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$ 1.3495 level and was capped around the $1.3690 level. Federal Reserve Chairman Bernanke said the current economic situation is "not remotely" as serious as the economic problems during the Great Depression. Bernanke reiterated the Fed "remains ready to use all available tools as needed" and some dealers interpreted that as an indication that rates will fall further. He added "I think the evidence is now in that the inflation problems are moderating and look to be returning to price stability at a reasonable pace." Bernanke will testify before the House on the fiscal stimulus on 20 October. Data released in the U.S. today saw August business inventories up 0.3% with sales off 1.8%, the largest decline in two years. Also, September retail sales posted their largest monthly decline in more than three years and this likely increases the chances of negative economic growth in the third quarter. Retail sales were off 1.2% with the ex-autos component off 0.6%. The October New York State manufacturing index fell to its lowest level since its inception in 2001. Additionally, the September producer price index was off 0.4% while the core index notched its largest annualized gain in seventeen years at +4.0%. The September Beige Book reported economic activity weakened in all twelve Fed districts. San Francisco Fed President Yellen reported the U.S. "appears to be in a recession" and "virtually every major sector of the economy has been hit by the financial shock." In eurozone news, German August retail sales were revised down to +3.3% m/m. Euro bids are cited around the US$ 1.3320 level.

¥/ CNY

The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥100.40 level and was capped around the ¥102.25 level. Prime Minister Aso said global leaders should only convene in a summit if countries are "prepared to inject more cash." Bank of Japan Governor Shirakawa reported "Global financial markets are highly strained. The way the central bank can contribute most in such a situation is to ensure financial market stability. this aspect, the BOJ will consider various measures besides providing liquidity." Some BoJ-watchers believe the central bank may offer interest on commercial banks' reserves. Data released in Japan saw the August current account surplus fall 52.2% y/y while revised August industrial output was off 3.5% m/m. BoJ Executive Director Yamaguchi was nominated to fill a vacant Deputy Governor position. The Federal Reserve announced it is temporarily increasing its U.S. dollar swap line with the BoJ and will "accommodate whatever quantity of U.S. dollar funding is demanded." The Nikkei 225 stock index gained 1.06% to close at ¥9,547.47. 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 ¥135.60 level and was capped around the ¥139.35 level. The British pound and Swiss franc lost ground vis-à-vis the yen as the crosses tested bids around the ¥174.10 and ¥88.45 levels, respectively. The Chinese yuan appreciated vis-à-vis the U.S. dollar as the greenback closed at CNY 6.8320 in the over-the-counter market, down from CNY 6.8390.

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