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$ 1.3345 level and was capped around the $1.3535 level. Data released in the U.S. today saw the October Philadelphia Fed manufacturing survey fell to -37.5 from 3.8 in September. Also, September industrial production printed at -2.8% and capacity utilization at 76.4%. August net long-term Treasury International Capital flows increased to US$ 14 billion but that was likely not enough to finance the U.S.'s current account deficit that month. Other data saw weekly initial jobless claims decrease 16,000 to 461,000 while continuing jobless claims rose 40,000 to 3.711 million. Additionally, the September consumer price index rose 4.9% y/y with the core rate up 2.5% y/y. These data indicate inflation is moderating in the U.S. and could give the Federal Reserve more scope to lower interest rates. Federal Reserve Vice Chairman Kohn reported “The effects of the easier stance of policy on the cost and availability of credit were overwhelmed last week by the further erosion in confidence. The net result of the erosion of confidence, declines in asset prices, and freezing up of many financial markets has been a marked deterioration in the outlook for economic growth both here and abroad. Already, the latest readings on the U.S. economy have become more downbeat. Given the likely drawn-out nature of the prospective adjustments in housing and financial markets, I see the most probable scenario as one in which the performance of the economy remains subpar well into next year and then gradually improves in late 2009 and 2010. In eurozone news, Germany reduced its 2009 gross domestic product forecast to 0.2% from 1.2% and noted it could be a deeper decline if financial stability measures aren't passed. Banks deposited a record €211 billion in overnight funds with the European Central Bank yesterday. Interbank rates for three-month U.S. dollar deposits fell back to 3.5% to 5.0% today and euro deposit rates fell to 4.75% to 5.25%. ECB member Quaden said EMU-15 growth prospects look worse. Euro bids are cited around the US$ 1.3320 level.

¥/ CNY

The yen depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥101.35 level and was supported around the ¥99.25 level. Prime Minister Aso remains cautious about a global leaders' summit to address the financial crisis and believes it could backfire if there are not firm pre-commitments to inject additional capital. The overnight call rate increased to around 0.50%-0.52% from a weighted average of 0.348% yesterday. Bank of Japan injected about ¥600 billion in same-day funds overnight. The Nikkei 225 stock index lost 11.41% to close at ¥8,458.45. 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 ¥133.35 level and was capped around the ¥137.20 level. The British pound and Swiss franc moved higher vis-à-vis the yen as the crosses tested offers around the ¥175.25 and ¥89.55 levels, respectively. The Chinese yuan appreciated vis-à-vis the U.S. dollar as the greenback closed at CNY 6.8297 in the over-the-counter market, down from CNY 6.8320. People's Bank of China reported currency stability “must be maintained.” Data released in China overnight saw industrial value-added output rise 15.2%.

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