The euro depreciated vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.3855 level and was capped around the $1.3980 level. Technically, today’s intraday high was right around the 38.2% retracement of the $1.4160 – 1.3695 range and dealers are citing stops below the $1.3840 level. The pair came off on speculation the Federal Reserve’s quantitative easing policies could precipitate a massive round of inflation. The Federal Open Market Committee convenes on 2-3 November and will likely decide to expand its balance sheet further by increasing its purchase of U.S. Treasuries securities. Some Fed-watchers expect the Fed will announce a US$ 500 billion buying binge while others expect the Fed could purchase as much as US$ 100 billion monthly for several months. The Fed is attempting to achieve multiple objectives simultaneously including an increase in consumer spending, a decrease in unemployment, and a pick-up in inflation so as to avert a format bout with deflation. New York Fed President Dudley yesterday said current inflation levels and a 9.6% unemployment rate are “unacceptable” but conceded an expansion in the Fed’s balance sheet is not a “perfect tool.” Fed officials have publicly stated they are split on whether or not to expand the Fed’s balance sheet at next week’s meeting and the meeting is therefore expected to be contentious. PIMCO CEO El-Erian warned additional Fed purchases of U.S. Treasuries could cause a global bout of inflation and fail to reduce U.S. unemployment. Data released in the U.S. today saw August Case-Shiller home prices off 0.28% m/m and up 1.70% y/y. Also, October consumer confidence climbed to 50.2 from the revised prior reading of 48.6 and August house prices reversed course and were up 0.4% m/m from the revised prior reading of -0.7%. Finally, the October Richmond Fed manufacturing index climbed to +5 from the prior reading of -2. In eurozone news, German data saw November GfK consumer confidence remain steady at 4.9 while the September import price index was up 0.3% m/m and 9.9% y/y. Provisional North Rhine-Westphalia CPI data came in higher-than-expected and other German provisional CPI data will be released tomorrow. French data saw October consumer confidence improve to -34 and September jobseekers data will be released later during the North American session. European Central Bank member Quaden said it would be “prudent” for the ECB to maintain its bond purchase program and said a double dip recession is “highly unlikely.” Quaden added there is no “big” risk from inflation and added exchange rate moves should never be “brutal.” French finance minister Lagarde said the eurozone is suffering from a weak dollar. Euro bids are cited around the US$ 1.3670 level.
¥/ CNY
The yen depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥81.40 level and was supported around the ¥80.60 level. Technically, yesterday’s and today’s intraday lows were just below the 23.6% retracement level of a major Fibonacci retracement extension area related to the ¥101.50 - ¥84.50 range. Many traders believe the pair may soon trade below the psychologically-important ¥80 figure and dealers cite heavy options-related orders both above and below that area. Bank of Japan’s Policy Board convenes this week and many traders believe the central bank will keep monetary policy unchanged. Yields on five-year Japanese government bonds reached a one-month high on expectations BoJ will not ease this week following its recent decision to drive the overnight call rate to zero per cent and pledge to purchase ¥5 trillion in financial assets. Intervention jitters continue to limit the pair’s downside following the government’s massive yen-selling intervention several weeks ago. Nikkei reported overnight that the BoJ may keep its overnight call rate unchanged for at least two years on account of an estimate that consumer prices could remain below 1% through fiscal year 2012. Data released in Japan overnight saw the September corporate price index off 1.1% y/y, the latest evidence that deflation remains evident at the production level. The Nikkei 225 stock lost 0.25% to close at ¥9,377.38. 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 ¥112.40 level and was capped around the ¥113.25 level. The British pound moved higher vis-à-vis the yen as sterling tested offers around the ¥129.05 level while the Swiss franc moved lower vis-à-vis the yen and tested bids around the ¥82.80 level. In Chinese news, the U.S. dollar appreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.6625 in the over-the-counter market, up from CNY 6.6583. China reported its national trade surplus will “definitely” be reduced and this led to a decline in yuan forwards as speculation increased that appreciation pressures will wane. People’s Bank of China researcher Wang Yong today said China should resist pressure to allow the yuan to appreciate to discourage “hot money” inflows. People’s Bank of China adviser Xia Bin reported there is ongoing pressure to raise interest rates further.
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