Daily Market Commentary - Fundamental Outlook

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The euro depreciated vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.4800 figure and was capped around the $1.4915 level. Today's intraday low was just above the 76.4% retracement of the move from $1.4920 to $1.4360. Many data were released in the U.S. today. First, December personal income was up +0.5% while December personal spending was up +0.2%. Second, weekly initial jobless claims increased 69,000 to 375,000, the highest level since October 2005. These data are important because they evidence a potential deterioration in the U.S. labour market. Tomorrow's all-important U.S. January non-farm payrolls data are expected to show job growth of about 65,000 workers. Traders will also pay close attention to revisions in November's and December's jobs tallies. Third, the Q4 employment cost index was up +0.8% and average hourly earnings data released tomorrow will be scrutinized to see if nagging inflation pressures are having so-called second-round effects. Fourth, the December core personal consumption expenditures index was unchanged at +0.2% m/m and +2.2% y/y with a 3.5% print on the headline number. These data are closely monitored by the Fed and confirm that inflation remains above the Fed's perceived comfort zone. Fifth, the Chicago Fed's January business activity index fell to 51.5. Traders are still talking about yesterday's 50bps monetary easing by the Federal Open Market Committee. Most traders now believe the FOMC will reduce the federal funds target rate by up to another 50bps at the 18 March and 30 April FOMC meetings. Dealers are also paying close attention to a report that ratings agency Standard & Poors is downgrading or putting on notice for potential ratings cuts up to US$ 270 billion in sub-prime mortgage bonds along with US$ 264 billion in collateralized debt obligations. In eurozone news, the EMU-15 consumer confidence survey fell to -12 in February from -9 in January. Also, EMU-15 annualized consumer price inflation was up 3.2%, the highest level since the common currency's inception and significantly above the ECB's target ceiling of 2.0%. These data may render it difficult for the ECB to ease monetary policy in Q1. Data released in Germany today saw December retail sales fall 0.1% and were off 2.2% in 2007 as a whole. Also, EMU-13 December unemployment was unchanged at 7.2%. Euro bids are cited around the US$ 1.4685 level.

¥/ CNY

The yen depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥106.85 level and was supported around the ¥105.70 level. Technically, today's intraday high and low were right around the 38.2% and 76.4% retracements of the move from ¥104.95 to ¥107.90. The yen was pressured overnight on comments from Bank of Japan Policy Board member Nishimura who reported “If risk factors, such as downside risks for the global economy, materialize, it is natural for us to consider taking flexible action on the basis of developments in the economy and prices.” Nishimura seemingly ruled out an imminent rate cut but added “We will take policy actions in a timely manner to achieve sustainable economic growth with price stability.” His remarks partially followed those of BoJ Governor Fukui who this week suggested the global economic slowdown is impacting Japan. These collective remarks are yen-negative because they suggest interest rates could be reduced and encourage more short yen carry trades. Data released in Japan overnight saw December construction orders up 4.7% y/y while December housing starts were off 19.2% y/y. The Nikkei 225 stock index gained 1.85% to close at ¥13,592.47. Dollar bids are cited around the ¥104.20 level. The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥158.70 level and was supported around the ¥156.70 level. The British pound and Swiss franc rallied vis-à-vis the yen as the crosses tested offers around the ¥212.25 and ¥98.55 levels, respectively. The Chinese yuan appreciated vis-à-vis the U.S. dollar as the greenback closed at CNY 7.1818 in the over-the-counter market, down from CNY 7.1916 – the pair's lowest close since the yuan revaluation of July 2005. Data released in China today saw Q4 property prices up 10.2% y/y in 70 major cities while January consumer price inflation jumped 6.5% y/y.

₤

The British pound moved higher vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.9945 level and was supported around the $1.9825 level. Technically, today's intraday high was right around the 61.8% retracement of the move from $1.9170 to $2.1160. Data released in the U.K. today saw Nationwide property prices fall 0.1% m/m in January. Many traders believe Bank of England's Monetary Policy Committee will reduce the repo rate by 25bps to 5.25% next week. It was also reported that the GfK January consumer confidence barometer printed at -13, up from December's -14 tally. Cable bids are cited around the US$ 1.9640/ 1.9260 levels. The euro came off vis-à-vis the British pound as the single currency tested bids around the ₤0.7445 level and was capped around the ₤0.7490 level.

CHF

The Swiss franc appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.0755 level and was capped around the CHF 1.0860 level. The pair established a fresh multi-decade low today before coming off. Swiss National Bank member Jordan spoke today and said financial market volatility does not warrant a decrease in interest rates at the present time. Jordan sees inflation accelerating above 2.0% in H1 2008 and later falling below that level. U.S. dollar offers are cited around the CHF 1.1155 level. The euro came off vis-à-vis the Swiss franc as the single currency tested bids around the CHF 1.6015 level while the British pound moved higher vis-à-vis the Swiss franc and tested offers around the CHF 2.1585 level.

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