Forex Market Update: Euro Pares Losses From the Drop in German PPI

EUR/USD traded up to 1.3640 after aggressive Middle Eastern buying interest. Weak trailing stops were filled on the way up and more are noted at 1.3655 and 1.3670 ahead of good standing offers at 1.3700. Larger stop loss interest is noted at 1.3740-45, which is expected to see heavy interest if it come in to play, although this is likely to be dependent on risk appetite. The euro has shaken off the decline in German PPI, which was much weaker than expected at -1.4% m/m and -2.7% y/y. The focus is likely to remain on equity markets, which are little changed on the session as the market digest economic recovery prospects. Option players indicate large outstanding expiries at 1.3600, which could draw an influence if the topside holds

Bank of England Votes Unanimously to Hold Interest Rate at 0.50%, Increase Asset Purchase by GBP 50B
The BoE MPC voted unanimously in favor of raising the asset purchase target by GBP 50 bln to 125 bln at this month's monetary policy meeting, the minutes from the May meeting showed. However, as expected there was a range of views about the amount by which to increase asset purchasing. Though all members favored raising the target, as we had expected, views ranged between 50 bln and 75 bln, but those favoring a larger increase saw no pressing need for it. The MPC noted that the Asset Purchase Scheme will be revised every month and the purchase target could be raised or lowered. (So far the MPC has been given a 150 bln ceiling by the Treasury, however.) Arguments for not extending the program included uncertainty of impact, signs of economic recovery, monetary stimulus already in the pipeline and the difficulty for the MPC to judge when to withdraw. The MPC also noted that recent surveys show that economic decline is moderating but that they give little insight into the robustness of recovery. The MPC was unanimously in favor of holding the repo rate steady at 0.5%.

inter-bank lending rates reduce

Lending among banks appears to be getting better with the Nigerian Inter-Bank Offer Rate (NIBOR) reducing significantly at the money market.But the Central Bank of Nigeria (CBN) continues to stretch its foreign exchange (forex) resources in an effort to meet demand.Available data at the inter-bank market showed that the 7-day NIBOR dipped to close the week at 13.25 percent, a 10-basis-point decrease from the previous week’s figure of 14.79 percent. Also, the 90-day NIBOR dipped to close the week at 16.40 percent, a five- basis-point decrease from the previous week’s figure of 17.33 percent.FSDH Weekly is confident that there will be increased activity at the government securities market this week, and therefore expects the inter-bank rates to moderate at the current levels. Meanwhile, maturities worth about N25 billion are expected to hit the system next week, even as the Federal Account Allocation Committee is likely to meet towards the end of next week.But in spite of the apex bank’s efforts to meet forex demand last week, the value of the naira slipped. It depreciated by 11 kobo and N2.00 to close the week at N146.01/$1 and N180.00/US$1, compared with the previous week’s figures of N145.90/$1 and N178.00/$1 in the official and parallel markets respectively. As of the time of this report, the inter-bank market remained closed by the CBN.However, auctions held at the Retail Dutch Auction System (RDAS) between Monday and Wednesday last week indicate that the CBN has spent much more than it earlier intended. At the auction held on Monday, May 04, 2009, the CBN offered $100 million, while it sold $114.05 million. The sale was 14.05 percent higher than what it offered. On Tuesday, May 05, 2009, the CBN offered $100 million, while it sold $131.59 million- the sale was higher than what it offered by 31.59 percent. On Wednesday, May 06, 2009, the CBN offered a total of $100 million, while it sold $149.50 million- the sale was higher than what it offered by 49.50 percent. In all, this week a total of $300 million was offered; while the apex bank sold $395.14 million- the sale was 31.71 percent higher than what it offered.The FSDH is confident that at the foreign exchange market, foreign exchange rate would remain relatively stable, as the CBN tries to meet all genuine demands and maintain the band at +/- three percent.According to the FSDH Weekly, as at the time of this report, there was no information about Treasury Bill (TB) transactions from the CBN. However, during the 91-day TB auction as at last week Thursday, April 30, 2009, the CBN did not offer nor allot any bill, but N10.11bn worth of TB was repaid.Also, at the 182-day TB auction last week, a total of N10 billion worth of TB was repaid.In all, last week there was total inflow of N20.11 billion from the primary segment of the money market.Also last week, at the secondary segment of the government securities market, a total of N222.05 billion worth of Repo & Expanded Discount Window (EDW) was injected, while N133.71 billion was withdrawn. This led to injection of about N88.33 billion from this segment of the market. The tenor days on the OMO Repo and EDW ranged from three days to 120 days, while the discount rate on the bills ranged between 8.25 percent and 12.75 percent.

China says forex reserves rise 16%

China's central bank says its foreign exchange reserves rose 16 per cent year-on-year to $US1.954 trillion by the end of March.

In a notice on its website on Saturday the bank said reserves increased by $US7.7 billion in the first quarter, $US146.2 billion lower than the same period last year.

Analysts believe China holds up to 70 per cent of its foreign reserves in US dollar-denominated assets, including Treasury securities.

In March, the reserves increased by $US41.7 billion, an increase of $US6.7 billion more than at the same period last year.

FOREX-U.S. dollar, yen slide as risk appetite rises

The U.S. dollar and yen fell on Friday as increasing risk appetite sparked by better-than-expected U.S. economic data pared demand for both currencies as a refuge against the global slowdown.

The dollar fell for a fourth straight session versus the euro, while the yen dropped to a two-week low against both the euro and dollar, with volumes thin given the May Day holiday in Europe. Higher-yielding currencies such as the Australian and New Zealand dollars were some of the biggest movers on the day, moving in tandem with higher U.S. stocks.

New data on Friday reinforced the view that the worst of the recession may have passed, making investors more comfortable with risk-taking. Reports showed U.S. consumers felt more upbeat about the economy in April while a key gauge of manufacturing suggested the sector was gradually emerging out of a prolonged recession.

Risk appetite is definitely coming back and the data this morning was phenomenal, said Melvin Harris, a market analyst at Advanced Currency Markets in New York.

The reports are supportive factors to truly build the case that while things are not completely better yet, we are moving in a positive direction. Economic fundamentals will become more important in the next couple of months.

The numbers were consistent with the Federal Reserve's less bleak outlook on the U.S. economy issued on Wednesday.YEN FALLS; AUSSIE, KIWI RISE