U.S. Forex Market Commentary

by GCI Financial Team

EURO

The euro appreciated vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.3350 level and was supported around the $1.3190 level. The common currency spiked above the $1.3275 level during the North American session after the release of worse-than-expected U.S. November non-farm payrolls data, representing the 61.8% retracement of the $1.2650 - $1.4280 range. It was reported that November non-farm payrolls climbed +39,000, down from the upwardly-revised +172,000 level in October and more than 100,000 below consensus estimates. November private payrolls added 50,000 jobs, down from +160,000 in October, and the November unemployment rate moved higher to +9.8%. November average hourly earnings were up 0% m/m and 1.6% y/y, both below expectations, and November average weekly hours were unchanged at 34.3. Collectively, these data evidence a U.S. labour market that did not add many jobs last month ahead of the U.S. holiday season and the pullback in recent jobs creation growth evidences a government sector that is paring jobs and a private sector hesitant to expand the labour force. Many economists believe the divide between private sector and public sector jobs growth next year will widen dramatically as overburdened U.S. states are forced to slash payrolls. Other U.S. data to be released today include October factory orders and November services PMI. The Federal Reserve is being criticized for not releasing enough information about the financial institutions and companies that borrowed from its credit windows and related facilities during the credit crisis and for not providing detailed information about the collateral the borrowers posted. The Fed is also being criticized for having provided significant amounts of liquidity to foreign financial institutions during the crisis. Fed officials Plosser and Bullard spoke yesterday about the Fed's ongoing credit easing programs. In eurozone news, the EMU-16 November composite PMI reading ticked higher to 55.5 while the services PMI reading ticked higher to 55.4. EMU-16 October retails ales were up 0.5% m/m and 1.8% y/y. German November services PMI climbed higher to 59.2 while French November PMI fell to 55.0. Spanish finance minister Salgado said Spain has no additional plans to raise taxes. Dealers continue to focus on Spanish and Portuguese fiscal woes and traders note the yields on Italian debt are moving appreciably higher. Bundesbank raised its 2010 German economic growth forecast to 3.6% today and sees the economy expanding 2% in 2011. German inflation is spected to come in around 1.7% next year. Euro bids are cited around the US$ 1.3075 level.

JPY / CNY

The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥82.50 level and was capped around the ¥83.90 level. Technically, today's intraday high was right around the 50% retracement of the ¥84.40 – ¥83.35 range. This week's tight range evidences the impact of many factors in the markets including eurozone sovereign credit jitters, last week's decrease in Japanese deflationary pressures, better U.S. economic data, and more. Democratic Party of Japan legislators met today and confirmed they will propose legislation to limit Bank of Japan's independence and permit the government to establish an inflation target. A change in the Bank of Japan law could impact the yen if traders sense the government will force the central bank to adopt additional credit expansion policies to stimulate inflation. Bank of Japan Deputy Governor Nishimura this week reported funding conditions remain tight but are easing. BoJ Policy Board member Suda this week pessimistically said "Chances of overcoming negative core consumer prices in the next fiscal year aren't high. It will take a while to beat deflation." Suda is known as a monetary hawk and her comments suggest the central bank may be reluctant to end its quantitative easing program. Suda also said the central bank may need to purchase additional asset types. The Japanese government reported it may scale back its plan to reduce corporate taxes. BoJ Governor Shirakawa spoke about the yen this week saying "In the short run, the appreciation of the yen depresses the revenue and profits of exporting firms. It should also be noted that the appreciation of the yen, from a longer-term perspective, has the positive effect of bringing about an improvement of the terms of trade through a decline in import prices." Shirakawa again vowed to take "appropriate action" on the yen and reiterated the Japanese economy is "pausing." Additionally, Shirakawa said he "doesn't feel the need to change in a major manner our judgment that economic risks are roughly in balance." The Nikkei 225 stock index climbed 0.10% to close at ¥10,178.32. U.S. dollar offers are cited around the ¥84.60 level. The euro moved lower vis-à-vis the yen as the single currency tested bids around the ¥109.85 level and was capped around the ¥111.10 level. The British pound moved lower vis-à-vis the yen as sterling tested bids around the ¥129.50 level while the Swiss franc moved lower vis-à-vis the yen and tested bids around the ¥83.80 level. In Chinese news, the U.S. dollar appreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.6627 in the over-the-counter market, up from CNY 6.6613. Data released in China overnight saw the November services PMI reading fall sharply to 53.2 from the prior reading of 60.5 while the HSBC services PMI measure came off to 53.1 from the prior reading of 56.4. People's Bank of China adviser Li said the central bank will raise interest rates slowly and will not "slam on the brakes" as PBoC moves to a tighter policy. Li reiterated the central bank will move from this year's "moderately loose" policy stance to a "prudent" policy next year and added fiscal policy will continue to be "proactive." Notably, yuan forwards notched their largest weekly gain in twenty months on renewed speculation China will permit additional yuan appreciation to reduce inflation.

STERLING

The British pound appreciated vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.5705 level and was supported around the US$ 1.5580 level. Stops were reached above the $1.5685 level, representing the 61.8% retracement of the $1.5295 – 1.6300 figure. Data released in the U.K. today saw November PMI services tick lower to 53.0 from the prior reading of 53.2. Bank of England Governor King is facing calls for his resignation following commentary that he has become too political and damaged the central bank's independence via the May Inflation report. Other data released in the United Kingdom this week saw November Nationwide house prices decline 0.3% m/m and climb 0.4% y/y. Also, November PMI manufacturing climbed to 58.0 from the revised prior reading of 55.4. Bank of England Monetary Policy Committee member Dale this week said the central bank is as "hard-nosed as ever" in hitting its consumer price inflation target, adding it is "not true" to say the MPC has "gone soft" on inflation. Dale also said quarterly economic growth is "likely to be choppy." Cable bids are cited around the US$ 1.5295 level. The euro appreciated vis-à-vis the British pound as the single currency tested offers around the £0.8515 level and was supported around the £0.8445 level.

SWISS

The Swiss franc appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 0.9775 level and was capped around the CHF 0.9950 level. Technically, today's intraday low was right around the 38.2% retracement of the CHF 1.0275 – 0.9460 range. Data released in Switzerland today saw November consumer price inflation up 0.2% m/m and 0.2% y/y, both above expectations. Data released in Switzerland this week saw Q3 gross domestic product up 0.7% q/q and 3.0% y/y while October retail sales were up 3.5% y/y. Also, the October consumption indicator climbed to 1.716 from the revised prior reading of 1.695. Swiss National Bank Chairman Hildebrand this week reported banks must be disincentivized from returning to their old risk models of the past. Last week, Hildebrand noted exchange rate moves are a "major challenge" to Switzerland. 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 1.3045 level while the British pound moved lower vis-à-vis the Swiss franc and tested bids around the CHF 1.5345 level.