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The euro lost ground vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.4830 level and was capped around the $1.5015 level.  The market was quite volatile on account of a few factors.  First, traders remained skittish and attentive to the Dubai World situation.  Dubai’s largest corporate entity on Wednesday asked creditors for a six-month standstill agreement on debt repayments.  The entity’s total liabilities aggregate around US$ 60 billion and there are some concerns that other emerging market debtors could experience similar problems through contagion.  Premia for emerging market debt in the fixed income market have increased over the past two days.  The U.S. dollar has really been on the back-end on a trading strategy that has been long risk and short the greenback for several months.  The paring of risk that has been associated with the Dubai situation could positively impact the U.S. dollar.  Second, traders are closely watching the yen and any potential Japanese response to the yen’s recent appreciation. Third, liquidity was reduced during the North American session on account of yesterday’s Thanksgiving Day holiday.  Data released in the U.S. today saw October building permits revised to -4.2% from -4.0%.  Data to be released on Monday include the November Chicago purchasing manager index.  In eurozone news, European Central Bank member Ordonez said the “euro interbank market…has suffered greatly” as a result of the global financial crisis.  Data released in the eurozone today saw November industrial confidence rose to -19 from -21 while November economic confidence improved to 88.8 from 86.1.  Also, November consumer confidence increased to -17 from -18 in October.  Additionally, the October import price index rose 0.5% m/m and was off 8.1% y/y.  Euro bids are cited around the US$ 1.4720 level.

¥/ CNY

The yen depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥87.00 figure and was supported around the ¥84.85 level.  The pair rallied higher from multi-year lows dating to 1995 as traders booked profits on their short yen positions.  Nervousness increased regarding the possibility of yen-selling intervention by Japanese and foreign monetary authorities.  Finance minister Fujii noted “this kind of situation is sustained, I think that it would be something abnormal. It would be possible for us to take” action.  Fujii added he is “extremely nervous and is watching the market carefully…there’s no doubt the market has moved too far in one direction.”  While some dealers do not believe the Japanese government will conduct yen-selling intervention at current levels, Japanese exporters are finding it more difficult to grapple with the yen’s ascent.  Chief Cabinet Secretary Hirano reported “Excessive moves are undesirable. The government will monitor the impact of the currency market on the economy.  We'll make sure that the yen rise will not lead to a second bottom in the economy, and the upcoming extra budget will be compiled with such risk in mind.”   Data released in Japan overnight saw the October overall retail sales index off 0.9% m/m, better-than-expected, while October core consumer price inflation was off 2.2% y/y.  These data suggest deflation could continue in Japan for quite some time.  Also, the October jobless rate improved to 5.1% from September’s reading of 5.3% while October all household spending was up 1.0% m/m and +1.6% y/y.  Finally, Japan’s trade deficit printed at ¥126.81 billion in the first ten days of November, off 2.1% y/y.  The Nikkei 225 stock index lost 3.22% to close at ¥9,081.52.  U.S. dollar offers are cited around the ¥94.75 level.  The euro moved lower vis-à-vis the yen as the single currency tested bids around the ¥126.85 level and was capped around the ¥130.15 level.  The British pound moved lower vis-à-vis the yen as sterling tested bids around the ¥139.25 level while the Swiss franc moved lower vis-à-vis the yen and tested bids around the ¥84.20 level. In Chinese news, the U.S. dollar depreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.8264 in the over-the-counter market, down from CNY 6.8270.  People’s Bank of China Deputy Governor this reported the yuan will become a “more attractive currency” and added the central bank will increase surveillance of hot money flows. Vice Foreign Minister Zhang Zhijun this week said China will “increase the flexibility of the yuan exchange rate while maintaining stability in the market,” adding the increase will be “incremental and balanced.”  Zhang added China is moving toward a system “that is market-based and is a managed floating mechanism with respect to a basket of currencies.” Chinese Premier Wen Jiabao will meet European Central Bank President Trichet and Ecofin head Juncker on 29 November.  China’s banking regulator informed Chinese lenders they must comply with capital requirements or risk sanctions. There is increasing speculation China will strengthen its strict capital requirements. 

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The British pound came off vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.6270 level and was capped around the $1.6520 level.  Sterling has come off about 300 pips over the past three trading days as dealers have reacted to the Dubai debt market shock. Bank of England Monetary Policy Committee member Posen reported wholesale reform is needed if the U.K. banking system is going to mount a sustainable recovery.  Chancellor of the Exchequer Darling downgraded the U.K.’s 2009 economic growth outlook today and now sees shrinkage of 4.75%, worse than the previous -3.75% forecast.  Cable bids are cited around the US$ 1.6155 level.  The euro moved lower vis-à-vis the British pound as the single currency tested bids around the ₤0.9060 level and was capped around the ₤0.9135 level.