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The euro gained marginal ground vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.4185 level and was supported around the $1.4110 level. Most traders believe the Federal Open Market Committee will keep interest rates unchanged when its policy decision is announced tomorrow. Many economists believe the FOMC will keep interest rates unchanged through at least 2010 on account of the global credit crisis. Traders are curious to see if the Fed changes any significant verbiage in its statement and gives any further clues about unwinding its massive monetary stimuli. The Fed’s balance sheet is currently right around the US$ 2 trillion level and has been declining over the past few weeks, an indication it is gradually reducing some of its quantitative easing programs. One program that traders are paying close attention to is the Fed’s purchase of U.S. Treasury securities. It is expected the Fed will allow its current US$ 300 billion purchase program to expire when that amount is reached, likely in September. There is speculation the Fed will be actively discussing pending problems in the U.S. commercial real estate market. There is an expectation the sector could worsen significantly early next year. Fed Chairman Bernanke recently noted the Fed is “paying very close attention” to the sector and highlighted “increased vacancy, declining rents, and falling prices.” Data released in the U.S. today saw Q2 non-farm productivity improve 6.4% from a downwardly revised Q1 reading of 0.3%. While these data mean U.S. workers are becoming more productive, they also signify higher productivity is coincident with considerably higher unemployment. Q2 labour costs were off 5.8%, down from a revised -2.7% in Q1, and June wholesale inventories were off 1.7%, down from a revised -1.2% in May. In eurozone news, the German July wholesale price index was off 0.5% m/m and 10.6% y/y while the July consumer price index was unchanged m/m and off 0.5% y/y. Euro bids are cited around the US$ 1.3900 figure.
¥/ CNY
The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥95.75 level and was capped around the ¥97.15 level. The yen extended recent gains across the board with U.S. equities under pressure and risk appetite lower globally, favouring the yen. As expected, Bank of Japan’s Policy Board voted unanimously to keep the overnight call rate target unchanged at 0.10% and kept its economic assessment unchanged. BoJ Governor Shirakawa pessimistically noted “Even if we have a recovery, I don’t think its strength will be impressive. I can’t be confident about the strength of final demand after inventory adjustments and policy measures run their course.” The central bank reiterated it remains concerned about “downside risks to economic activity and prices” and merely noted the economy has “stopped worsening.” Data to be released next week may show Japan’s economy expanded around 4.0% in the three months that ended 30 June. Deflationary pressures have returned to the economy. Consumer prices excluding fresh food fall a record 1.7% in June and this may pressure policymakers into keeping rates low through 2011. Data released in Japan overnight saw the government’s consumer sentiment index improve to 39.4 from 37.6 in June, its highest level since November 2007 and the seventh consecutive monthly improvement. The Nikkei 225 stock index climbed 0.58% to close at ¥10,585.46. U.S. dollar offers are cited around the ¥104.15 level. The euro moved lower vis-à-vis the yen as the single currency tested bids around the ¥135.25 level and was capped around the ¥137.40 level. The British pound moved lower vis-à-vis the yen as sterling tested bids around the ¥157.80 level while the Swiss franc moved lower vis-à-vis the yen and tested bids around the ¥88.40 level. In Chinese news, the U.S. dollar gained ground vis-à-vis the Chinese yuan as the greenback closed at CNY 6.8355 in the over-the-counter market, up from CNY 6.8313. Data released in China overnight saw July exports decline a staggering 23% y/y while July factory output was up a weaker-than-expected 10.8%. Also, July CPI was off 1.8% y/y and July PPI was off 8.2% y/y with July retail sales up 15.2% y/y.
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The British pound lost minor ground vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.6430 level and was capped around the $1.6520 level. Traders await the release of Bank of England’s quarterly inflation report tomorrow. Data released in the U.K. today saw the June DCLG house price index off 10.7% while the June goods trade deficit increased to ₤6.5 billion from ₤6.2 billion. Other news out of the U.K. today suggests the BoE earned more than a 10% return on its ₤918 million portfolio of corporate bonds. Cable bids are cited around the US$ 1.6215 level. The euro moved higher vis-à-vis the British pound as the single currency tested offers around the ₤0.8615 level and was supported around the ₤0.8560 level.
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