Forex Report
JPY is higher vs. all major currencies as the deteriorating ABCP market has led to an unwinding of assets funded with borrowed JPY in a flight to quality. USD/JPY is down 31 pips to 115.85; 1-month USD/JPY option volatility dropped 1.5 to 13.5; GBP/JPY is down 101 to 233.37 and EUR/JPY is down 81 pips 158.09. NZD/JPY is down 84 pips to 81.49 and AUD/JPY is down 91 pips to 94.56.
Q2 GDP came in at 4%, the largest increase in a year; however, the Home Price Index came in at 0.1%, the slowest pace of growth in over ten years. The USD traded within narrow ranges vs. all the major currencies, gaining 28 pips vs. the EUR to 1.3649. The USD Index is marginally higher on the day and has traded within a narrow range since Aug 24th. The FED added $10 bln to the banking system and FED Funds are trading at the 5.25% target. Tomorrow’s speech from FED President Ben Bernanke will be closely analyzed for transparencies and the FED’s take on the recent credit purge.
The BOE loaned £1.6 bln ($3.2 bln) in emergency funds at 6.75% to stem any potential liquidity shortage. GBP/JPY fell from a two-week high as high-yielding assets were shunned in favor of safety. UK Nationwide House prices for August increased more than expected at 0.6%, implying another BOE rate hike may be needed to restrain increases home prices; Dec interest rate futures imply a full BOE rate hike before year’s end. Some lenders in the UK will be tightening lending standards for home loans to borrowers with imperfect credit.
French President Sarkozy issued a statement saying he was told not to discuss the Euro’s exchange and he was told France was isolated on Euro policy. He nonetheless mentioned that the introduction of the Euro has led to a rise in prices and that forex dumping has led to undervalued currencies. He feels the ECB should use the 2nd world currency to its advantage, much like the FED. The EU’s Barroso followed with a statement saying central banks should not be pressured at the service of politicians and that forums such as Eurogroup meetings are more appropriate for such discussions.