’s weakest showing since 10 September and was just above the 76.4% retracement of the move from ¥109.00 to ¥124.15. There was little in the way of new Japanese news that moved the market and traders instead reacted to market-moving comments from a Chinese official about foreign reserves diversification. Most traders believe Bank of Japan’s Policy Board will remain on hold through the end of the year but the unwinding of short yen carry trades en masse represents the yen’s largest upside risk. The Nikkei 225 stock index lost 0.94% to close at ¥16,096.68. Dollar bids are cited around the ¥112.55 level. The euro came off vis-à-vis the yen as the single currency tested bids around the ¥165.55 level and was capped around the ¥167.65 level. The British pound and Swiss franc lost ground vis-à-vis the yen as the crosses tested bids around the ¥237.00 and ¥99.70 levels, respectively. The Chinese yuan appreciated sharply vis-à-vis the U.S. dollar as the greenback closed at CNY 7.4421 in the over-the-counter market, down from CNY 7.4530. Today’s closing low represents the pair’s weakest showing since the yuan revaluation of July 2005. Chinese official Cheng Siwei moved the markets today when he said China should diversify its foreign reserves holdings by “buying more strong currencies (such as the euro).”

STERLING

The British pound moved higher vis-à-vis the U.S. dollar today as cable tested offers around the US$ 2.1070 level and was supported around the $2.0860 level. The pair established a new multi-decade high as U.S. dollar sentiment worsened further. Most traders believe Bank of England’s Monetary Policy Committee will not change monetary policy tomorrow but are cognizant of the fact that this MPC has not been afraid to surprise the markets with unexpected rate actions. Data released in the U.K. today saw BRC October annual shop price inflation accelerate to its strongest level this year while Nationwide reported October U.K. consumer confidence weakened but remains resilient. Cable bids are cited around the US$ 2.0950 level. The euro came off marginally vis-à-vis the British pound as the single currency tested bids around the ₤0.6965 level and was capped around the ₤0.7000 figure.

CHF

The Swiss franc appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.1255 level and was capped around the CHF 1.1450 level. The pair reached its weakest level since May 1995. KOF reported Swiss economic growth is expected to decelerate in Q4 and further in Q1 2008. U.S. dollar offers are cited around the CHF 1.1465 level. The euro and British pound depreciated vis-à-vis the Swiss franc as the crosses tested bids around the CHF 1.6580 and CHF 2.3695 levels, respectively.