Monday November 8, 2004 - 16:20:30 GMT
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Forex Market Commentary and Analysis (8 November 2004)
The euro weakened vis-à-vis the U.S. dollar today as traders booked profits following last week’s appreciation in the euro to record levels. The single currency traded at an intraday high around the $1.2990 level before slumping to the $1.2905 level. The pair was within fifteen or so pips of testing the psychologically-important $1.3000 figure. Several factors have contributed to the pair’s gains lately including President Bush’s re-election and renewed concerns about the U.S.’s trade and current account deficits. The U.S. budget deficit currently stands at US$ 427 billion, or 3.7% of GDP, while the current account deficit reached a breathtaking $166.18 billion deficit in Q2. European Central Bank President Trichet took some wind out of the euro’s sails today when he said the euro’s rise is “not welcome” and “brutal.” Trichet succeeded in talking down the euro this year when it was trading around these levels but there is such a bearish U.S. dollar mentality in the markets now that he may not be able to succeed this time. The FOMC will announce its interest rate decision on Wednesday and most dealers expect a 25bps monetary tightening. There is less certainty about the December FOMC meeting. ECB Chief Economist Issing didn’t comment on the euro when given the chance today while Germany’s DIHK Chambers of Trade and Industry suggested Germany GDP forecasts for 2005 could withstand the recent appreciation as long as the euro doesn’t remain above $1.3000 for a “lasting” period. French finance minister Sarkozy verbally intervened today saying the G7 Boca Raton statement from February about foreign exchange “remains valid and our American friends have to remember it.” He implored the U.S. to find “measures to reduce the public deficits.” Euro bids are seen around the $1.2890 level.
The yen weakened modestly vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥105.80 level before receding to the ¥105.50 level during North American dealing. The pair, however, traded around the ¥105.30 level today, a fresh multi-month low. Dealers continue to speculate where Bank of Japan will conduct yen-selling intervention and as traders probe lower levels in the ¥105 handle, the likelihood of intervention increases. Some chartists cite the ¥103.50/ 40 level as technically supportive. Japan expended a record ¥14.83 trillion intervening during the January – March quarter after a staggering ¥20.06 trillion amount of intervention in 2003. Data released in Japan saw its official foreign exchange reserves rise US$ 6.89 billion in October to $837.88 billion, the thirteenth increase in fourteen months. Last month represented the third consecutive month that the figure posted a record high. The Nikkei 225 stock index fell 0.70% to close at ¥10,983.83 with the TOPIX off 0.85%. Dollar bids are cited around the ¥105.30 level with dollar offers around the ¥106.30 level. The euro came off vis-à-vis the yen today as the single currency tested bids around the ¥136.35 level after failing to get above the ¥137.00 figure. Euro bids are seen around the ¥136.05 level. In Chinese news, the government reported “The government will selectively and gradually ease control over cross-border capital transactions and make the yuan fully convertible under the capital account.”
The British pound moved higher vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.8620 level after finding demand around the $1.8525 level. Sterling improved on stronger-than-expected U.K. producer prices data for October that saw a +0.7% m/m and +3.5% y/y increase, the highest annual rate since December 1995. The increase was attributable to surging oil prices and this will put added emphasis on Wednesday’s Bank of England Quarterly Inflation Report. Traders also expect the central bank to highlight sterling’s weakness vis-à-vis the euro given the fact that more than 60% of U.K. trade is conducted with the eurozone. The strong cross increases the likelihood of imported inflation in the U.K. The BoE is expected to maintain a balanced view on U.K. interest rate prospects. Other data released today saw ODPM annual house price inflation rise to 13.8% in September from 13.6% in August. Cable bids are seen around the $1.8520 level. The euro came off vis-à-vis the British pound today as the single currency tested bids around the £0.6960 level but not before the cross tested the psychologically-important £0.7000 figure.
The Swiss franc lost marginal ground vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.1840 level. The pair, however, reached a fresh multi-month low around the CHF 1.1755 level before a round of short-covering saw the pair reclaim the $1.18 handle. Chartists have to go back to August 1996 to see the pair trading this low. Traders await comments from Swiss National Bank’s Hildebrand tomorrow. Dollar offers are cited around the CHF 1.1845 level. The euro was little changed vis-à-vis the British pound today as the single currency tested offers around the CHF 1.5295 level and was supported around the CHF 1.5260 level.
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