U.S. Forex Market Commentary: Bank of Japan’s Policy Board kept monetary policy unchanged overnight, leaving the overnight unsecured call rate target between 0% and 0.1% and maintaining the size of its credit programs.

Euro

The euro appreciated vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.3200 figure and was supported around the $1.3110 level. Stops were reached above the $1.3190 level, representing the 23.6% retracement of the $1.3500 – 1.3095 range.  The common currency was pressured earlier after it was reported Portugal’s credit rating could be be downgraded.  European Central Bank member Stark defended the central bank’s purchase of €72.5 billion in eurozone members’ government bonds since May and railed against a proposal that joint eurozone debt be issued under a “E-bond” program, suggesting that would “contradict the monetary union’s fundamental principles.”  Separately, a German government source reported Germany would support the ECB if it deems more capital is required.  There is market chatter that ECB President Trichet may bring up the issue of raising more capital when European Union leaders convene on Thursday.  Eurogroup chairman Juncker reported speculation the euro is in danger “unfounded” and said there needs to be “automatic” sanctions in Europe when fiscal deficit limits are breached.  The European Commission reported Europe’s financial aid funds will sell bonds to raise as much as €34.1 billion for Ireland in 2011.  ECB member Liikanen today reiterated non-standard monetary policies are “temporary” in nature.  Data released in Germany today saw the January GfK consumer confidence survey tick lower to 5.4 from the prior reading of 5.5.  Some major central banks including the Federal Reserve, ECB, Bank of Japan, Swiss National Bank, Bank of England, and Bank of Canada agreed to extend liquidity swap operations today until August.  The ECB is said to maintain “serious concerns” about about proposed Irish legislation regarding the country’s banking system.  There is speculation the new law, if passed, would inhibit the ECB’s ability to execute its liquidity operations.  In U.S. news, there were no major U.S. economic data scheduled for release today.  Data to be released tomorrow include third quarter gross domestic product and November existing home sales.  Data to be released on Thursday include November durable goods orders, November personal income, November PCE, November new home sales, jobless claims numbers, and the final University of Michigan consumer sentiment number.  Euro bids are cited around the US$ 1.3075 level.
 

Yen / Yuan

The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥83.50 level and was capped around the ¥83.80 level.  Today’s range was extraordinarily narrow, partially reflecting traders’ reaction to the Bank of Japan’s announcement.  Technically, today’s intraday low was right around the 50% retracement of the ¥82.35 – 84.50 range.  As expected, Bank of Japan’s Policy Board kept monetary policy unchanged overnight, leaving the overnight unsecured call rate target between 0% and 0.1% and maintaining the size of its credit programs.  BoJ Governor Shirakawa reported “Volatile long-term rates can affect the economy, prices, and financial conditions by influencing borrowing costs for households and companies.”  The BoJ noted “The bank will steadily purchase various financial assets and provide longer-term funds” so that “the effects of comprehensive monetary easing spread.”  Many dealers believe the BoJ will be reluctant to ease monetary policy further unless the yen appreciates sharply or equities fall sharply.  Data released in Japan overnight saw the October all industry activity index decline 0.2% m/m.  Other data to be released this week include November merchandise trade.  BoJ’s monthly economic report will also be released tomorrow.  Bank of Japan last week reported Japanese companies accumulated a record amount of cash on their balance sheets last quarter, consistent with this week’s BoJ quarterly Tankan survey that showed a decline in business confidence among large manufacturers.  The Nikkei 225 stock index climbed 1.51% to close at ¥10,370.53.  U.S. dollar offers are cited around the ¥84.60 level.  The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥110.45 level and was supported around the ¥109.80 level.  The British pound moved lower vis-à-vis the yen as sterling tested bids around the ¥129.25 level while the Swiss franc moved higher vis-à-vis the yen and tested offers around the ¥87.35 level. In Chinese news, the U.S. dollar depreciated vis-à-vis the Chinese yuan today as the greenback closed at CNY 6.6590 in the over-the-counter market, down from CNY 6.6725.  The China Banking Regulatory Commission tightened requirements for banks’ loan sales to other lenders to “avoid blind expansion” of off-balance-sheet credit.  Notably, Chinese financial institutions have lent CNY 17 trillion over the past two years.  Chinese money-market rates escalated to their highest level in more than two years overnight as a result of lenders having to provision more capital as reserves.  People’s Bank of China Governor Zhou last week reported global economic turbulence is limiting the central bank’s ability to raise interest rates to counter inflation.  Notably, China’s inflation rate reached a 28-month high in November and PBoC has pledged it will transition to a “prudent” monetary policy stance in 2011.  China is said to be targeting 8% GDP growth and 4% inflation growth in 2011 along with 16% M2 money supply growth.

Pound

The British pound depreciated vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.5450 level and was capped around the US$ 1.5565 level. Technically, today’s intraday high was just above the 23.6% retracement of the $1.5910 – 1.5455 range.  Data released in the U.K. overnight saw the December GfK consumer confidence survey remain steady at -21.  Other data released today saw November public sector net borrowing climb to £22.8 billion from the revised prior reading of £8.6 billion.  Also, the November public sector net cash requirement climbed to £16.8 billion from the revised prior reading of £1.9 billion. Minutes from Bank of England’s December Monetary Policy Committee meeting will be released tomorrow and are expected to evidence intense debate regarding a possible shift in monetary policy.  The Confederation of British Industry this weekend reported the central bank will likely begin to start raising interest rates within six months to reduce inflation.  BoE released its semi-annual Financial Stability Report last week in which it warned the U.K. is only “partially insulated” from the European financial crisis.  MPC member Posen last week reported policymakers should not “overreact” to inflation while BoE Deputy Governor Bean last week warned “elevated inflation” may persist in the U.K. economy.  Cable bids are cited around the US$ 1.5265 level.  The euro appreciated vis-à-vis the British pound as the single currency tested bids around the £0.8515 level and was supported around the £0.8445 level.

Franc

The Swiss franc appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 0.9560 level and was capped around the CHF 0.9655 level. Technically, today’s intraday low was right around the 23.6% retracement of the CHF 1.0275 – 0.9460 range.  Data released in Switzerland today saw the November trade balance surplus narrow to CHF 1.93 billion from the revised prior reading of CHF 2.05 billion.  Also, the November M3 money supply indicator climbed 6.4% y/y.  Swiss National Bank member Jordan this weekend reported “There may be situations where interest rates have to be kept at a low level to ensure price stability, and where higher rates could threaten the economy.”  SNB Chairman Hildebrand reported he remains concerned over the eurozone sovereign debt crisis, adding it could lead to “devastating” consequences if the euro depreciates sharply and the franc soars.  Data to be released tomorrow include the November trade balance and November M3 money supply.  The KOF Institute last week raised its Swiss GDP growth forecast slightly for 2011 and reported Swiss National Bank is likely to raise interest rates around the middle of 2011.  Swiss National Bank’s quarterly interest rate announcement was announced last week in which policymakers maintained the central bank’s three-month Swiss franc Libor target rate at 0.25%.  SNB’s 2011 inflation forecast was raised to 0.4% from 0.3% and its 2012 inflation forecast was reduced to 1% from the prior reading of 1.2%.  SNB expects the Swiss economy to grow about 2.5% in 2010 and around 1.5% in 2011.  The Swiss government last week raised its GDP growth forecast for 2011 to 1.5% from the 1.2% projection it noted in September.  U.S. dollar offers are cited around the CHF 1.0180 level.  The euro depreciated vis-à-vis the Swiss franc as the single currency tested bids around the CHF 1.2595 level while the British pound moved lower vis-à-vis the Swiss franc and tested bids around the CHF 1.4815 level.

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