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The euro moved sharply higher vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.4845 level and was supported around the $1.4700 figure.   Fresh gains in U.S. equity markets added to the growing view that risk appetite is expanding, favouring currencies with positive interest rate differentials such as the euro and sterling.  Also, the Reserve Bank of India announced it purchased 200 metric tons of gold yesterday, the latest indication that monetary authorities are partially divesting themselves of U.S. dollars.  The spot rate of gold reached an all-time high of US$ 1,095.80.  Traders were loath to add more U.S. dollar exposure ahead of the Federal Open Market Committee interest rate decision.  The FOMC unanimously voted to keep interest rates unchanged and reported “Information received since the Federal Open Market Committee met in September suggests that economic activity has continued to pick up. Conditions in financial markets were roughly unchanged, on balance, over the intermeeting period. Activity in the housing sector has increased over recent months. Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability. With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time. In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. The amount of agency debt purchases, while somewhat less than the previously announced maximum of $200 billion, is consistent with the recent path of purchases and reflects the limited availability of agency debt. In order to promote a smooth transition in markets, the Committee will gradually slow the pace of its purchases of both agency debt and agency mortgage-backed securities and anticipates that these transactions will be executed by the end of the first quarter of 2010. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.” Data released in the U.S. today saw the October ISM service index move lower to 50.6 fom 50.9 in September.  The new orders sub-index improved to 55.6 while the prices index climbed to 53.0.  Also, the October ADP employment services report indicated employers reduced private-sector jobs by 203,000 last month, down from a revised 227,000 in September.  In eurozone news, the EMU-16 September Purchasing Managers services index improved to 52.6 from 50.9 in September.  Also, the EMU-16 producer price index fell 0.4% m/m in September and was off 7.7% y/y.  Germany’s PMI services index declined to 50.7 from 52.1 in September.  Euro bids are cited around the US$ 1.4445 level. 

¥/ CNY

The yen depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥91.05 level and was supported around the ¥90.05 level.  Bank of Japan Governor Shirakawa continued to talk up Japan’s economy, saying “given that the emerging and commodity-exporting economies are likely to continue growing at high rates, risks have been becoming balanced, compared with a situation in early spring when risks were generally tilted downside.”  On interest rates, Shirakawa added “The Bank of Japan declared an end to the state of emergency, but it will stand pat until the economy returns to normal. The bank will probably continue its super-low rate policy through early 2011.”  Finance minister Fujii reported the government will issue additional bonds to cover a shortage in tax revenue in 2009 – 2010.  BoJ’s Policy Board last week predicted core consumer prices will decline 1.5% in the year ending March 2010, decline 0.8% in the fiscal year ending March 2011, and decline 0.4% in the fiscal year ending March 2012.  The central bank last week reported it will stop its purchase of corporate debt and commercial paper at the end of 2009.  BoJ Policy Board’s next interest rate decision is scheduled for 19 November.  The Nikkei 225 stock index climbed 0.42% to close at ¥9,844.31.  U.S. dollar offers are cited around the ¥94.75 level.  The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥134.95 level and was supported around the ¥132.50 level.  The British pound moved higher vis-à-vis the yen as sterling tested offers around the ¥150.85 level while the Swiss franc moved lower vis-à-vis the yen and tested offers around the ¥89.35 level. In Chinese news, the U.S. dollar weakened vis-à-vis the Chinese yuan as the greenback closed at CNY 6.8205 in the over-the-counter market, down from CNY 6.8215.  Data released in China overnight saw the October services sector business activity index decline to 56.5, a four-month low, from 58.1 in September.  The Chinese media yesterday reported People’s Bank of China is likely to adopt a tighter monetary policy.  PBoC Governor Zhou on Friday reported the central bank should maintain a “moderate easy monetary policy.”  Data released yesterday saw October manufacturing expanded at its fastest pace in eighteen months and eighth consecutive month with the CFLP Purchasing Managers’ Index rallying to 55.2 from 54.3 in September.  It was also reported that PBoC is establishing a new department to manage its foreign exchange policy. 

₤

The British pound moved sharply higher vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.6595 level and was supported around the $1.6400 figure.  Data released in the U.K. today saw Nationwide consumer confidence print at 72.0, unchanged from September’s reading.  Also, the October PMI services index rallied to 56.9 from 55.3 in September.  Furthermore, the BRC October shop prices index was unchanged m/m and y/y.  Cable bids are cited around the US$ 1.6240 level.  The euro moved higher vis-à-vis the British pound as the single currency tested offers around the ₤0.8980 level and was supported around the ₤0.8920 level.  Euro bids are cited around the ₤0.8780 level.