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Wednesday November 17, 2004 - 14:49:26 GMT
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Forex Market Commentary and Analysis (17 November 2004)

The euro established a fresh lifetime high vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.3050 level after rocketing through the psychologically-important US$ 1.3000 figure. Traders dumped dollars en masse following benign comments from U.S. Treasury Secretary Snow in London this morning. Snow simply reiterated the U.S.’s long-standing “strong-dollar” policy and failed to protest the recent dollar weakness in a speech the FX trading market deemed critical. Snow’s comments that the markets should determine exchange rates competitively – also one of his favourite mantras – were further evidence of the Bush administration’s laissez-faire attitude about the dollar. Talking about other critical themes, Snow said the U.S. is serious about grappling with the U.S. budget deficit, the “most pressing issue” in his mind. He characterized it as “too large” and said it “needs to be brought down.” He did, however, characterize the current account deficit as a sign of U.S. economic strength and said it will diminish as other countries’ economies grow more rapidly. While this is true from an economist’s sense, the markets continue to be preoccupied with the U.S. ability to finance this mammoth imbalance. He said the current account deficit is a “shared responsibility” and said the U.S. will do its part to encourage a higher national U.S. savings rates. As many dealers expected, Snow said the markets must pay attention to the “growth deficit” between the U.S. and its major trading partners, including Europe. This is expected to be a major message that Snow drives from at the G20 meeting that opens in Berlin from this Friday. It does not appear concerted FX intervention will be on the cards at the G20 meeting as some suspect. Data released in the eurozone today saw EMU-12 HICP rise a final 0.3% m/m and 2.4% y/y in October, down from the provisional reading of 2.5%. Core inflation was seen at +1.8% y/y in October, unchanged from a downwardly revised September pace. Additionally, EMU-12 industrial output increased 2.9% y/y in September. Also, France reported a large surplus in tax receipts that has prompted the government there to reduce its forecast for the French budget deficit to €49.3 billion from its original €55.1 billion forecast. In Germany, the “Five Wise Men” panel of economic advisors said it expects GDP to rise 1.4% in 2005 and said the economy is still “a considerable distance from experiencing a far-reaching recovery.” Data released in the U.S. today saw headline October consumer price inflation come in at +0.6% while the “core” rate printed at +0.2%. Fed funds futures reacted by pricing in a 100% change of a +25bps hike at the FOMC meeting in December. Other data released saw October building permits down 0.7% to 1.984 million units while October housing starts improved nicely. Later in the North American session, it was reported that October industrial production and October capacity utilization were both stronger-than-expected. Euro bids are seen around the $1.2980 level.


The yen appreciated sharply vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥104.35 level, a fresh low dating to April 2004. Rumours of Kampo-related bids around the ¥105.20 level failed to materialize as early European sales of the pair hit stops below the ¥105.20 level. The likelihood of yen-selling intervention by Japanese monetary authorities increased with this foray into the ¥104 handle but no activity has been cited yet. Word that MoF’s Tanigaki and BoJ’s Fukui will not personally attend the G20 meeting in Berlin was seen as an excuse to sell dollars on the premise that Japan will not try to seek support for yen-selling intervention from its G7 counterparts. Tanigaki verbally intervened overnight saying FX rates that deviate from fundamentals “could be harmful to global economic growth” and said a “big move” would prompt action from authorities. There is some thin market talk that G20 leaders might pursue a 1985 Plaza Accord-type agreement in which the dollar would be allowed to depreciate to help reduce the U.S. trade deficit. The ¥104.80 level had been cited as an option barrier but the market moved through this level with ease. Economists who parsed yesterday’s U.S. TIC data noted that Japan became a net seller of U.S. securities for the first time since July 2003. A fall in December NYMEX crude futures to the $45.79 level has also benefited the yen as traders price in a decrease in energy inflation. The Nikkei 225 stock index gained +0.3% to close at ¥11,131.29. Dollar bids are seen around the ¥103.40 level. The euro weakened vis-à-vis the yen today as the single currency tested bids around the ¥135.90 level after stops were reached below the ¥136.60 level. Euro bids are cited around the ¥135.70 level. In Chinese news, People’s Bank of China raised the interest rate on one-year U.S. dollar deposits by 0.3125% to 0.875%, effective tomorrow, and increased rates on six-month deposits. PBoC also announced it will no longer establish two-year deposit rates for major foreign currencies. Speaking in London today, U.S. Treasury Secretary Snow said “The Bush administration has had an unprecedented level of engagement with the Chinese government on its exchange rate policy” and cited China’s “significant steps” to move to a flexible exchange rate policy. PBoC Governor Zhou Ziaochuan was quoted in the China Securities Journal as saying “The central bank is concerned about the trend in inflation. Taking into account the rapidly rising prices of production materials and that the economy is still attracting big investment, monetary policy in 2005 will lean towards stability.”


The British pound moved sharply higher vis-à-vis the U.S. dollar today as cable tested offers just below the US$ 1.8630 level, its highest level since 20 July 2004. Minutes from the Bank of England Monetary Policy Committee’s November meeting were released today and they suggest monetary policy will remain unchanged for some time with the headline repo rate at 4.75%. Policymakers concluded “inflation expectations seem well anchored around the target” during their deliberations. Last week’s Quarterly Inflation Report revealed risks around the BoE’s central inflation projection are skewed slightly to the downside. In the minutes released today, the MPC noted house price inflation is “declining rapidly” and noted the fall in sterling’s trade-weighted value would benefit the economy along with the rise in equity prices. The MPC characterized Q3 economic growth in the U.K. as weaker-than-expected but added the economy is not too far from being close to capacity. Cable bids are cited around the US$ 1.8510 level. The euro moved higher vis-à-vis the British pound today as the single currency tested offers around the £0.7020 level after finding good demand around the £0.6985 level.


The Swiss franc exploded higher vis-à-vis the U.S. dollar today as the greenback receded to the CHF 1.1645 level, a fresh low dating to January 1996. Swissy was one of the main driver of the day in the FX market as the British pound/ Swiss franc cross fell to an intraday low of CHF 2.1650 and the Swiss franc/ yen cross reached an intraday high above the ¥89.80 level before coming off. Swiss National Bank President Roth gave two speeches in Buenos Aires yesterday in which he said “safeguarding international financial stability” is a high priority for Switzerland and discussed some moral hazard problems. Dollar bids are cited around the CHF 1.1625 level. The euro came off sharply vis-à-vis the Swiss franc today as the single currency tested bids around the CHF 1.5190 level after testing offers around the CHF 1.5250 level.


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